You are on page 1of 3

IMPACT OF UNION BUDGET 2011-12

OIL AND GAS Industry Snapshot


Particulars FY08 FY09 FY10 1HFY11 FY10 Growth y/y Production Crude Oil (MMT) Natural Gas (MCM) Refinery Production (MMT) Consumption Petroleum Products (MMT) Imports Crude Oil (MMT) Petroleum Products (MMT) Export Petroleum Products (MMT) Prices Crude Oil (Dubai) ($/bbl) Crude Oil (Indian Basket-$/bbl) 77.4 79.25 81.8 83.57 69.22 69.76 76.1 76.56 -15.38% -16.53% 40.779 36.931 50.974 27.482 38.02% 121.672 22.462 128.155 18.285 159.259 14.662 81.854 8.939 24.27% -19.81% 128.946 133.599 137.808 69.366 3.15% 34.12 32,417 150.813 33.51 32,849 157.059 33.69 47,512 186.562 18.3 26,662 96.01 0.54% 44.64% 18.78%

India continues to be heavily dependent on imports for meeting its crude oil requirements. The domestic production of crude oil during 2009-2010 stood at around 33.69 MT while imports were almost of 159.259 MT. The refinery production in India stood at 186.562 MTPA (million tonnes per annum). The domestic consumption was around 138.808 MTPA in 2009-2010, with the balance refining output being exported. Export of petroleum products showed signs of recovery, increasing at about 38 per cent during FY10 compared to a decline of 9.44 per cent during the same period last year. GoI regulates retail prices of certain sensitive petroleum products (mainly petrol, diesel, Liquefied Petroleum Gas (LPG) and kerosene) which results in sales-related under-recoveries with volatility in crude oil prices. During FY10, the total under-recoveries to Public Sector Undertaking (PSU) OMCs were Rs.45,000 crore, of which Rs.15,000 crore were borne by upstream companies and the Finance Ministry

_____________________________________________________________
Professional Risk Opinion

53

provided Rs.26,000 crore cash compensation in respect of these under recoveries. The balance was borne by the OMCs. In the wake of an increasing budget deficit, the GOI put forth the deregulation of petrol prices in the economy. This move will benefit the downstream oil marketing companies which should see their under-recoveries reduce substantially. Besides, it essentially means the reemergence of private oil retailers in domestic market such as Reliance Industries Ltd and Essar Oil, who now in the decontrolled regime will be able to pose stiff competition to the oil PSUs. With the recent deregulation of petrol prices and increase in prices of diesel, LPG and kerosene, the underrecoveries in FY11 are expected to reduce from Rs.77,000 crore to about Rs.53,000 crore. Duty Structure Basic Customs Duty on petroleum coke has been reduced from 5% to 2.50%. No changes in Excise & Customs Duty for the Oil & Gas Industry Impact

Budget Proposals:
1. Basic customs duty on petroleum coke is reduced from 5% to 2.50%. 2. Minimum Alternative Tax proposed to be increased from 18% to18.50% of book profits. Surcharge has been reduced from 7.50% to 5%. 3. Units operating in Special Economic Zones (SEZs) were exempt from MAT under Section 115JB of the Income Tax Act, MAT would now be levied on units operating in Special Economic Zones (SEZs) with changes in the tax rate effective from April 2012. However, these units were also given a relief to the zones wherein a new scheme is introduced in which units in SEZs will be able to obtain tax-free receipt of services wholly consumed within the SEZ. 4. Government will provide a direct cash subsidy on kerosene to BPL populace & the same direct cash subsidy is also proposed in case of LPG.

Impact on the industry


The direct cash subsidy on kerosene given to below-the-poverty-line populace would significantly reduce the under-recoveries of the Oil Marketing Companies (OMCs). Subsidy on Kerosene accounts for around 30-35% of the under-recoveries for the OMCs. In addition to the under-

54

_________________________________________________________________________

IMPACT OF UNION BUDGET 2011-12

recoveries, it is estimated that around 35% of such kerosene marketed through the public distribution system is diverted illegally for other purposes. With the introduction of the direct cash subsidy, both these issues would be settled, proving positive for the OMCs. The government has targeted March 2012 for implementing the same; however, this deadline seems too optimistic considering the various procedures involved in implementing the same. The increase in the MAT rate and its applicability to the units in the Special Economic Zones (SEZs) would negatively affect oil and gas companies which pay the same on account of oil and gas blocks and their presence in SEZs. However, as a slight relief, the government has reduced the surcharge rate from 7.50% to 5% in the budget.

Impact on companies
COMPANY NAME Oil & Natural Gas Corp. Ltd. INDUSTRY Exploration & Production IMPACT adversely blocks Increase in the MAT rate and its Gas Exploration, Reliance Industries Ltd. Oil Refining, Petrochemicals applicability to the units in SEZ would adversely affect RIL especially on account of its new Jamnagar refinery which is located in a SEZ at Jamnagar. Bharat Petroleum Corp. Ltd. Hindustan Petroleum Corp. Ltd. Indian Oil Corp. Ltd. Refining & Marketing With the direct cash subsidy given to consumers, under-recoveries would reduce significantly. COMMENTS Increase in the MAT rate would affect ONGC on account of certain oil & gas

_____________________________________________________________
Professional Risk Opinion

55

You might also like