Govt working on relief measures for oil producers
The government is stitching together a package of measures to help domestic oil producers pull through the price crash and the uncertainty in the global oil market as heavy losses on each barrel they pump threaten the commercial viability of projects.
“The pandemic and lockdowns (in countries around the world) have created very challenging times for exploration & production sector. The disruptive impact of the pandemic and developments in the global oil market will continue for some time. So, we have suggested some measures for the finance ministry’s consideration so that companies such as ONGC and other stakeholders can stay in business,” oil minister Dharmendra Pradhan told TOI.
“Lockdowns erased major demand. Before that, three big global producers — Saudi Arabia, Russia and the US — were locked in a competition for market share and producing more. This resulted in a glut. Commodity has become cheap but there is no demand. Now price is slowly rising as demand revives; in India and elsewhere. We are working in a changed scenario. No one knows where prices will stabilise,” he said explaining the need for relief to producers.
TOI had on April 23 reported that government was working on a lifeline for producers. Sources told TOI the proposals on the table include relief in royalty, cess and other levies. There could be waiver of royalty on production from offshore fields. A graded oil development cess could be brought in, with a floor of $45/barrel below which cess will not be charged. ONGC had also sought pricing at par with the landed cost of imported crude.
A relief package has become crucial for the survival of companies such as ONGC as the price crash since March has turned oil production into a loss-making proposition. For example, the total cost of a barrel of oil produced by ONGC works out to $45 after including royalty, cess and other levies. So at Friday’s $35/barrel closing price of global benchmark Brent, ONGC actually loses $10/barrel. Brent had on April 22 crashed to 21-year low of $16/barrel.
ONGC is also losing Rs 6,000 crore annually on gas due to a pricing formula based on benchmarks in surplus markets. While it costs $3.75 to produce each unit, the current price is $2.39.
ONGC pays 10-12.5% royalty to the Centre on oil produced from offshore areas. State governments charge 20% royalty on the price of oil produced from onland fields. Then there is 20% ad-valorem oil industry development (OID) cess on the price that producers get.
OID cess has increased from $3 to $13 over the years and causing a financial stress to current and new projects. The cess is levied as excise duty under the Oil Industries (Development) Act of 1974. The cess is being levied on crude oil from nominated blocks and pre-NELP exploratory blocks only.
The OID cess was raised from Rs 2,500 per tonne to Rs 4,500 per tonne in March 2012. The price of the Indian basket of crude oil stood at around $110 per barrel then.
With the fall in global crude oil prices in mid-2014, companies asked for reduced levy and converting it into 8-10% ad-valorem. The government had changed the cess to 20% ad-valorem in March 2016.