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

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.