As output costs exceed global prices, upstream oil & gas cos seek relief

Oil producers are required to pay a 20 per cent oil cess on the price of crude as well as a royalty of 10-12.5 per cent for offshore production of oil.

Upstream oil and gas companies are seeking reliefs on taxes and levies from the government as the fall in international Brent crude prices to below $20 per barrel has hit their profitability. Sources at ONGC and Oil India (OIL) said that top management was in discussions with the Petroleum Ministry seeking relaxations in both oil cess and royalties, as their cost of production exceeds international crude prices.

“ONGC management has asked that oil cess and royalties not be levied when crude prices are below $45 per barrel,” said a source aware of developments, adding that these should be waived for the duration of the supply glut and demand collapse due to the COVID-19 outbreak.

Oil producers are required to pay a 20 per cent oil cess on the price of crude as well as a royalty of 10-12.5 per cent for offshore production of oil.

Another source in the know said that upstream oil PSUs had borne the brunt of providing subsidies to consumers when crude oil prices had reached over $100 a barrel in 2007 and 2008, and the government should consider an arrangement in which OMCs are asked to purchase crude oil from PSUs at rates above international prices in such situations. “Oil marketing companies (OMCs) could be asked to buy domestic crude production which account for only 20 per cent of crude demand in India at some agreed upon price which is viable for domestic producers,” said the person.

Another source said that OIL was losing around $10-15 per barrel of crude production and that a relief from the Centre in royalties and oil cess may not be enough to make up for losses, but may help in meeting operating expenses.

“Both gas and crude businesses are incurring major losses, but we are sure the government will take steps to provide relief” said an official at Oil and Natural Gas Corporation (ONGC), noting that staff at offshore sites were spending stints of over 40 days as against an average of 14 days to ensure uninterrupted supply.

The Centre slashed natural gas prices earlier this month by 26 per cent to $2.39 per million British thermal units (mmBtu), despite calls from industry that a downward revision from the previous price of $3.23 per mmBtu would make gas production unviable for some domestic producers.

Ajay Kumar Dixit, CEO of private upstream player Cairn India, told The Indian Express that domestic producers needed relief from government levies.

“Companies are getting hammered down heavily. It would take at least couple of quarters for things to normalise,” he said, adding that the Centre should consider waiver or deferment on royalty, cess and profit petroleum.

A spokesperson for the Petroleum Ministry said the government was holding internal discussions about the proposals by upstream companies.