NEW DELHI: June may turn out to be the luckiest month for government oil marketing companies for the third year in a row. Like the last two years, this June is also expected to see a round of price hikes in controlled fuel products. Price hikes of controlled petroleum products such as diesel, cooking gas and kerosene have been happening annually in the month of June, irrespective of the companies’ losses. A price increase of petrol is also likely.
This is a departure from the period following the dismantling of the administered pricing mechanism (APM) in April 2002. The first year after the APM was dismantled saw as many as 16 price changes, of which 12 were price increases in both petrol and diesel. While petroleum ministry officials are tight-lipped about the next price increase, industry officials are certain of another hike some time next month as the Budget session of Parliament is scheduled to end on May 22.
Hinting at a fuel price hike, Finance Minister Pranab Mukherjee said in Parliament on Tuesday it was impossible for the government to maintain the current level of fuel subsidies. He said the government would have to address the under-recoveries of oil marketing companies IndianOil, Bharat Petroleum and Hindustan Petroleum. At the current prices of products, oil companies are likely to see record under-recoveries of Rs 1.8 lakh crore for the financial year.
The government provided for Rs 40,000 crore in the Budget towards fuel subsidy and upstream oil companies will chip in with another Rs 68,220 crore at their subsidy share of 37.9 per cent. The two combined would still leave a gap of Rs 71,780 crore.
In June 2010, the government decontrolled petrol and increased prices of diesel, kerosene and cooking gas.
Thereafter, no price increase was effected for a full year in the controlled products — diesel, kerosene and cooking gas. Exactly a year later, on June 24, 2011, the government allowed an increase in prices of the three regulated products. This time, it also removed the five per cent customs duty on crude oil, brought down the import duty on petrol and diesel from 7.5 per cent to 2.5 per cent and reduced the excise duty on diesel by Rs 2.6 to Rs 2 per litre, thereby foregoing revenues of Rs 49,000 crore. However, within a few weeks companies started losing sharply on all these products as global prices continued to increase. A weakening rupee added to their woes. From barely Rs 5 per litre in July last year, the under-recovery on diesel has touched Rs 14 per litre.
“The month of June is a lull period in terms of political activity. As there is no Parliament session, reactions will be muted if a price hike is done during June. But, this is not a healthy situation for oil companies,” said R S Sharma, former ONGC chairman and current chairman of the Ficci Hydrocarbon Committee.
Industry experts, however, see a regular price hike of a small quantum ideal rather than an annual hike that stresses the public. “Ideally, price hikes should be done in a phased manner so that the consumers are not burdened in one go. I see the June increase as a coincidence but if it happens this time too then it would become a trend,” said G C Daga, former director (marketing) at IndianOil.
Currently, the three OMCs together lose Rs 570 per day on the regulated sale of diesel, kerosene and domestic cooking gas, according to P K Goyal, director (finance) at IndianOil. Product-wise, the loss is Rs 13.91 per litre of diesel, Rs 31.49 per litre of kerosene and Rs 480 on every domestic cooking gas cylinder. On petrol, which stands deregulated since June 2010, the revenue loss is Rs 7.17 per litre. The Indian basket of crude oil has averaged $117.64 per barrel so far in the current fiscal, up over five per cent from the previous fiscal’s average of $111.89. With the rupee depreciation, the actual impact is much higher.
LET’S BITE THE BULLET ON FUEL & REFORMS: FM TO OPPOSITION, STATES
NEW DELHI: The United Progressive Alliance’s chief crisis manager Pranab Mukherjee made a compassionate plea to all political parties and states to urgently bite the bullet on fuel subsidies and urged the Opposition to help with the passage of some crucial economic laws.
He also tinkered with the indirect tax rates to cheer some sectors, including commercial vehicles, solar energy, polyester fibre, yarn from waste and certain parts of footwear, even as he expressed hope that the Goods and Services Tax could be rolled out next fiscal.
Winding up the debate on the Finance Bill, 2012 in Lok Sabha, Mukherjee also promised the House a white paper on black money in the ongoing session of Parliament itself, though he declined to reveal the names of tax evaders.
“…the government is awaiting the reports about the estimate of black money stashed abroad, which are being prepared by three independent groups,” he said on Tuesday.
In a moving speech that lasted for more than an hour, FM said the changes in indirect taxes, including rollback of excise duty on jewellery, will cost the government 600 crore.
Mukherjee warned that when the global economy recovers, crude could climb to $150 a barrel and will make things very difficult for the economy.
“If the prices go up to $150 per barrel, it is not merely my imaginary fear, what will be the effect?” he said, urging all stakeholders to help work out a solution in which everyone takes a haircut. “Partly, it will be passed on to the consumers, partly, it will be absorbed by the States and partly by the Union Government,” he said.
Rising crude imports and high gold purchases are largely the reason the current account deficit that has risen to 4% of GDP.
The inability to pass on higher prices to the consumer has pushed up subsidies and landed oil firms in trouble. Under-recoveries of oil companies are pegged at 1.39 lakh crore in the last financial year.
Finance minister also cautioned that the high fiscal deficit, 5.9% in 2011-12 and budgeted 5.1% in the current fiscal, will be a major hurdle in putting the economy back on the path to higher GDP growth.
“I do believe that if we can see just the three fiscal legislations passed, two major tax reforms passed, the entire atmosphere will be changed,” he said, seeking support from the Opposition benches.
“… I cannot get those legislations passed, I cannot have the Constitution Amendment passed where two-third majority of both the Houses and ratification by 50% states are required, I cannot have that,” he said.
Finance minister said he was ready to discuss the issue of Central Sales Tax compensation with states, but sought assurance of progress on GST.
RIL GAS OUTPUT TO FALL FURTHER: REDDY
NEW DELHI: Gas output from the Andhra offshore fields of Reliance Industries (RIL) is expected to drop further to a quarter of the targeted volume in the next three years, oil minister S Jaipal Reddy told Rajya Sabha in a written reply on Tuesday.
Output from the D1 and D3 discoveries in the KG-D6 field has dropped to about half of the 60 mcmd (million cubic metres per day) peak production it had achieved in March 2010. This is expected to bottom out to 20 mcmd in 2014-15, Reddy said. The field was projected to pump 80 mcmd by that year.
TOI had on May 2, 2011, first reported the expected fall in gas output.
On April 4, 2011, the Directorate General of Hydrocarbons – the oil ministry’s regulatory arm – had told the government that RIL’s revised work programme and budget for 2011-12 and 2012-13 indicated production of 43 mcmd and 38 mcmd, respectively.
This is less than the 62 mcmd indicated for this period in the $9-billion plan approved by the regulator for developing the field.
The fields are producing less than 34 mcmd. The output would average 28 mcmd this year, Reddy said. On May 2, the ministry slapped a notice of $1.2 billion, or about Rs 7,000 crore, on the company for failing to achieve the gas production target. The notice said the company would not be allowed to recover from sale of gas the cost of its investments worth $457 million made in the fields in 2010-11 and $778 million in 2011-12.
The government’s contracts for auctioned fields allow companies to fully recover their investments from sale of oil or gas. RIL has so far invested $5.6 billion and recovered nearly all of it. The government’s notice, however, does not mean that RIL will have to return this amount immediately as it has already served an arbitration notice on the ministry on November 24, 2011, and moved the Supreme Court to speed up appointment of an arbitrator.
RIL’S KG D6 OUTPUT TO FALL TO 20 MMSCMD BY 2014-15, SAYS GOVT
NEW DELHI: The government on Tuesday projected that the natural gas production from Reliance Industries’ deep water D6 block in the Krishna Godavari basin would fall to 20 million metric standard cubic metre a day (mmscmd) by 2014-15 from the current fiscal’s expected production of 28 mmscmd.
In a written reply to a question in Rajya Sabha, petroleum and natural gas minister S Jaipal Reddy said the gas production from the field is projected to be 24 mmscmd in 2013-14.
On other hand, output from state-owned ONGC is expected to stay steady this year and next year at 55 mmscmd, and would inch to 58 mmscmd in 2014-15, the minister said in Rajya Sabha.
State-owned OilIndia’s gas production would inch up from 8 mmscmd in 2012-13 to 10 in 2014-15. While availability of the clean fuel from domestic sources would go up modestly to 113 units by 2014-15 from 104 units this year, the extra domestic demand for the fuel is expected to rise sharply by 254 units this year to 356 units in 2014-15, Reddy said. NowIndia’s domestic demand is at 166 units.
To tap this additional demand, investors are now betting on setting up terminals for processing imported liquefied natural gas (LNG) and in gas pipelines to ship the fuel to industries. While spot market price of gas in overseas markets are in the range of $12-16 per unit, India hopes to access gas at a better price by sourcing it from the US, where it is abundant.
INDIA RESISTS US PRESSURE AGAINST IRAN OIL IMPORTS
NEW DELHI: Hillary Clinton has insisted thatIndiato ‘do more’ to scale down its oil imports to pressureIranto bow to international demands against its nuclear programme.
Resisting US pressure to further scale down oil imports from sanction-hit Iran, India on Tuesday made it clear that it has to look at the issue involved beyond the energy trade as it has ‘vital’ security stakes in the Gulf region.
After talks with US Secretary of State Hillary Clinton during which she asked India to restrict its trade and energy ties with Tehran, external affairs minister S M Krishna said, ‘I conveyed our vital stakes in peace and stability in the Persian Gulf and wider West Asian region, given the six million Indians who live there and the region’s importance to our economy.’
Clinton, who is here on her last leg of three-nation Asia tour, has been pressing India to ‘do more’ to scale down its oil imports from Iran to keep pressure on Tehran to meet international demands on its disputed nuclear programme.
Addressing a joint press interaction, Krishna said on Tuesday, ‘Iranis a key country for our energy needs but we have to look at theIranissue beyond the issue of energy trade.’
‘In the first place, we have to see security and stability in the Gulf region,Indiahas vital stakes in Gulf region. It is one of the critical destinations for our external trade,’ he said, while noting thatIndia’s exports to that region was about $100 billion and oil imports stood at 60 per cent.
Indiahas been askingTehranto abide by its international obligations as non-nuclear weapons state under the Non-Proliferation Treaty but has maintained that it has a right to pursue nuclear activities for peaceful purposes.
BRITISH GAS, PSU CONSORTIUM TO DISCUSS GUJARAT GAS STAKE ON MAY 18
MUMBAI: After an impasse of about two months, British Gas and representatives of the PSU consortium bidding for its 65% stake in Gujarat Gas are planning to meet on May 18 to discuss the modalities of the deal.
A consortium comprising Bharat Petroleum Corporation, Oil and Natural Gas Corporation, Gujarat State Petroleum Corporation and OilIndiais bidding for the UK-based energy major’s stake in Gujarat Gas.
“There is a meeting with the BG group on May 18 where we will be discussing how to take the deal forward, and as of now we have no plans to revise our initial bid,” said a senior executive from one of the PSU companies.
SHOULD UPSTREAM OIL & GAS COMPANIES GET TAXED TO DEATH?
NEW DELHI: The way the government treats its upstream oil companies (involved in exploration and production) and downstream ones (focussed on refining, marketing and distribution) can be very similar to what happens in a family when one child gets coddled while the other is largely ignored.
In this case, it is clear that within the oil and gas industry, upstream companies are considered the industry’s milch cows, generating large amounts of cash for the government via the levies that they are forced to pay. Meanwhile, downstream companies in the petroleum marketing and refining arena are protected through tax exemptions primarily due to their direct interface with retail consumers.
Can this be sustainable for a country which needs to optimise its energy resources, which in turn requires appropriately incentivising those companies involved in unearthing them?
This impulse, by the government, to mete out differential treatment to players on either side of the oil and gas spectrum has its roots in 2008, when crude oil prices had peaked at $147 a barrel. Then, the government started considering a windfall tax on domestic oil producing companies. High international prices meant higher gains for them and it was felt that super profits should be singled out for special taxation. While this proposal, put forth by the BK Chaturvedi committee, did not eventually materialise, ever since then there has been a consistent move to either tax upstream companies in newer ways or increase the existing levy on them
In fact, the increase in cess levy for upstream companies from Rs 2,500 a tonne to Rs 4,500 in the Budget can be seen clearly in the context of a series of similar moves, such as the service tax on upstream activities, removal of tax holiday for gas production and other such levies that have emerged in the past few years. “There have been quite a few instances which illustrate the absence of stability in the fiscal policy for exploration and development activities,” says Gokul Chaudhri, partner, BMR Advisors.
Take the case of the government’s own company, Oil and Natural Gas Corporation. Besides being made to share the subsidy burden of oil marketing companies to the extent that its outgo on this account alone was Rs 1,51,900 crore in the first three months of 2011-12, the company will be taking a hit of about Rs 5,000 crore from an increase in cess and service tax this year.
Upstream companies in the private sector have similarly suffered. CairnIndia, which was made to fork up royalty and cess payments on its Barmer production, thereby reducing its profit share, is now facing an additional burden of about Rs 13,282.1 crore due to this increase. While Reliance Industries will not be impacted, since its various production-sharing contracts for fields given out before the New Exploration and Licensing Policy cap the cess, it too has been hit by the denial of tax holiday on gas production. “Both RIL’s KG-D6 and Cairn’s Barmer discoveries have been surrounded by policy and regulatory complications. Exploration is a high-risk activity, and the government and the industry have significant gains from a successful project. Changing the rules of the game post the discovery is a material dilution of the rule of law which is most important to attract investment,” says Chaudhri.
On the other end of the spectrum are the favoured children—downstream companies such as Indian Oil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum Corporation. Not only have these three companies benefited from tax holidays provided to their refineries, they have also been saved from officially being in losses through subsidies doled out to them. Besides providing Rs 68,481 crore in petroleum subsidy to them last year, the government also took a hit of Rs 24,000 crore in excise duty cut on petroleum products and customs duty exemption on crude oil. Consequently, the government can no longer rely on the petroleum sector as the major contributor to its exchequer.
The state of affairs as it exists on Tuesday wasn’t always intended to be so. Chaudhri points out that the policy objective under NELP was designed to ring-fence the upstream projects from the subsidy problems of the downstream sector and hasn’t happened due to the inability to align the supply chain with the market prices—such as supplying to subsidised sectors (like the power industry).
Meanwhile, unchecked consumption of the petroleum sector is encouraged because of the shield provided to the government-owned downstream players against the increase in international prices. “In hindsight, if the government had walked the path of de-control as suggested in the road map by the task force chaired by Dr Vijay Kelkar, and not abandoned the reforms mid-way, the current distortions could have been avoided. The fiscal and energy policies need to be aligned—maybe the time has come for the country to have a National Energy Security Advisor in the PMO, akin to NSA for defence matters,” suggests Chaudhri.
There may be, however, another problem that the government cannot get around. SV Narasimhan, former director (finance), Indian Oil, says that it is difficult for any government to pass on the full price increase to consumers. “You have to see consumer interest as well and that is the reason that the government cut taxes.” Besides, he points out that even after subsidy-sharing upstream companies like ONGC have been able to make good profit due to the increase in international crude oil prices, they still make a post-tax profit of around Rs 20,000 crore and are able to fund their acquisitions themselves.
However, Rahul Garg, executive director and direct tax leader, PricewaterhouseCoopers doesn’t see any harm in the upstream sector bearing a greater burden. “We have to see whether with the kind of oil prices which are prevalent, tax increase reduces profitability to an extent that upstream operations become unviable, like what happens in the case of downstream companies.”
One important question is, do onerous taxes hurt the exploration and discovery industry as a whole? Garg doesn’t think so. “It is recognized that tax laws are tools to collect revenue rather than determine people’s investment behavior,” says Garg. “A sector may not necessarily flourish if tax concessions are available. The power sector is an apt example of this,” he adds
Most mature economies have a royalty-based tax regime for the upstream sector. For downstream companies, policies are market-driven, with a regulatory regime that ensures there is no monopolistic or restrictive trade practice. “Our upstream regime is a production-sharing system, and hence the government benefits from the higher profit sharing as production or prices increase from the project. Also the royalty rates are ad-valorem. Therefore, the fiscal system self corrects in favour of the government when there is a rise in the oil and gas prices,” says Chaudhri. In other words, there is no reason for a tax above and beyond what already exists.
Energy security requires the promotion of the upstream sector in order to facilitate as many oil and gas discoveries as possible. Onerous tax regimes simply disincentivise these companies from using better technology and send a wrong message to the investment community about an ever-changing and fickle fiscal policy. This is bad news for a country hoping to ease its dependence on foreign oil.
LIC SEES MARGINAL APPRECIATION IN ONGC INVESTMENT VALUE TILL MARCH
The country’s largest insurer, Life Insurance Corporation (LIC), has seen a marginal appreciation in its investment in Oil and Natural Gas Corp (ONGC) till March 31. “The amount of money invested by LIC in ONGC shares till March 31, was Rs 20,493.60 crore. The value of this investment as on March 31 is Rs 21,752.91 crore,” Minister of State for Finance, Namo Narain Meena, said in a written reply to the Rajya Sabha. In March, the government had raised Rs 12,767 crore through auction of ONGC shares. The share sale was subscribed 98.3 per cent. LIC had subscribed to 84 per cent of the shares on offer. Following this, LIC’s stake in ONGC had gone up to 9.48 per cent. According to the Insurance Regulatory and Development Authority norms, insurers cannot hold more than 10 per cent stake in any company. In another reply, Meena said the book value of the total outstanding investment in PSU shares as on March 31, 2012, was Rs 59,116.36 crore while its market value was Rs 59,851.16 crore.
LIC INVESTMENT IN ONGC PROFITABLE: NAMO NARAIN MEENA
NEW DELHI: Amid rising speculation that the country’s largest insurer incurred heavy losses in a bid to save the Rs 12,400-crore disinvestment auction plan of ONGC, the government, in a statement to Parliament, clarified that Life Insurance Corporation of India had, on the contrary, made profits on the investment.
Responding to a query in the Rajya Sabha on Tuesday, Minister of State of Finance Namo Narain Meena said LIC had invested Rs 20,493.60 crore in ONGC till March 31, 2012, which is now valued at Rs 21,752.91 crore.
With a luke warm response from investors to ONGC auction, which was touted as the first of many more such deals, the government brought on board LIC to save face. The minister also denied any investigation into how such a large transaction was allowed after the closure of the stock market.
This was following media reports that had stated that a Parliamentary panel had directed the IRDA to enquire into LIC’s share purchase in ONGC. Meena added, ” LIC has reported that as on 31 March 2012, total investment in PSUs is in profit.” According to the statement, LIC’s Rs 59,116 crore investment is valued at at Rs 59,851 crore. LIC has invested in many PSUs, including the Shipping Corporation ofIndia, NMDC and PTC India .
RIL CONFIRMS GAS RESERVE DOWNGRADE AT KG-D6
MUMBAI: Reliance Industries (RIL) has cut estimates for proven gas reserves in its Krishna-Godavari block off the east coast by 6.7 per cent, to 3.67 trillion cubic ft (tcf), the company said in its annual report.
The report also mentioned it had planned to invest Rs 4,800 crore in its telecom business this year. The company, which has Broadband Wireless Access licences across the country, is to launch high-speed data services on the LTE platform this year.
“The broadband market inIndiais expected to leapfrog from its current user base of around 20 million wireless and wire-line subscribers. Our foray in Broadband Access is aimed at achieving a leadership status in providing digital services to a large base of consumers and providing next generation data services,” said Mukesh Ambani, chairman and managing director, in a statement to shareholders.
During the financial year, Infotel Broadband Services Ltd (Infotel), a subsidiary of RIL, acquired 38.5 per cent stake in Extramarks Education Pvt Ltd, a company focused on school education and digital learning.
RIL is building one of the largest coke gasification facilities in the world, with capital expenditure of $4 billion (Rs 22,000 crore) over the next three to four years. This will significantly increase the complexity and profitability of the refinery and also make it more environmentally-friendly. And, enhance bottom-of-the-barrel conversion in terms of value creation, the company said.
“Our planned expansions in the petrochemical segment have commenced and are aimed principally at addressing the growing consumption inIndia. These expansions will leverage from downstream integration with RIL’s refining complex and the resultant feedstock security,” Ambani added.
Ambani said production from the KG-D6 block had been adversely impacted, mainly due to unforeseen reservoir complexities and water ingress in the producing fields. “Significant steps have been taken by the joint technical teams in assessing options for overall reservoir management, based on which an integrated plan for work-overs and additional wells can be executed, subject to necessary regulatory and government approvals,” he said.
RIL’s 30 per cent partner in the block, UK-based BP, in its calendar year 2011 annual report, had stated it accounted for just 0.3 tcf of proven reserves (1P) for its 30 per cent stake, implying that gross 1P reserves in KG-D6, including the government’s share, was barely 1.4 tcf.
Canadian exploration company Niko Resources, which holds 10 per cent stake in KG-D6 for the past 12 years, had also revised its estimate downward. In March this year, the company said it expected a drop in reserves at the Dhirubhai-1 and 3 (D1 & D3) gas fields.
And, petroleum minister Jaipal Reddy said on Tuesday the output at D6 was projected to decline to 20 million standard cubic metres a day (mscmd) in 2014-15, from an estimated 28 mscmd this financial year.
RIL’s philanthropy arm, Reliance Foundation, is in the process of setting up a Reliance Institute of Technology inJamnagarand a Reliance Polytechnic in Dwarka in partnership with theGujaratgovernment, the annual report stated.
RELIANCE INDUSTRIES ACCUSES OIL MINISTRY OF VIOLATING PRODUCTION SHARING CONTRACT
NEW DELHI: Reliance Industries has replied to the oil ministry that its notice, which imposed about $1 billion penalty for steep fall in gas output from D6 block, is “illegal” and asked it to appoint an arbitrator to resolve the vexed issue.
In a letter to the oil ministry, Reliance’s solicitor said, “Any such purported attempt to unilaterally adjust any amounts as threatened or otherwise would be completely illegal and constitute a serious breach of the provision of the production sharing contract …”
The oil ministry last week slapped a hefty penalty of about $1,005 million on Reliance Industries for the steep fall in gas output from the KG-D6 block, sharply escalating the oil ministry’s raging dispute with the Mukesh Ambani-controlled company.
In its notice, the ministry admonished RIL for the decline in production and said the company had violated the production sharing contract (PSC) and willfully drilled fewer wells than what it had committed in its approved plan. It also rejected company’s argument that unexpected geology caused the decline in production and data established that drilling more wells would not boost output.
Replying to the oil ministry’s notice, Reliance solicitor said, “our client fully and emphatically denies the accusations made in your letter that our client has breached its obligations” under the contract.
“Unfortunately, unfair, and unfounded, these accusations severely misstate or misunderstand the terms of PSC, the actions of our client is in its capacity as operator, and Good International Petroleum Industry Practices,” the reply to the oil ministry’s penalty notice said.
RIL’s advocate said that the dispute was old and Reliance had “repeatedly” pointed at the disagreements and sought to resolve the matter through arbitration since Nov 2011.
The advocate accused the oil ministry that it has violated the contractual terms by delaying arbitration for about five months. “The government of India’s refusal since receiving our client’s notice of arbitration to nominate an arbitrator and to proceed with arbitration of this dispute constitutes a serious breach of its obligations under the dispute resolution procedures agreed in Article 33” of the PSC, the advocate said in the reply.
The reply added that the delay in response to RIL’s arbitration notice of Nov 23, forced the company to move the Supreme Court last month pleading its intervention to initiate arbitration.
The advocate said, the ministry’s notice acknowledged the dispute; hence the government should nominate the arbitrator “without any further delay.” An oil ministry official said last week that the government was expecting a reply from RIL refusing to pay the penalty. “Once, we get the reply of our notice, we would initiate the process to appoint an arbitrator,” a senior oil ministry official said requesting anonymity.
Reliance had initiated arbitration in November last year in anticipation of financial penalties for falling gas output. But the oil ministry rubbished the arbitration notice, saying it had not taken any adverse action. The company had argued that the PSC allows it to recover its entire investment from the sale of gas, independent of the actual production.
The oil ministry allows companies to recover their investment from the sale of oil and gas they discover. If the company does not discover any oil or gas, it loses all the money. In the case of Reliance, the oil ministry says it has to restrict the recovery of costs.
RIL has had a rocky relationship with the Centre ever since Jaipal Reddy replaced Murli Deora as oil minister in January last year. Its approvals have been delayed; top company executives have had to wait for months to meet bureaucrats; and its proposed pricing formula for coal bed methane has not been cleared for a long time.
The penalty of $1.235 billion has two components: $457 million for lower production in 2010-11, and $778 million for 2011-12 when output fell further.
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