Column: Budget FY17; Fuelling oil & gas growth Calibrated marketing freedom for gas could be the most important structural reform for the sector.

With a short sentence in his Budget speech, the finance minister introduced the most important

structural reform in the hydrocarbon sector: “To provide calibrated marketing freedom in order to

incentivise gas production from deep-water, ultra deep-water, and high pressure-high temperature

areas”.

Industry welcomes this reform as it can fast-track development of 10-15 trillion cubic feet of already-

discovered gas resources. A progressive policy of marketing- and pricing-freedom, similar to oil, can spur

investment as the present formula-driven gas pricing has made development of almost all discoveries

unviable. It could mean a doubling of current domestic production of natural gas over the next 5 years

for our energy-starved nation.

This forward looking policy shares an ‘energised’ vision for India. Domestic natural gas as a clean fuel will

not only be competitive with other alternates, but also be the bridging fuel for the renewable

programme, alongside solar and wind.

The import substitution could be of the order of R6 lakh crore. This will flow into the economy as

revenue where most of it will be ploughed right back in economic activities for building facilities and

infrastructure, developing and utilising skilled jobs, advanced technology; and reinforces the Make-in-

India mandate. Over R2.4 lakh crore will be spent in facilities and infrastructure. Around R1.8 lakh crore

of this revenue will flow to the government that could directly target subsidy programmes on LPG,

kerosene, and fertiliser. These projects will require an additional spend of R90,000 crore as day-to-day

operating costs. The multiplier effect in the economy can be three to four times this revenue. Most

importantly, CII has estimated a 100,000 skilled jobs being generated during the construction phase for

the next 5 years.

A key driver of this policy is the stimulus it provides to beleaguered oil and gas companies to resume

additional exploration. When over half of the Indian sedimentary basins are yet to be appraised and 65%

of prognosticated resources are yet to be established, this policy will incentivise exploration and attract

a lot more players.

One of the areas where the Budget vacillated is the proposed discontinuation of a tax holiday on

commercial production of mineral oil for blocks starting production on or after April 2017. This will be

seen as reversing the contractual commitments in the PSCs (Production Sharing Contract), since the

blocks offered in NELP rounds were bid with a commitment of a 7-year income tax holiday. It is

important to remember that these oil and gas projects span multi-decades and fiscal/contract stability is

key to confidence building and risk-taking.

Levy of cess at the rate of 20% on domestically produced crude oil, calculated ad valorem, as against the

present rate of Rs 4,500 per tonne, would disappoint the industry which was expecting it to be more in a

range below 10%, given the bleak business environment outlook. However, the switch to an ad valorem

tax is well meaning and appropriate.

A significant boost to nuclear power generation was announced in the budget with government

drawing-up a comprehensive plan, spanning the next 15 to 20 years, to augment investments. This is a

positive development for balancing the energy mix. The government has also allowed the mobilisation

of additional finances (to the extent of Rs 31,300 crore) by raising bonds during FY17 in the energy

sector. Side by side, the subsidies to fertiliser and petroleum have been pegged lower by over 4%. This

would ease the impact of subsidy bearing PSU oil companies during the year.

In summary, this is a budget, where in the oil and gas sector it touches all the key initiatives of this

governments development agenda—Make-in-India, skills development, jobs creation, investment and

FDI and, above all, import reduction. It is important we—producers, government and service

providers—now work together as one to convert this aspiration into reality!

NGS INDIA