Ad valorem cess spells barrels of cheer

The cess paid by the likes of Cairn India and ONGC for producing crude oil in India will now be at the rate of 20 per cent on an ad-valorem basis as against the fixed amount of ₹4,500 per tonne levied currently.

By making the cess ‘ad valorem’, the government has now linked it to the prevailing crude oil price, which has been a long-standing demand of domestic exploration and production companies. For ONGC, its average realisation was $44.34 per barrel during the third quarter of fiscal 2015-16.

The fixed cess rate of ₹4,500 a tonne translated to around $9.3 per barrel.

A 20 per cent ad valorem cess would have meant that the company would have paid $8.8 per barrel or about 50 cents per barrel lower.

Similarly, Cairn India’s average price realisation during the quarter was $35.2 per barrel. At the fixed rate, the cess being paid by the company was around 26 per cent of its realisation. At a 20 per cent ad valorem rate, the company would have paid $7.04 per barrel cess which would be almost $2 per barrel lower.

The Oil Industry (Development) Act provides for a cess as duty of excise on indigenous crude oil. This is a production cess, and has to be borne by the producers as it is not a pass-through. In 2005-06, when crude oil prices had increased to $60 a barrel, the cess was ₹2,500 a tonne. When oil hit $100 a barrel in 2012, the cess was increased to ₹4,500 a tonne. Even after the price at which Indian refiners bought crude oil fell to around $47 a barrel (April to date average), the level of cess remained unchanged. At ₹4,500 a tonne, the industry estimates that cess was more than 20 per cent of the current crude oil prices and, as a result, marginal fields and small discoveries would have faced project viability issues.

While the change in cess structure has been welcomed by the industry, the quantum of the ad valorem rate has been seen as a sore point.

“We appreciate that the government has seen the need for relief in cess. However, the proposed relief is too little. Current margins for Cairn after depreciation are negative in our world-class Rajasthan field. We would seek continued dialogue with the government to ensure that the necessary investment in the sector is not further curtailed, which may hamper India’s quest for energy security,” Mayank Ashar, CEO, Cairn India, said.

The goodies did not just stop at a new cess structure for domestic oil and gas explorers. Finance Minister Arun Jaitley also gave hope for incentives which could soon be provided to new discoveries in deep-water, ultra deep-water and high pressure-high temperature area. “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,” Jaitley said.

It is not just companies but also households that are below poverty line (BPL) that stand to gain from the announcement related to the petroleum and natural gas sector in the Budget.

For the next two years the Finance Ministry will provide ₹2,000 crore to provide LPG connections at a concessional rate for BPL households. “Through this, we will provide LPG connections to 1.5 crore BPL families each year in 2016-17 and 2017-18,” Dharmendra Pradhan, Minister of State (Independent Charge) for Petroleum & Natural Gas, said.

Pradhan added that the aim is to provide LPG connections to 5 crore BPL families in the next three years.

The connections will be in the name of the women members of the household. The scheme has been christened ‘Ujjwala,’ said Pradhan, adding that a rebate of ₹1,600 will be provided for the installation cost which is currently at around ₹3,400.

The Ministry for Petroleum and Natural Gas is also working on a wholesale marketing plan and is in consultation with the public sector oil marketing companies to reduce the installation cost.

“While we have been providing the same discount as in 2015-16 while providing LPG connections to BPL families, it has been done through the CSR (corporate social responsibility) funds of the oil marketing companies. This is for the first time that the Finance Ministry will provide funds for the same,” said Pradhan.

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