On slippery ground

Upstream oil companies are disappointed with the service tax proposal in Budget 2007-08.

The UPA government's Budget 2007-08 has disappointed the oil and gas industry as their demands have not been met, despite finance minister P Chidambaram having said that "energy security is high on the government's agenda".

The exploration and production companies are unhappy with the proposal of service tax on outsourced mining services in which oil and gas have been included. 
 

CRUDE OIL PRODUCTION IN '000 TONNES
	1990- 91	2000- 01	2001- 02	2002- 03	2003- 04	2004- 05	2005- 06*
Production *provisional	32,160	32,426	32,032	33,044	33,373	33,981	32,190
Source: Ministry of Petroleum and Natural Gas

"This will result in a significant rise in cost of operations of upstream companies," according to an analyst.

"Upstream companies will now have an additional tax burden of 12.36 per cent on operations," he adds.

Exploration and production companies currently employ services worth Rs 3,000 crore. This will lead to a service tax payout of close to Rs 400 crore, says Oil India director-finance T K Ananthkumar.

The country's crude oil output in January increased by 4.7 per cent compared to the same month last year. ONGC produced 2.9 million tonnes during the month, up from 2.77 million tonnes produced in the corresponding period last year.

Production from the Mumbai High fields, operated by ONGC, rose 13.2 per cent to 1.59 million tonnes. The fields, 100 miles north-west of Mumbai in the Arabian Sea, account for half of the country's annual output.

Crude oil production by explorers such as Cairn India fell 4 per cent to 3,89,000 tonnes. Natural gas output fell 1.2 per cent to 2.746 billion cubic metres in January.

The country's proven oil reserves are estimated at about 5 billion barrels, or about 4.5 per cent of the world total. Most of these reserves lie offshore near Mumbai and onshore in Assam. However, it is thought that the country's offshore and onshore basins contain as much as 11 billion barrels of oil.

India ranks 25th among oil producing countries, and accounts for about 1 per cent of the world's annual crude oil production. About 30 per cent of India's energy needs are met by oil, and more than 70 per cent of that oil is imported.

A strong growth in oil demand has resulted in India's annual petroleum consumption increasing by more than 75 per cent in the last decade, and the consumption is projected to climb to about 3 million barrels per day by 2010.

The country is currently the world's sixth largest oil consumer, accounting for about 2.9 per cent of the world's total annual petroleum consumption.

"With increasing consumption and fewer large crude oil discoveries, there is a need to incentivise exploration and production companies. The finance minister failed to do so in this Budget. Instead, he has increased their tax liability," says an analyst.

However, some analysts believe that the upstream companies have been over-protected by the government.

"They have huge cash reserves, and sharing some of that with the government would not affect them much. They need to come out of their cushioned existence," according to an analyst.

SNIPPETS

NELP push
In five rounds of auction of exploration blocks under the New Exploration and Licencing Policy (NELP), the government has signed 110 production sharing contracts with the winners of the blocks.

During his Budget speech, the finance minister said that close to Rs 97,000 crore had been invested in exploration under NELP rounds so far.

"In the five rounds, 32 discoveries of oil and gas have been made, establishing in place reserves of 400 million tonnes of oil and oil equivalent of gas," petroleum minister Murli Deora said during the signing of contracts under the sixth round of NELP last week.

Director general in the directorate general of hydrocarbons, V K Sibal had earlier said that around $6 billion would be invested in the exploration phase, which will be for five years, under NELP VI. NELP VI, in which 52 blocks have been awarded, marked the entry of companies like British Gas and Reliance Natural Resources in the country's oil and gas exploration business.

According to Sibal, around 70-80 blocks are likely to be put on the block in the seventh round of NELP. The seventh round is likely to be offered in mid-April.

Besides the sheer number of blocks, the government is considering carving out blocks in states that were not present in NELP VI.

"The North-east will be a major focus area. Blocks in Arunachal Pradesh, Nagaland and Tripura could be offered in NELP VII," says a senior official in the ministry of petroleum and natural gas.

In the sixth round only Assam and Mizoram came on the exploration map. Jammu and Kashmir is also a focus state under NELP VII, but government sources are not too sure if blocks will be offered in the state, considering the volatile situation there.

Global scenario
The price of the Indian crude oil basket has remained volatile in the past month on fears over Iran's nuclear policy and weather conditions in the US. Prices, which had hit a low of $49.85 on January 17 this year, rose to over $60 a barrel on March 1, for the first time in the current calendar year.

Prices have remained over $60 a barrel in the month so far, dipping just below the level on March 12. 
 

INDIAN CRUDE OIL BASKET                    In $/barrel
Mar 13	59.37
Mar 12	59.15
Mar 9	60.00
Mar 8	60.22
Mar 2	60.27
Mar 1	60.06
Feb 28	58.41
Feb 27	59.22
Feb 26	58.98
Feb 23	58.81
Feb 22	57.05
Feb 21	55.74

The Indian basket comprises Oman-Dubai sour grade crude oil and Brent dated sweet crude oil in 58:42 ratio.

The price of the basket has risen 6.51 per cent to $59.37 a barrel from $55.74 a barrel three weeks ago. The basket had been hovering around the $56-57 a barrel level for over two weeks before fears over Iran's nuclear programme pushed the prices up.

In February, the basket of crude oil that Indian refiners buy had averaged $56.53 per barrel compared with $52.53 a barrel in January.