Oil And Gas Sector: A Major Beneficiary In Jaitley's Budget

The government has proposed several measures in the 2017-18 budget that will boost the oil and gas sector in the country. Industry experts have welcomed these proposals.

Finance Minister Arun Jaitley in his budget speech announced that India will merge the existing state-owned oil and gas companies to set up a global behemoth to compete with global petroleum companies.

K Ravichandran, Group Head, Corporate Sector ratings, ICRA Ltd, said that the union budget has many favourable proposals for the oil and gas sector such as creation of two more strategic oil reserves projects, reduction in basic customs duty (BCD) on LNG from 5 per cent to 2.5 per cent and creation of an integrated oil PSU major.

If things go right, existing state-owned entities like Oil and Natural Gas Corporation (ONGC), Indian Oil Corporation, Bharat Petroleum Corporation, Hindustan Petroleum, GAIL and few others will come together and form an integrated oil PSU major to take on global giants like Russia's Rosneft and UK's BP Plc.

"Globally, the concept of state-owned oil majors is a well established one, which confers several advantages to the stakeholders," Ravichandran said.

On the challenges the government may face in combining the existing PSUs, Ravichandran said that the idea is certainly laudable which will strengthen the business and financial risk profile of the combined entity, key challenge will be integration issues especially on the HR side.

As per reports, the oil ministry had last year begun the process of evaluating the prospects of creating the conglomerate, which will have a bigger market value than Russian state oil giant Rosneft and India's Reliance Industries Ltd.

Jaitley also announced setting up two more strategic oil reserves in Bikaner and Odisha to overcome future shortage of crude oil. He said that this will lead India’s existing crude oil storage facility to 15 million metric tonnes (MMT) from the current 5.33 million metric tonnes (MMT).

Currently, India has underground caverns at Visakhapatnam (1.33 million tonnes), Mangalore (1.5 million tonnes) and Padur (2.5 million tonnes).

"The creation of additional strategic oil reserves will boost the energy security of the nation, besides the refineries," Ravichandran said.

Another key takeaway for the sector in the budget is the reduction of Basic Customs Duty (BCD) on LNG from 5 per cent to 2.5 per cent.

Ravichandran said that reduction in BCD on LNG is a welcome move, which will make LNG more affordable to end users in industrial category such as ceramics, glass, chemicals besides large consumers such as power and fertilizer sectors.

Gokul Chaudhri, Leader, Direct Tax, BMR & Associates LLP said, "The lowering of custom duty on LNG will help the natural gas industry and their user industries like power. The budget therefore helps with no hurts in the proposals that focus on this sector."

Anish De, Partner and Head of Oil and gas, KPMG in India said, "Reducing the basic custom duty in LNG to 2.5 per cent will make it more affordable for various applications. Industrial and city gas consumption will benefit. Will further climate goals under COP 21."

The proposal to allow a carry forward of Minimum Alternative Tax (MAT) for a period of 15 years, up from the current 10 years is also welcomed by industry experts.

Chaudhri said, "The single biggest tax change that impacts the energy industry is the extension for carry forward of Minimum Alternate Tax."

He added that the power, oil and gas, and mining industry has been impacted by the sluggish crude and commodity prices and this impacts their ability for setting of the MAT credits within the existing time period. This change is therefore helpful.

De of KPMG said "Extension of MAT credit carry forward period to 15 years is a positive for all infrastructure players. Especially considering the large forthcoming investments in oil & gas, the measure will serve to de-risk some of the infrastructure projects in the sector."