Give incentives to boost investments: Upstream oil firms

In tough times of a continuous slide in crude oil prices, exploration and production companies say a fiscal incentive from the government would give them a shot in the arm to invest more in exploration and production.

OIL THE WHEELS

• Lowering of cess, royalty and miscellaneous taxes
• More money with firms would mean more investments
• Fiscal incentives for mature fields would push employment of EOR methods
• Pushing E&P would help India improve production and lower imports
• Cess should be ad-valorem  
• Currently cess is over 20% of crude oil price

World over, exploration and production has slowed as oil prices have crashed to an 11-year low at $35 a barrel. In such a situation, say industry players, certain fiscal support from the government would come in handy for the exploration and production companies.

"Internationally, companies are struggling due to the drop in crude oil prices. But governments are incentivising these companies with measures like lower royalty and lower production tax. If these lead to some additional production improving the investment viability and margins for companies, it is a win-win situation for both companies and the government," said Ranbir Singh Butola, ex-chairman and managing director, Indian Oil Corporation and convener of the taskforce, Hydrocarbon Committee of the Confederation of Indian Industry (CII).

The CII committee has made recommendations to the government that it is possible for the country to increase oil production from the present 37 million tonnes (mt) to 42 mt and gas production from the present 95 million to 150 million cubic metres per day by 2022 if the government provides fiscal incentives, reduces cess and extension of production sharing contracts, among others.

Currently, most of India's hydrocarbon production comes from the ageing fields of Oil and Natural Gas Corporation (ONGC) and Oil India. However, companies can arrest the decline rate and improve their recovery factor by adopting methods of enhance oil recovery (EOR), which requires additional cost and technological understanding.

Butola added that even if these companies can improve the recovery factor from these ageing fields by one per cent, it can accrue 500 million barrels of reserves.

Prime Minister Narendra Modi had, last March, said India needs to bring down its import dependence on oil and gas to 67 per cent of its requirement by 2022. India currently imports around 77 per cent in the oil, gas and petroleum sector. "We can reduce this import by at least 10 per cent by 2022. This 10 per cent we will produce ourselves and this should be our dream," Modi had said.

But with the cycle of production in the industry being around 10 years, certain fiscal incentives could give the industry much needed push to invest in extracting more hydrocarbon from existing fields and increase production may be five to six million tonnes by 2022 to meet Prime Minister's target.

"Cess, royalty and miscellaneous taxes, all put together leave very less with the exploration and production companies. A very important measure for the industry would be bringing in ad-valorem duty against current levying of cess," said K Ravichandran, senior vice-president & co-head (corporate ratings), Icra.

Sources said the government is looking at addressing the concerns of the exploration and production industry by means of reducing the cess levied on domestically-produced crude oil.

The cess rate is about 20 per cent of crude oil price. The rate has progressively increased from the original Rs 60 to Rs 900 at the time of introduction of the contract regime to Rs 1,800 in 2002, Rs 2,500 in 2006 and Rs 4,500 from 2012 till now.

"As a result all decisions for increase of production by additional investments in exploration, IOR/EOR etc. get stymied at the management committee-level by "non-commerciality" consideration, thus, robbing India of the much-needed additional oil," wrote Ashu Sagar, secretary-general, Association of Oil and Gas Operators' in a letter to the secretary, ministry of petroleum and natural gas, in September 2015.

The government is said to be considering converting the cess on domestically produced crude oil into an ad-valorem rate, a levy in proportion to the estimated value of the goods or transaction concerned. The ad-valorem cess will mean higher payouts when prices are high and lower when the rates fall. Currently, Cairn India, ONGC and Oil India Ltd pay a cess of Rs 4,500 per tonne on the crude oil they produce from their fields.

Sources said the industry has requested a cess levy of nine per cent of the crude oil price. A drop in oil prices means low realisations for the exploration and production companies while higher payment of cess. An ONGC official said a drop in cess would certainly help the exploration and production companies allowing them more money power to invest further and that expectation of the sector from this year's budget are high.

"The time is right for the government to support the upstream segment. Just as the government had supported the downstream segment by means of under-recovery, certain fiscal incentives could help the upstream segment too," added Butola.