With the crude oil price nearing $53/barrel mark, last crossed in October 2015, domestic oil exploration companies such as ONGC and Cairn India are facing the prospect of higher outgo on Oil Industries Development (OID) cess. Whatever relief they got from the last budget replacing an earlier specific impost (`4,500/tonne) with ad valorem (20%) levy has already vanished.
“When crude oil rules at $50/barrel, the cess outgo is around Rs 4,900 a tonne, higher than earlier specific levy of Rs 4,500 a tonne,” said a top official with a domestic exploration firm.
Cess is a production tax which is not a pass-through and so, has to be borne by the oil producers. Given this situation, then producers have asked for a reduction in the levy to 5-8%.
International Brent crude oil futures hit a fresh high of $52.86 a barrel, and were up 23 cents at $52.74 a barrel on Thursday afternoon.
“In the last couple of years, cess rate constitutes about 25% of the realised price of crude oil and as a result, it is severely impacting current and future capital expenditure and viability of future projects,” the official explained.
The latest report of the standing committee on petroleum and natural gas has recommended to halve the impost.
However, petroleum minister Dharmendra Pradhan, when recently asked if his ministry is pursuing North Block to reduce cess rate, said he has not come across any standing committee report on this issue.
The Association of Oil and Gas Operators (AOGO), an industry body representing nearly two-dozen members, in a recent communication to the petroleum secretary, sought reducing the cess to 5-8%.
“As a result thereof industry cost curve would be significantly higher vis-à-vis current developments. 20% ad-valorem cess rate will make these projects unviable and hamper monetisation of resources,” AOGO wrote to the petroleum secretary.