Budget wishlist: Energy sector

The oil ministry has put up for comments a draft policy to opt for revenue-sharing model while auctioning future oil & gas blocks for exploration to private firms

KEY DEVELOPMENTS

• Transparency: The oil ministry has put up for comments a draft policy to opt for revenue-sharing model while auctioning future oil & gas blocks for exploration to private firms. The idea is to make the process more transparent and market-oriented.
   
• Incentives: The ministry has announced a Marginal Fields Policy, to bring into production 69 marginal oil & gas fields with 89 million tonnes or ~75,000 crore worth of reserves, by offering incentives to explorers. These include exemption from payment of oil cess and Customs duty on machinery and equipment.
   
• Oil diplomacy: To strengthen the country’s energy security, oil diplomacy initiatives have been intensified through meaningful engagement with hydrocarbon-rich nations.
   
• Give it Up: The government launched the Give it Up campaign for LPG subsidy. It helped save ~140 crore as on July 22, 2015, with nearly 1.26 million Indians registering for the cause.
   
•  Nelp-X: The government is preparing to issue the 10th round of bidding for the National Exploration Licensing Policy with 52 blocks..
   
• Oil prices: A sharp drop in oil prices — below $40 a barrel at the end of 2015 — reflects rampant supply and weak global demand, amid concerns over slowing economic growth around the world, especially in China

KEY ISSUES

• Infra:  Inadequate infra in the gas market. Amid growing demand, efforts to support LNG development will boost energy security.
   
• Imports: High dependence on oil imports.
   
• Output: Almost static domestic oil production and declining gas production

EXPERT VIEW: Deepak Mahurkar

PwC expert answers Business Standard readers' questions on what to expect from the Budget

Kedarnath: Oil Minister Dharmendra Pradhan said during the Make in India week the government was looking into a new crude oil import policy for spot purchases by state-owned refiners. What is your take on this? 

State-owned refiners will get to tap opportunities to procure crude oil at optimal price. It is a matter of companies’ internal policies to be aligned with the needs of the business. Such change will also place a demand on participating companies of new skills, added competencies, technology frameworks, process enhancements, market understanding and change in delegated authority. 

Global companies have met with graded success in such programmes. They are pushing the envelope for facing competition and bringing value to customers.
 

Afsandiar:  Should the government look into providing a bailout package of sorts for upstream firms, hit by low global crude oil prices?  

During the New Exploration Licensing Policy (NELP) regime, companies have competitively bid for assets. It is unlikely that the government would infuse bailout funds into such companies or assets. The contracts neither provide for windfall gains stripping nor floor for triggering any support. In nomination blocks and pre-NELP awards, too, such provisions aren’t available. When the upstream sector started enjoying international parity pricing for crude oil, it was implicit that companies will enjoy highs and bear lows. Other steps like fiscal measures might be used before a bailout is considered. A cut in or removal of cess, concession in taxes and royalties are some examples. In an industry whose financial performance depends on external environment, a one-time bailout might not suffice. The current low crude oil price may last longer than expected, and hence systemic response rather than a one-time response will be considered, if situation goes out of hand.

Deepak Mahurkar
Leader (Oil & Gas), PwC India

"The business of oil & gas exploration and production is a long-term one, requiring fiscal certainty for reasonable returns. It is heartening that the govt is supporting industry’s plea to make oil cess ad valorem. If implemented, it will be a win-win for all stakeholders. We remain optimistic that this will be addressed in the Budget, sending a positive signal to investors. It will also encourage the sector to pursue PM’s vision of reducing India’s import dependence for crude oil by at least 10 per cent by 2022"

Mayank Ashar

Managing director & chief executive officer, Cairn India