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Budget 2018: Create level playing field for domestic crude producers

Sudhir Mathur     January 19, 2018

On the back of a production cut by OPEC, global oil prices have risen from the depths of $40 a barrel and have rallied sharply in last few months. The benchmark Brent is currently trading at $68 and can move up further in 2018. This is an important phenomenon on the back of the upcoming budget: as we import more than 80% of our energy requirement, the country's economic fortune is closely linked to international oil prices. The need of the hour is to create an eco-system to encourage domestic production and cut down dependence on imports with a sustained, targeted approach. The reality, however, has not kept pace with the good intentions. India's domestic oil and gas production touched a five-year low in 2016-2017, dropping more than 20 percent to just 68 million tonne. With rising oil prices and overall decrease in production, the government has a critical task to balance fiscal and trade accounts and give an immediate boost to domestic oil and gas production. At the same time, there needs to be further impetus to the policy objective of reducing India's imports of crude by 10% by 2022. The budget is a great opportunity to create a level playing field for domestic crude producers who have to bear 2% CST while imported crude has no taxes. The advent of GST and the exclusion of petroleum sector from its purview has meant much higher costs for the sector contrary to the stated principle of cost neutrality. While the government is making efforts to align states and bring the Petroleum sector under GST, the budget would be the best opportunity to clarify that there will be no GST on royalty, cost recovery, cash calls and profit petroleum as has always been the case.

Similarly the budget also must look at addressing the issue of Cess. The Industry needs government's support in regulating the cess regime. The cess on crude oil was introduced as a temporary measure back in 1974 when the Oil Industry (Development) Act provided for its collection to part-fund domestic exploration. Today, 43 years on, cess on domestic crude oil continues long after it has outlived its utility. Cess was originally levied at Rs 60 per tonne in July 1974 and subsequently revised from time to time. During 2005-06, when crude oil prices rose sharply from an average of $40 per barrel to $60 per barrel, the OID Cess was raised from Rs 1,800 to Rs 2,500 per tonne in March, 2006. The cess incurred by producers is not recoverable from refineries and, thus, forms part of the cost of production of crude oil. Again, when crude shot up to over $100 per barrel in 2012, the rate of cess was increased by the government to Rs 4,500 per tonne, effectively linking the cess rate to prevailing crude oil prices. Waking to the situation, the Government attempted to give some relief to the industry in the Union budget of February 2016 by connecting cess to an ad valorem regime and making it 20% of the per-barrel cost. But the relief was too little, too late. The 20% cess rate provided limited benefit for a temporary period only till crude oil prices were moderate. Regulation of the Cess is must to spur more confidence and bring in more investment to the sector. As per the industry's recommendation the cess should be brought down to 8% from 20% as it will will accelerate additional production, investment and much needed job creation.

Sidharth Mathur is CEO, Vedanta Cairn Oil & Gas

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