Budget blues for oil firms

Service tax, cess on domestic petroleum crude to raise exploration costs.

Union Budget has brought no relief for oil companies as exploration costs are likely to shoot up with the introduction of additional service tax and the proposed increase in the cess on domestically produced petroleum crude.

Now, oil companies including state-run Oil and Natural Gas Corporation (ONGC), Oil India (OIL) and private majors such as Reliance Industries and Cairn Energy, will have to revamp their business structures to keep the profits up.

The Union Budget has proposed to increase the cess on domestically produced petroleum crude to Rs 2,500 per tonne from Rs 1,800 per tonne.

This proposal will hit ONGC and OIL. And the increase in service tax to 12 per cent from 10 per cent, will also affect the oil exploration companies.

Subir Raha, chairman of ONGC said, "The company will have an annual incremental outgo of Rs 1,600 crore as additional cess. This is in addition to ONGC's contribution to the government exchequer. We pay over 50 per cent of our revenue to the govexchequer and the Rs 1,600 crore will add a little more.''

According to an OIL official, the company will have to pay Rs 200 crore to the government exchequer as additional cess.

"Cess is a tricky thing. It's applicable only to pre-NELP (new exploration licencing policy) blocks, thus ONGC and OIL will be the affected companies. NELP blocks have not started production yet, where major private players including RIL look for huge production," an industry analyst said.

Panna-mukta-tapti (PMT) and Kharsang blocks, which fall under pre-NELP, are owned by private players also. Exploration companies are paying fixed cess of Rs 500 per tonne here alone.

From pre-nelp blocks, ONGC and Oil are producing over 20 million tonne oil while PMT and Kharsang jointly produce about 7 million tonne oil.

The share of PMT is 6 million tonne in this. The rise in service tax will affect the upstream sector, which includes private companies.