For the oil and gas sector, the >Budget was high on generics and low on specifics. The proposals announced by the Finance Minister are in the nature of actions intended to be taken, but with no specific roadmap or timeline specified.
Some of these proposals are, in fact, old wine. For instance, the statement that “a policy to encourage exploration and production of shale gas will be announced” has been made by the Government (oil and gas ministry) earlier too.
Also, the intention to make fully operational the 5 mmtpa LNG terminal in Dabhol (operated by GAIL) in 2013-14 was already known. The Rangarajan Committee’s recommendations on natural gas pricing policies which aim to remove uncertainties have also been in the public domain for some time now. An acceptance of the committee’s proposals may give a fillip to the sagging domestic gas production in the country. The Budget has indicated that this may be the way forward but has stopped short of fixing a deadline to announce the policy change. As and when the proposals are accepted, gas producing companies such as Reliance Industries, ONGC and Oil India may benefit.
The announcement that the oil and gas exploration policy may move from profit sharing to revenue sharing contracts may help the government ring-fence its income from hydrocarbon blocks. While this may save the government the trouble it is seeing in existing production sharing contracts like the one pertaining to the KG-D6 fields of Reliance Industries, a shift to a revenue sharing model (from a profit sharing model) may increase the risks for oil and gas explorers, who may not be able to recover costs fully. This could impede interest in the sector. On the other hand, if the government implements its Budget proposal to clear New Exploration Licensing Policy (NELP) blocks that were awarded but stalled, this may provide a fillip to the poor investment mood in the hydrocarbon sector in the country. Companies such as Italy’s Eni Spa were stuck with blocks awarded under the NELP which they were not able to explore for want of clearances from different arms of the government.
The Budget has not acceded to the sector’s requests for clarity on subsidy sharing, relaxation or extension of tax holiday clauses, and exemptions from service tax. The provision for petroleum subsidy (Rs 65,000 crore) for 2013-14 seems to be betting on the fuel price reforms being continued. But if the revised estimates of Rs 96,880 crore for 2012-13 against last year’s budget provision of Rs 43,580 crore is any indication, this year’s provision also seems rather optimistic. Especially, with crude oil (Brent) prices hovering around $110 a barrel. With general elections next year, the government’s resolve to continue with price reforms (hikes) may also be tested.