Faced with its steepest ever drop in quarterly net profit, Cairn India wants the government to not wait till the Budget to cut cess on crude oil so as to give relief to domestic oil producers hit by slump in prices.
Cairn India Managing Director and CEO Mayank Ashar said the government should convert the Rs 4,500 per ton Oil Industry Development Cess, which takes away a third of the current oil price of about $30 per barrel, into ad valorem.
“We look forward to a positive development on reduction in cess on crude oil. We hope the government will implement it even before the Budget to encourage the domestic exploration and production (E&P) sector, which is reeling under stress due to crash in crude oil price,” he told PTI here.
Cairn India had recorded a 99 per cent drop in its October-December quarter net profit at Rs 8.7 crore as it paid $9.6 per barrel in oil cess alone out of a gross realisation of $34.5 per barrel on oil it produces from its flagship Rajasthan fields.
“The business of oil and gas exploration and production is a long-term one, requiring fiscal certainty to ensure reasonable returns for investors. It is indeed heartening to note that the Ministry of Petroleum and Natural Gas is supporting the industry’s long standing petition to make oil Cess ad valorem,” he said.
If implemented it will be a win-win for all stakeholders, protecting government revenues by way of direct correlation with prevailing oil price. Also, it will send a positive signal to investors, he said.
“It will also encourage the sector to pursue the Prime Minister’s vision of reducing India’s import dependence for crude oil by at least 10 per cent by 2022,” he said.
The Oil Industry (Development) Act, 1974, provides for collection of cess as a duty of excise on indigenous crude oil. Cess incurred by producers is not recoverable from refineries and thus, forms part of cost of production of crude oil.
The cess was levied at Rs 60 per tonne in July 1974 and subsequently revised from time to time. In 2005-06, when the crude oil prices had increased from an average of $40 per barrel to $60, the OID cess was raised from Rs 1,800 to Rs 2,500 per tonne from March 1, 2006.
Again, when the crude prices climbed to over $100, the rate of cess went up to Rs 4,500 ($12 per barrel) with effect from March 17, 2012.
While the government had effectively linked the cess rate to prevailing crude oil prices in the past, there has been no reduction when the oil prices have declined, oil producers say adding cess has severely impacted several small discoveries and marginal fields, making many of the projects unviable.
While New Exploration Licensing Policy (NELP) blocks like Reliance Industries’ KG-D6 are exempt from payment of cess, pre-NELP discovered blocks like Panna/Mukta and Tapti and Ravva pay a fixed rate of cess of Rs 900 per tonne.