Budget 2015: A mixed bag for oil and gas sector

NEW DELHI: The government on Saturday proposed reduction of customs duty on some petrochemical intermediaries that could marginally reduce their prices, but refrained from announcing dramatic policy changes in the oil and gas sector, leaving some companies a little disappointed.

“The finance minister has not addressed many of our genuine expectations,” said LK Gupta, MD & CEO of Essar Oil. “We wanted the government to remove basic custom duty on imported natural gas, currently at 5%, as it is an inverted duty.”

Gupta said, “The government has also not provided relief to E&P companies for their demand of service tax credit. Service tax drains away a substantial part of their funds, and since crude oil/natural gas produced are not liable to excise duties, companies cannot take CENVAT credit of service tax incurred for exploration and production.”

The budget for 2015-16 has proposed scrapping of the basic customs duty on ulexite ore and halved that on isoprene and liquefied butane. On ethylene dichloride, vinyl chloride monomer and styrene monomer, it has been reduced to 2%. Similarly, butyl acrylate and anthraquinone will now attract lower customs duties of 5% and 2.5%, respectively.

SAD on naptha, ethylene dichloride, vinyl chloride monomer and styrene monomer for manufacture of excisable goods has been halved to 2%.
“For an integrated player, the duty reduction will not have much impact, but for a standalone petrochemicals maker, the margin will get slightly squeezed,” Mehul Thanawala, an oil and gas sector analyst with JM Financials, said.

The government rejigged the duty structure for petrol and diesel that would have no impact on the final excise duties paid on the two commodities. The rejig exercise has been done “only to the extent of subsuming the quantum of education cess presently levied on them”, Finance Minister Arun Jaitley said in his budget speech.

The minister also unveiled plans to spend an estimated Rs 40,000 crore, likely to be collected through excise duty on petrol and diesel, to bolster the country’s infrastructure. He proposed “conversion of existing excise duty on petrol and diesel to the extent of Rs 4 per litre into Road Cess”.

The global crude price crash since June has brought down petrol and diesel prices in the country, which imports nearly 80% of its oil requirements, and has given the government the leeway to raise revenue through additional levy without stoking inflation.

The finance minister also proposed to introduce a Public Contracts (Resolution of Disputes) Bill to “streamline the institutional arrangements” for resolution of disputes, which take “long to resolve, and the process is very costly too”.

This could be particularly beneficial to the oil and gas sector, where several explorers are locked in legal battles with the government. Reliance Industries, the country’s largest private sector company, Cairn Energy, Niko Resources and Videocon Industries are among those engaged in arbitration with the government.
Almost half of the 21 cases of arbitrations in 15 years have been initiated only in the past five years, indicating a higher pace of disputes lately, which must get resolved to attract private investment in the oil and gas sector.

“We will have to see the fine print of the proposed bill. At present, we don’t know how good the proposed framework will be and if it can block company’s desire to go for arbitration in case of disputes,” Thanawala said.