Crude oil output costs to rise by $1 per barrel on Union Budget move

Removal of duty exemptions on chemicals may lead to annual rise of $40 mn

The removal of duty exemptions for chemicals essential to crude production in the latest budget, has raised production costs by $1 per barrel, and led to an annual cost increase of about $40 million, officials at upstream companies said.

Specific chemicals used for enhanced oil recovery (EOR) in ageing fields, have seen duty exemptions being removed, they stressed. One such chemical is Partially Hydrolyzed Polyacrylamide (HPAM), a widely used polymer in the oil and gas industry.

It works by increasing the viscosity of the injected water in oil wells, thus improving its mobility and oil recovery. "Due to non-availability of domestically produced HPAM, it is largely imported for domestic operations. The production cost has increased by $1 per barrel or $40 million annually," an official at an upstream major said under conditions of anonymity.

Given that upto 90 percent of domestic production by volume comes from ageing fields which require some level of EOR, the companies have asked the government to roll back the changes. "Implementation of EOR technologies optimize the yield of otherwise unviable fields and currently account for a sizable portion of domestic production," the official said.

Call for exemptions

Upstream companies have also called for the reinstatement of other chemicals removed from the list of those having exemption from customs duty. Till July, 2017, no basic customs duty (BSC) and indirect taxes were levied on oil and gas supplies. Afterwards, the list of chemicals, called List 33, provided only generic names for all the chemicals and therefore only a concessional IGST at 5 percent was applicable.

But from February, 2022, List 33 was modified, and excluded a lot of chemicals that started attracting customs duty, a social welfare charge (SWS) and and 18 percent IGST. Chemicals such as reverse emulsion breaker, corrosion inhibitor oxygen scavenger and scale inhibitor got excluded," an official from a private sector oil producer said.

"Our request is that these chemicals should be reinstated in List 33 so that we pay only 12 percent IGST and nil basic customs duty, and BCD and SWS," he added.

Oil and Gas operators have long been advocating for the reduction of the effective tax rate of 70 percent to meet the global standard of 40 percent. In recent meetings with the Finance and Petroleum Ministries, the industry has called for bringing the tax imposed under previous regimes such as New Exploration Licensing Policy (NELP) and Pre-NELP, on a par with the current Hydrocarbon Exploration and Licensing Policy (HELP) regime, Business Standard recently reported.

India's exploration and production (E&P) sector is currently dominated by the two government companies, Oil and Natural Gas Corporation and Oil India Limited which account for 71 percent and 9 percent of India's total crude oil production. Cairn Oil & Gas, a part of the Vedanta group and Reliance Petroleum, a subsidiary of RIL are the two major private sector upstream companies.

With an eye to progressively reducing the import dependence, the government wants $100 billion investment in the E&P sector by 2030, especially in key offshore areas such as the Andaman Sea, However, it has struggled to attract interest. Meanwhile, the country has witnessed an aggregate of $2-3 billion of capital expenditure in the sector, as opposed to the $15-20 billion that is required to hit the government's targeted levels, industry insiders say.

India currently imports 87 percent of its crude oil requirements. While the crude oil import bill shrank to $139.8 billion in FY24, down 13.3 percent from the $161.4 billion in FY23, this was mostly chalked up to the continued incidence of major discounts on Russian crude oil.