Windfall tax: Relief for product exports, not for upstream crude, says Citi

Petrol and diesel prices are down by $40-50 per barrel from month-ago levels

Brokerage firm Citi on Tuesday said a moderation in crude oil prices and a substantial correction in petrol and diesel prices could bring relief to oil companies on the product export tax announced by the government on July 1.

The Centre had announced a fortnightly review of its windfall tax as part of its endeavour to rein in super-normal profits of refiners.

While Indian oil companies would have to pay Rs six per litre on exports of petrol and aviation turbine fuel (ATF) each, and Rs 13 per litre on diesel exports as part of the new fuel tax, upstream producers would have to pay Rs 23,250 per tonne of crude oil produced in India.

On Monday, government officials had clarified to Business Standard that the review of the windfall tax on oil producers and refiners would be based on average global price trends in crude oil, not on brief fluctuations in the price of the commodity.

While the review is still pending, petrol and diesel prices have corrected by $40-50 a barrel from a month ago, Citi said in its report on Tuesday. A relief on the upstream crude cess, however, was unlikely, the brokerage said, adding that oil marketing companies such as Hindustan Petroleum (HPCL), Bharat Petroleum (BPCL) and Indian Oil Corporation (IOCL) as well as Reliance Industries (RIL) were key beneficiaries of this evolving dynamic.

"The government's intent appears to be to maximise revenues from upstream producers by capping their upside from higher oil prices. While the product tax appears to be targeted at ensuring domestic fuel availability isn't compromised. India remains a refining surplus nation and therefore normalising exports to earlier levels rather than completely halting exports would appear to be the primary objective of the government," Citi said.

Last week, brokerage CLSA had said that a crash in refining margins of diesel, petrol and ATF coinciding with a cool-off in crude oil prices from their peaks in June had diminished the super-profits of refiners.

The Brent crude price had corrected sharply in the past one month on recession fears, moving from $120 per barrel to $95 a barrel last week. On Monday, the benchmark rose sharply to touch $105.58 a barrel on concerns that global supplies would be limited in the coming months. It is currently hovering at around $106 a barrel.

"The refining spread for diesel has almost halved from the peak seen in June 2022 of $55-60 a barrel to $30 a barrel. Similarly, we have seen ATF spreads crash from $50-55 a barrel to$25-30 a barrel. Gasoline (petrol) spreads have also been slashed from $30-35 a barrel last month to $10-15 a barrel," CLSA said in its report last week.

This questions the need for the continuation of the windfall tax, the brokerage added, saying a review was likely if prices sustained at current levels.

“If this tax remains for long, we fear it may hamper the position of this government as an export and manufacturing-friendly regime. A review will be seen as a relief for Reliance. It will be a big trigger for ONGC and Oil India as these stocks bake-in a crude realisation of only $40-45 per barrel,” it said.