Existing state-run companies may be merged; LNG customs duty cut to boost move towards gas-dependent economy
From strategic oil reserve projects to reduction in customs duty on liquefied natural gas (LNG) and creation of an integrated state-owned oil company, the oil and gas sector received some attention in the Union Budget.
The country may soon have its own version of Royal Dutch Shell or BP Plc as finance minister Arun Jaitley on Wednesday announced the government plans to create an integrated public sector oil company that will have the wherewithal to match the competitiveness of international and domestic private sector oil and gas companies.
This means the existing state-run firms engaged in exploration and production (such as Oil and Natural Gas Corporation, or ONGC) and retailing (such as Indian Oil Corporation) may be merged to create a behemoth offering end-to-end services.
“It will give them (the entities which will be merged) capacity to bear higher risks, avail economies of scale, take higher investment decisions and create more value for the stakeholders,” said Jaitley.
Oil minister Dharmendra Pradhan had recently, commenting on the ONGC and Gujarat State Petroleum Corporation deal, said integration is a norm followed worldwide.
Reliance Industries and Essar Oil are already in the race to enter end-to-end business, and Shell and BP have already got licences to open retail outlets in the country. However, creating such an entity will be a big challenge. “Lessons have to be learned from the merger of Air India and Indian Airlines. There are personal issues in terms of seniority, merger of cultural practices and human resource problems,” said Saurabh Chandra, former petroleum secretary. Others sounded caution too. “I hope this is not a ploy to cover the subsidy burden under the cover of merger,” said a former secretary with the finance ministry.
The government also plans to build caverns at two more locations — Chandikhole in Odisha and Bikaner in Rajasthan — in addition to the existing three. With this, the total reserve holding capacity will go up to 15.33 million tonnes. Last month, an agreement was entered into between state-run Indian Strategic Petroleum Reserves and Abu Dhabi National Oil Company to supply crude oil to one such facility in Mangaluru in Karnataka to meet unexpected future exigencies.
At the same time the government also announced income arising from sale of leftover crude oil from strategic reserves after the expiry of agreement period be exempt “given the strategic nature of the project benefiting India to augment its strategic petroleum reserves,” said the Budget documents. The provision will take effect from April 1, 2018.
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In yet another decision, the basic customs duty on LNG has been decreased to 2.5% from the existing 5%. This will boost the country’s efforts to move towards a gas-dependent economy as it aims to increase the share of the natural gas in the energy mix from the current 6.5% to 15% in the next three-four years.
The cess on crude oil, however, has been kept at 20% ad valerom which, according to Chandra, will hurt as the prices move upwards and cross $60 a barrel. The current crude oil price is $54.63 per barrel.
By Saurabh Kumar