Budget 2016: Little cheer for upstream industry

The much-awaited demand from the exploration and production industry to reduce the Oil Industry Development Board cess from Rs 4,500 per tonne to ad valorem has been met this Budget. The fixed rate of cess has been replaced by a 20 per cent ad valorem rate.

The move is positive for exploration and production players, including Cairn India, Oil and Natural Gas Corporation and Oil India. The ad valorem cess will mean higher payouts when prices are high and lower when the rates fall. Currently, the companies pay a cess of Rs 4,500 per tonne on the crude they produce despite a steep fall in crude oil prices. However, stocks of these companies reacted negatively to the Budget. While Cairn India fell 4.60 per cent to close at Rs 118.15 a piece, ONGC fell the most at 9.72 per cent to close at Rs 194.10 a piece. Oil India dropped 2.73 per cent to close at Rs 309.50 a piece on the Bombay Stock Exchange.
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The finance minister announced, "A proposal is under consideration for new discoveries and areas which are yet to commence production, first, to provide calibrated marketing freedom; and second, to do so at a pre-determined ceiling price to be discovered on the principle of landed price of alternative fuels."

Raju Kumar, tax partner, Oil & Gas practice, EY, said the move would help improve self-sufficiency through enhanced domestic production besides bringing in foreign investment. "However, the proposal to discontinue the tax holiday on commercial production of mineral oil for blocks starting production on or after April 1, 2017 could prove to be a disincentive since the blocks offered in the NELP rounds were promised a seven-year tax holiday," Kumar said.

Cairn India CEO Mayank Ashar, while appreciating that the government had seen the need for relief in cess, said, "The proposed relief is too little. The current margins for Cairn after depreciation are negative in our Rajasthan field. We would seek dialogue with the government to ensure that investment in the sector is not curtailed."

The customs duty exemptions on specified goods imported for petroleum exploration, meanwhile, will reduce the cost of exploration for upstream companies.