Investment-based tax gains announced for Nelp-IX

NEW DELHI: Energy explorers will get tax incentives based on their investments in the ninth round of auctions for oil and gas exploration blocks, replacing the existing regime of seven-year tax holiday on profits.

The tax benefits will extend to gas exploration as well, oil minister Murli Deora clarified on Friday at the launch of the ninth new exploration licensing policy (Nelp-IX ), under which bids have been invited for 34 exploration blocks.

Oil secretary S Sundareshan said the new tax incentive regime is based on the proposed Direct Tax Code set to replace the existing income tax laws from 2012. ET was first to report the change in policy on October 1.
“The change will not (adversely) impact Nelp-IX . Investors want clarity so that they will bid accordingly . They don’t want doubts after investments are made,” he said.

As per the current practice, oil companies get a seven-year tax holiday on their income from selling crude oil from a block, but the incentives are not available for natural gas production.

This is because the current income tax law is ambiguous on the definition of “mineral oil” , interpreted to exclude gas. A one-time exception was made for only Nelp-VIII bidding round last year.

“As per the DTC bill, the exploration companies shall be entitled to investment-linked deduction rather than a profit-linked tax holiday,” said Nabin Ballodia, Director - Tax & Regulatory Services KPMG India. As per oil ministry experts, the change will be a major relief for energy firms who otherwise lose entire investments if they fail to find commercially viable oil or gas in a field.

The ninth auction round offers eight deep water , seven shallow water, 11 on-land and eight small blocks. Out of the total, 19 blocks are new areas and 15 are areas relinquished by energy explorers due to various technical reasons, including lapse of time.

The bid closing date for Nelp-IX is March 18, 2011. An energy expert said investors will be guided by data on the blocks put on auction.

“The decision to make investments in oil and gas sector is very little to do with factors like tax incentives , bigger question is how prospective are the blocks,” he said requesting anonymity as the consultancy firm where he works is an external adviser to the oil ministry.

The government appears confident on that count. “Blocks (under offer) are highly prospective as per available data. Relinquished blocks are equally prospective for example Cairn’s Rajasthan oil field which was earlier held by other operators ,” director general in the Directorate General of Hydrocarbon (DGH), SK Srivastava said.

DGH, a technical arm of the oil ministry, is the custodian of country’s oil & gas assets.
The oil ministry has projected about $1.1 billion investments from Nelp-IX as per minimum work programme requirements.

“This is the minimum commitment, actual investments could be even larger, but can’t be quantified at this juncture,” Mr Sundareshan said.

The country has attracted about $14 billion in exploration & production of oil and gas up to Nelp-VIII . The oil ministry will launch Nelp-IX roadshow in Mumbai on October 18 and take it to Moscow , Houston, Calgary, Perth and Singapore in the next four months.

In previous eight auction rounds, the ministry has already awarded 235 blocks covering 58% of country’s sedimentary basins. India plans to put 80% of its basins under exploration by 2012.