BMR Advisors has come out with its report on energy sector.•Energy sector being one the key strategic sectors, continues toreceive policy thrust required for sustained growth.•Proposals to extend viability gap funding for oil and Gas/LNGstorage facilities and oil and gas pipelines will provide muchneeded impetus for growth of this sector.•Extension of ten year tax holiday for undertaking engaged ingeneration / generation and distribution of power by a year untilMarch 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 theGovernment to achieve a balance fiscal consolidation over the 12thplan period.
Policy announcements•Viability gap funding extended to oil and gas/ LNG storage facilitiesand oil andgas pipelines.•To overcome fuel supply constraints in the power sector, Coal IndiaLimited directed to sign fuel supply agreements with power plantsthat have entered into long term Power Purchase Agreements withdistribution companies; such power plants should becommissioned on or before March 31, 2015.•ECB allowed to partly finance rupee debt of existing powerprojects.•Issue of tax free bonds for power sector increased to INR 100billion.
Direct Tax Proposals Oil & Gas•Income received by foreign companies in Indian currencyin India from sale of crude oil will be exempt, subject tofollowing conditions:•Consideration received is pursuant to an agreement /arrangement entered into with or approved by CentralGovernment;•Foreign company and the agreement / arrangement isnotified by Central Government having regard to thenational interest; and•Foreign company does not undertake any other activityin India other than receipt of consideration from oil sale.
Direct Tax Proposals Power•The period for commencing operations for claiming taxholiday has been extended by one year to March 31,2013;•Benefit of additional depreciation at 20 percentextended to power generation companies;•Interest payable on ECBs between July 1, 2012 to July 1,2015 by an Indian company engaged in the business ofgeneration or distribution or transmission of power,under a loan agreement approved by the CentralGovernment, and subject to a maximum rate of interestapproved under such agreement, subject to tax at theconcessional rate of 5 percent.
Indirect Tax Proposals Oil & Gas•Cess levied under Oil Industry (Development) Act, 1974, as a duty of excise on crude andpetroleum increased from INR 2,500 per tonne to INR 4,500 per tonne effectiveimmediately. 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 asopposed to the earlier rate of 5 percent.•Direct import of ATF by Indian carriers as actual users allowed. This is likely to helpeliminate 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 totallease value of the contract•If the dredger is imported by the owner, CVD to apply on 120th of the value of dredgerfor each month or part thereof for which the dredger has been granted license by theDirector General of Shipping for stay in India•Important to note that CVD is to apply at 6 percent while BCD and ACD remainunchanged 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 areentitled to 7 year tax holiday. Flexibility to claim such tax holiday in a block of 10 yearsshould be introduced.•ANIL REGO-CEO & Founder-RIGHT HORIZONSThe power sector would be expected to get some relief especially in terms of assistance onthe interest to be paid on borrowed capital. The sector is under pressure of high bank debtwhich 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 unlessthis 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 itinconceivable that the finance ministers budget speech will not contain a reference to thepower sector.•S RAMAKRISHNAN-CFO-TATA POWERFor our international investments, we hope the budget will have some long-term clarity onthe 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: KotakInstitutional
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 thegovernment restrained from any such move in the budget presented.•The companies were also calling for an extension of the tax holiday for bothexploration and refining activities by10 years, as in case of power sector but thispitch did not materialize as per the market expectations.•"All eyes were pinged on the potential decontrol measure on diesel, but thegovernment backed off from such shift, possibly citing the escalating inflationarylevels in the country.•Oil and gas exploration companies were seeking an elimination of 5 percentimport tax on LNG but the Union budget on the contrary exempted natural gasand LNG from basic customs duty.•The budget also revised cess on crude petroleum oil produced in India to Rs4,500 per metric tonne. In an effort to cut down the burden on the aviationsector, the Union budget allowed direct import of aircraft turbine fuel (ATF),much to the delight of the struggling aviation industry," said C P Krishnan, wholetime 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 tobring much cheer to the Indian oil & gas industry.•With its back pushed against the wall and very littleoptions left to explore, the government was required todeliver a reformist budget by de-regulating the subsidisedfuels and cutting down on its subsidy burden.•However, owing to political pressure against thebackdrop of its dismal defeat in the state assemblyelections of UP, Punjab and Goa, the government choseto not only adopt a more populist measure but alsodecided to shy away by completely ignoring to discusscertain important measures which the markets hadlooked forward to.
Positive:•The finance minister (FM) has proposed toallot VGF for the oil & gas sector.• This is a positive move as it will help spurup investment activity in the sector,especially in the natural gas sector which hasoff late found itself in a situation where thecompanies have not been able to meet therampant demand owing to supplyconstraints.
Neutral:-•The finance minister indicated that the government hasundertaken some concrete steps towards successfullyimplementing the mechanism of direct transfer of subsidies topeople living below the poverty line.•According to him, all the three oil marketers have launched LPGtransparency portals to improve customer service and reduceleakage.•Certain pilot projects have also been set up in cities of Mysore andAlwar (Rajasthan) to facilitate the direct reimbursement of subsidyinto the beneficiary’s bank account.•This move is a very old move and may fail to bring about anythingpositive for the sector unless the subsidised prices are de-regulated.
Negative:-•Under the amendments to the CentralExcise Tariff Act, 1985, the FM has proposedto revise the ad valorem excise upwards to14 per cent on petroleum goods.•This is a negative development, as it wouldlead to rise in the prices of petrol and dieselwhich will in turn give rise to headlineinflation.
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 6,8841crore as against last year’s budgeted Rs 23,700 crore.•Despite this stupendous rise in the subsidy bill and the sharp spurt seen in theglobal crude prices, the government, rather than de-regulating fuel prices andletting the economics of the market decide the prices, has gone on to set atarget of Rs 43,580 crore for FY13 towards fuel subsidy.•This target for fuel subsidy fails to provide any clarity as we cannot understandthe government’s intentions here.•With the global crude prices expected to remain put at around the currentlevels, the overall subsidy burden for the government over the coming year willsurely add to the pressure.•The only possible outcome would be the politically sensitive move of hiking theretail fuel prices. Its inability to do so will prove fatal to its fiscal calculationsgoing forward.
Miscellaneous:-•The FM has proposed to increase the cess leviedon indigenous petroleum crude oil from Rs 2,500per MT to Rs 4,500 per MT.•This would prove to be negative for the oil & gasexplorers like ONGC and OIL who would beadditionally burdened over and above the ad-hocsubsidy burden that’s clouding their future.•Private oil explorer Cairn India too would sufferon account of this development.
Conclusion:-•Despite the need of the hour, the government has refrained fromtaking any bold steps fearing a backlash from the common manwho is already dithering under the burden of high prices and slowgrowth.•The only positive moves were the ones to directly transfersubsidies to end users and to provide VGF for the sector.•However, while the direct transfer move is a very old one, the VGFmove is also not too great for the sector given the government’swhimsical interference from time to time.•Also, the government has not touched upon the extension of thecommissioning date of new refineries to avail the seven-year taxholiday.•Finally, as the case has been in the past, the budget has yet againfailed to provide any major impact for the oil & gas sector.