Submitted By:- Jyoti Kumari(12).

Navneet Bisht(18).Rahul Kumar(21).

Overview On OIL & GAS SECTOR-2012

BMR Advisors has come out with its report on energy sector.

•Energy sector being one the key strategic sectors, continues to receive policy thrust required for sustained growth. •Proposals to extend viability gap funding for oil and Gas/LNG storage facilities and oil and gas pipelines will provide much needed impetus for growth of this sector. •Extension of ten year tax holiday for undertaking engaged in generation / generation and distribution of power by a year until March 31, 2013 is a welcome move.Other non-tax policy measures including proposed cap on subsidies (which will subsume fuel subsidy as well) would enable the Government to achieve a balance fiscal consolidation over the 12th plan period.

Policy announcements

•Viability gap funding extended to oil and gas/ LNG storage facilities and oil andgas pipelines.•To overcome fuel supply constraints in the power sector, Coal India Limited directed to sign fuel supply agreements with power plants that have entered into long term Power Purchase Agreements with distribution companies; such power plants should be commissioned on or before March 31, 2015.•ECB allowed to partly finance rupee debt of existing power projects.•Issue of tax free bonds for power sector increased to INR 100 billion.

Direct Tax ProposalsOil & Gas

•Income received by foreign companies in Indian currency in India from sale of crude oil will be exempt, subject to following conditions:•Consideration received is pursuant to an agreement / arrangement entered into with or approved by Central Government;•Foreign company and the agreement / arrangement is notified by Central Government having regard to the national interest; and•Foreign company does not undertake any other activity in India other than receipt of consideration from oil sale.

Direct Tax ProposalsPower

•The period for commencing operations for claiming tax holiday has been extended by one year to March 31, 2013;•Benefit of additional depreciation at 20 percent extended to power generation companies;•Interest payable on ECBs between July 1, 2012 to July 1, 2015 by an Indian company engaged in the business of generation or distribution or transmission of power, under a loan agreement approved by the Central Government, and subject to a maximum rate of interest approved under such agreement, subject to tax at the concessional rate of 5 percent.

Indirect Tax ProposalsOil & Gas

•Cess levied under Oil Industry (Development) Act, 1974, as a duty of excise on crude and petroleum increased from INR 2,500 per tonne to INR 4,500 per tonne effective immediately. Cess continues to remain exempt for crude oil imported into India.•Reduced rate of Cess of INR 1,600 for specified fields appears to have been retained.•Exemption from basic customs duty ("BCD") has been provided to Natural Gas / Liquefied Natural Gas imported for power generation by a power generating company as opposed to the earlier rate of 5 percent.•Direct import of ATF by Indian carriers as actual users allowed. This is likely to help eliminate VAT cost when a State trading Enterprise imports and sells to the actual users.•CVD payable on import of dredgers on the following value:•If the dredger is imported against a lease agreement, the CVD is to apply on the total lease value of the contract•If the dredger is imported by the owner, CVD to apply on 120th of the value of dredger for each month or part thereof for which the dredger has been granted license by the Director General of Shipping for stay in India•Important to note that CVD is to apply at 6 percent while BCD and ACD remain unchanged at Nil rate.

Expectation from Budget –Oil, Gas & Power Sector.

•NABIN BALLODIA-Partner-Tax-KPMGCompanies engaged in exploration and production of petroleum and natural gas are entitled to 7 year tax holiday. Flexibility to claim such tax holiday in a block of 10 years should be introduced. •ANIL REGO-CEO & Founder-RIGHT HORIZONSThe power sector would be expected to get some relief especially in terms of assistance on the interest to be paid on borrowed capital. The sector is under pressure of high bank debt which is difficult to service given the cost and pricing structures •HEMANT KANORIA-CMD-SREI INFRASTRUCTURE FINANCEFinancial health of the State Electricity Board is a major area of worry. Until and unless this is addressed, this can translate into a banking sector crisis. •VINAYAK CHATTERJEE-Chairman-FEEDBACK VENTURESThe power sectors problems have such a huge shadow on economic growth that I find it inconceivable that the finance ministers budget speech will not contain a reference to the power sector. •S RAMAKRISHNAN-CFO-TATA POWERFor our international investments, we hope the budget will have some long-term clarity on the taxation of dividends from them.

Announcements on Oil, Gas & Power Sector Budget.

•LNG exempt from customs duty; positive for GAIL and other gas dist cos, power cos and fert cos.•Direct cash subsidy for LPG and kerosene to be positive for oil PSUs.•LNG exempt from customs duty; positive for GAIL and other gas dist cos, power cos and fert cos•Thermal power co exempted from customs duty for 2 yrs•ECB for rupee-debt of power company; positve for all power companies•Propose tax free bonds of Rs 10,000 cr for power sector •To allow ECB borrowing to part finance power projects•Coal India advised to sign FSA with power plants •Coal India advised to sign FSA with power plants•Mkt has not priced in 19% import duty on power equipments: Kotak Institutional

Reaction On Budget-2012•Prior to the Union budget, the oil companies were proposing 100% compensation for the under-recoveries in line with year 2008-09, but the government restrained from any such move in the budget presented. •The companies were also calling for an extension of the tax holiday for both exploration and refining activities by10 years, as in case of power sector but this pitch did not materialize as per the market expectations.•"All eyes were pinged on the potential decontrol measure on diesel, but the government backed off from such shift, possibly citing the escalating inflationary levels in the country. •Oil and gas exploration companies were seeking an elimination of 5 percent import tax on LNG but the Union budget on the contrary exempted natural gas and LNG from basic customs duty. •The budget also revised cess on crude petroleum oil produced in India to Rs 4,500 per metric tonne. In an effort to cut down the burden on the aviation sector, the Union budget allowed direct import of aircraft turbine fuel (ATF), much to the delight of the struggling aviation industry," said C P Krishnan, whole time director of Geojit Comtrade Ltd.

Post Budget Impact On Oil & Gas Industry: Old Wine In New Bottle

•As expected, the Union Budget 2012-13 has failed to bring much cheer to the Indian oil & gas industry. •With its back pushed against the wall and very little options left to explore, the government was required to deliver a reformist budget by de-regulating the subsidised fuels and cutting down on its subsidy burden. •However, owing to political pressure against the backdrop of its dismal defeat in the state assembly elections of UP, Punjab and Goa, the government chose to not only adopt a more populist measure but also decided to shy away by completely ignoring to discuss certain important measures which the markets had looked forward to.

Positive:

•The finance minister (FM) has proposed to allot VGF for the oil & gas sector.• This is a positive move as it will help spur up investment activity in the sector, especially in the natural gas sector which has off late found itself in a situation where the companies have not been able to meet the rampant demand owing to supply constraints.

Neutral:-

•The finance minister indicated that the government has undertaken some concrete steps towards successfully implementing the mechanism of direct transfer of subsidies to people living below the poverty line. •According to him, all the three oil marketers have launched LPG transparency portals to improve customer service and reduce leakage. •Certain pilot projects have also been set up in cities of Mysore and Alwar (Rajasthan) to facilitate the direct reimbursement of subsidy into the beneficiary’s bank account. •This move is a very old move and may fail to bring about anything positive for the sector unless the subsidised prices are de-regulated.

Negative:-

•Under the amendments to the Central Excise Tariff Act, 1985, the FM has proposed to revise the ad valorem excise upwards to 14 per cent on petroleum goods. •This is a negative development, as it would lead to rise in the prices of petrol and diesel which will in turn give rise to headline inflation.

Subsidy Bill:-

•Here is where the government has got its calculations completely wrong. •The subsidy bill for FY12 is expected to have come in at a whopping Rs 6,8841 crore as against last year’s budgeted Rs 23,700 crore. •Despite this stupendous rise in the subsidy bill and the sharp spurt seen in the global crude prices, the government, rather than de-regulating fuel prices and letting the economics of the market decide the prices, has gone on to set a target of Rs 43,580 crore for FY13 towards fuel subsidy. •This target for fuel subsidy fails to provide any clarity as we cannot understand the government’s intentions here.•With the global crude prices expected to remain put at around the current levels, the overall subsidy burden for the government over the coming year will surely add to the pressure. •The only possible outcome would be the politically sensitive move of hiking the retail fuel prices. Its inability to do so will prove fatal to its fiscal calculations going forward.

Miscellaneous:-

•The FM has proposed to increase the cess levied on indigenous petroleum crude oil from Rs 2,500 per MT to Rs 4,500 per MT. •This would prove to be negative for the oil & gas explorers like ONGC and OIL who would be additionally burdened over and above the ad-hoc subsidy burden that’s clouding their future. •Private oil explorer Cairn India too would suffer on account of this development.

Conclusion:-•Despite the need of the hour, the government has refrained from taking any bold steps fearing a backlash from the common man who is already dithering under the burden of high prices and slow growth. •The only positive moves were the ones to directly transfer subsidies to end users and to provide VGF for the sector. •However, while the direct transfer move is a very old one, the VGF move is also not too great for the sector given the government’s whimsical interference from time to time. •Also, the government has not touched upon the extension of the commissioning date of new refineries to avail the seven-year tax holiday. •Finally, as the case has been in the past, the budget has yet again failed to provide any major impact for the oil & gas sector.