If wishes were horses, the Indian oil and gas sector would have seen a much-expected moderation in the taxation rates on crude oil and petroleum products.

Surprisingly, however, despite crude oil prices being on a boil, and a galloping subsidy burden, Budget 2011-12 has provided no such relief. The only note of consolation is the Government announcing its intent to directly transfer cash subsidies on kerosene and LPG. This measure though is work-in-progress and is likely to be implemented (if at all) only by March 2012.

Last year's budget had seen restoration in basic customs duty (5 per cent on crude oil, 7.5 per cent on diesel and petrol, and 10 per cent on other refined products). Central excise duty on petrol and diesel was also increased by Re 1 per litre each.

It was widely anticipated that with crude oil prices breaching the crucial $100-a-barrel mark (currently trading at around $112 a barrel), all or at least some of these taxes would be reversed or at least moderated. Such a move would have provided relief to the oil and gas sector in general, and to the oil marketing companies (Indian Oil, BPCL, and HPCL) in particular, which are reeling under the burden of a ballooning subsidy bill (expected to be north of Rs 100,000 crore at current rates).

Subsidy sharing

Upstream oil companies (ONGC and Oil India) and GAIL would also have benefitted from a reduction in the amount they need to provide as discounts as part of the subsidy sharing mechanism. Such a measure would, no doubt, have helped a smoother consummation of the soon-to-be launched mega follow-on offer of ONGC.

Given the current high inflationary conditions, the Government is likely to find it difficult to increase the prices of the subsidised transport fuels (petrol and diesel) and cooking fuels (kerosene and LPG), at least in the near term. With the brunt of the crude oil price rise likely to fall on the public sector oil companies, moderation in customs and excise duty would have been a welcome measure.

However, the Government's revenue considerations seem to have won the day, at least for now. Given the ascendant crude oil prices, the budgeted subsidy burden of Rs 23,640 crore for 2011-2012 (compared with the revised estimate of Rs 38,386 crore for 2010-11) seems inadequate.

Unless of course, the Government bites the bullet and hikes fuel prices. In such a scenario, consumers will have to bear the brunt and get ready for higher prices.

Current retail prices for a litre of petrol, diesel and kerosene at Delhi are Rs 58.37, Rs 37.75, and Rs 12.73 respectively. A 14.2-kg cylinder of LPG costs Rs 345.35. Taxes account for a big chunk of the retail prices (44 per cent in the case of petrol and 24 per cent in the case of diesel).

Exploration

Another disconcerting provision in Budget 2011 for the oil and gas industry is the proposal to do away with the seven-year profit-linked deduction available for commercial production of mineral oil, for blocks licensed under a contract awarded after March 31, 2011 under NELP. This could adversely impact future exploration bids for the country's hydrocarbon reserves.

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