Tax break removal not to affect Nelp auction in April: Experts

The proposed withdrawal of the seven-year income tax holiday on gas production will have only a "marginal" impact on the auction of oil and gas blocks under the New Exploration and Licensing Policy (Nelp VII) in April. Production of gas will continue to be highly profitable even if the tax holiday is withdrawn, say industry officials.

"Exploration and production of oil and gas will continue to be a profitable business," said a senior official with Oil and Natural gas Corporation (ONGC), the country's largest exploration and production company, which has been a beneficiary of the tax holiday.

The government will offer 57 oil and gas exploration blocks in Nelp VII in April this year. It is expecting to attract global oil majors to bid in this round of auctions. Big Oil, except for British Gas and Italy's ENI, had stayed away from previous Nelp auctions.

The withdrawal of the tax holiday, as mentioned in the Finance Bill and the explanatory memorandum to the Finance Bill, part of the Budget 2008-09 documents, is likely to force companies to designate fields with larger reserves as "marginal".

A marginal field is one where the oil and gas reserves are very small and return on investment is not adequate to justify significant efforts.

Typically, bigger oil companies lease out such fields to smaller companies and take a share of the profits.

"Fields with larger reserves are likely to be defined as marginal as the profitability from them will decrease," said another official with ONGC, which has already sought clarification from the petroleum ministry on the issue.

Against the spirit
The seven-year tax holiday is not a contractual obligation under Nelp agreements. The holiday promised by the petroleum ministry is, however, a prominent selling point for the government while marketing the Nelp auctions during roadshows around the world.

Some industry officials believe the withdrawal of the tax benefit can be challenged in a court of law as the it will go against the "spirit" of the Nelp contracts. "The government ensures fiscal stability under the contracts, which means that no terms can be altered to inconvenience operators," said another official with an oil company.

Major oil companies such as ONGC have already sought clarifications from the petroleum ministry on the move.

"It will be an embarrassing situation for the government if it has to go against the spirit of its promise of giving the tax holiday, which is a major attraction in oil and gas production," said a Delhi-based analyst who advises oil and gas companies.