If it wasn’t bad enough that govt policies were sclerotic, new levies are being imposed on successful explorers
With the government wanting to reduce oil/gas dependency by 10% by 2022 and 50% by 2050, you would think it would go out of its way to encourage investors by removing onerous levies—70% of all oil/gas profits go to the government—and by rolling out new sops. Instead, it continues with the old anti-industry policies and keeps adding new ones to them. The fact that the two largest private producers—Reliance and Cairn—are locked in court battles with the government, of course, tells its own story of how unfriendly the policy environment is.
If the government’s high levies weren’t bad enough, when Cairn found more oil and wanted to extend its licence to extract this, instead of being grateful for increased self-sufficiency, the government decided to hike its share of profits by a whopping 10 percentage points three years ago. And when, two years ago, the government decided to move from a high—and fixed—cess on oil, this resulted in it rising from Rs 4,500 per metric tonne in 2016 to Rs 6,600 today, or a hike of 47%. Last year, the government compounded the industry’s problems by issuing service tax notices on ‘cost petroleum’ (the share of oil/gas the companies get to compensate for their costs), cash calls (the amount a consortium leader asks others to pay for production costs) and royalty paid to the government. While industry outrage resulted in this getting partially fixed, the industry is still being asked to pay an 18% GST on the royalty it pays the government.
It gets worse. As Business Standard reported, the government is planning a de facto cap on the costs oilcos can recover. Right now, under the law, oilcos can recover all their investments from the oil/gas extracted, after which the profits are shared with the government. This profit-share depends on the investment multiple (IM), which is the revenue divided by the capex—so the more the investment, the lower the IM, and the lower the IM, the lower the government’s profit share. The new government directive says even if an oilco invests more—this depresses the IM—the share of profits accruing to the government must not fall. Apart from the fact that this is contrary to the contracts the government has signed with the oilcos, which allows full cost-recovery, since oilcos will now not be able to recover their investments quickly enough, they will scale back their investments so as to ensure the IM doesn’t fall.
But that’s not all. The government is proposing that, for all pre-NELP contracts, the private oilco must now pay its share of the royalty and cess—typically, 30% of production—that, under the law, their PSU oilco partners were to pay. When these fields were given to private oilcos before 1997-98, the government told them that, if any oil/gas was found, ONGC/OIL would have to given a 30% share in the venture for free; in return, ONGC/OIL would pay all the royalty/cess. So, ONGC/OIL got a free entry into valuable fields that they did not discover, and the government now wants to revoke the terms under which these fields were given out. In the case of Cairn’s Rajasthan fields, which were also pre-NELP, the government forced Vedanta to agree to pay cess/royalty as a pre-condition to allowing the deal to go through. With this kind of oil/gas policy, it is not clear if the government wants the oilcos to invest more in finding oil/gas to reduce India’s import-dependency.