By Vandana Hari

With international crude prices having slumped into the $70s from more than $90/barrel in the third quarter of last year and poised to remain under pressure in 2024, upstream producers in India are bracing for a hit on revenues as well as a squeeze on margins as their operating costs remain elevated.

The government needs to jettison the “windfall profit tax” on domestic crude production introduced one and a half years ago if it wants contractors to not only try and maintain steady output, but have the wherewithal to invest in maximising output from ageing fields. Enhanced oil recovery or EOR projects, which are the need of the day to coax the remaining molecules out of India’s many depleted fields, invariably hinge on cutting-edge, expensive technologies; as does the exploitation of the country’s untapped oil and gas reserves, most of which lie in deep waters that are a far tougher environment to operate in than onshore fields.

The government hiked the special additional excise duty on crude, more commonly known as the windfall tax, by 77% to `2,300/mt (nearly $3.8/barrel) effective January 2. It followed a rise of about $2.60/barrel in the Indian crude basket, an official pricing benchmark representative of imported barrels, in the second half of December versus the first half.

When the tax was introduced in July 2022, upstream players in India were reaping all-time-high profits in the aftermath of the Russian invasion of Ukraine, which had sent crude surging into triple digits. Brent futures had spiked to a 14-year high of just under $128/barrel in March, a month after the invasion. The government’s move at the time could be rationalised as a way to channel the excess profits from the upstream sector into subsidising fuel prices at the pump to ease the burden on consumers and shield the economy from further inflationary pressures.

But the situation is vastly different now. Petrol and diesel prices, which were frozen in April 2022 and have remained static for a record 20 months, could now be allowed to float with international crude prices without imposing a heavy burden on motorists.

Besides, the 2022 extraordinary profits of oil producers have long disappeared. The Indian crude basket averaged about $82.30 in 2023, down $15/barrel from the previous year.

An onerous taxation and profit-sharing regime already leaves only a sliver of the revenues with Indian producers. At $75/barrel crude, after accounting for capital and operating expenditures, all the regular taxes and levies, and the government’s share of profit, the contractor is left with less than $10/barrel. With the windfall tax on top, that amount crunches to less than $6/barrel, which does not even support investment in further exploration and development activity, let alone EOR projects.

Though softer crude prices will ease India’s foreign exchange outflow on imports this year, policy makers need to maintain efforts to rein in the country’s growing dependence on overseas supplies, especially at this critical juncture of economic growth.

Indian fuel demand increased by a robust 5% year-on-year in 2023 to a new high just shy of 5 million b/d and is poised to remain on a strong upward trajectory in the coming years, in line with its economic expansion. Crude imports over January-November 2023 rose 4% on-year to a new record high of 4.75 million b/d, according to government data.

Meanwhile, domestic crude and condensate production remained on a downtrend, easing to an average of 580,000 b/d over the first 11 months of last year from 590,000 b/d in the corresponding period of 2022.

With the world likely to remain geopolitically charged for the foreseeable future, not only do the country’s refiners incur higher input costs as a growing share of their feedstock is shipped in from distant suppliers, but they also take on a greater risk of supply disruptions, especially in the Middle East.

To be sure, India is not alone in levying a windfall tax on oil producers. The UK in May 2022 introduced a windfall tax on the profits of oil and gas producers in the North Sea, which has raised their effective tax rate from 40% previously to 75% at present. 

But the North Sea is a much richer hydrocarbon province than the Indian offshore and has a more attractive fiscal regime. It has seen a notable pick-up in investments after a few years of a downturn—in fact, this year could see up to 14 new oil and gas fields getting the green light in the UK portion of the North Sea, the highest in a decade. 

The UK cushioned the impact of its new levy by introducing an “investment allowance”— producers can discount up to 80% of capital and operating expenditure to reduce the amount of profits subject to the levy.

India’s invitations to international majors such as ExxonMobil, Chevron and Total Energies to participate in oil and gas exploration and development need the backing of a stable and attractive upstream regime. These companies have the technology needed to tap the reserves in frontier areas and geographically challenging locations. Getting them over the line, beyond signing preliminary deals with state-owned Oil and Natural Gas Corporation for potential joint exploration in India’s deep waters and sharing technical expertise, may be difficult but is not impossible.

Moves to ensuring ease-of-doing business, cutting red tape, providing regulatory certainty, and deregulating oil and gas prices have all yielded some results but remain work in progress. However, the windfall tax on oil producers is a major new disincentive. Scrapping it would be a step in the right direction, and the sooner the better.

The author is founder & CEO, Vanda Insights. Views are personal.