NEW DELHI: The petroleum ministry has come to the aid of oil exploration firms, producing crude in India, including Oil and Natural Gas Corp (ONGC) and Reliance Industries Ltd (RIL).
These companies currently pay a 20% cess on domestically produced crude oil, calculated ad valorem, against the current rate of 4,500 per tonne. Ad valorem mechanism means levying cess as an amount proportional to the estimated crude price, instead of a fixed price. Hence, a rise in crude prices also increases the outgo on cess.
The cess impacts any company which produces crude in India, even global ones, such as, Cairn Energy, Niko Resources and BP.
“I have requested the finance ministry to review this cess. I understand the point that oil exploration companies are making,” oil minister Dharmendra Pradhan told HT. Since cess cannot be passed on to consumers and has to be borne by companies, producers have been clamouring for relief.
“With crude oil prices hovering around $48 per barrel, the 20% ad valorem cess rate is now a disincentive to production and investment. The cess, in effect, is higher than the earlier 4500 per tonne” said an official with an oil and gas exploration company, who did not wish to be named.
The Association of Oil and Gas Operators (AOGO), an industry body representing nearly two-dozen members, have written to oil minister Dharmendra Pradhan, expressing concern over the 20% cess. ”In the event of continuing with the cess, the rate should be fixed between 5% and 8% of the realised price of crude oil,” the companies said in the letter, a copy of which is available with HT.
“We understand that for exploration companies, surplus cash generation is necessary for reinvestment and to increase oil production. A rise in crude prices will hurt these companies since the outgo on cess will also increase,” said an official familiar with the development, who did not wish to be named.
In a report released in April, the standing committee on petroleum and natural gas highlighted the “serious impact on the financials of ONGC and OIL” because of the high cess, keeping in mind that oil production is also subjected to other levies such as royalty.” The standing committee has recommended an ad valorem cess of 6% to 10%.
“We are aware of the grievances of exploration companies. The finance ministry will do whatever it can” Pradhan said.https://www.hindustantimes.com/business-newspaper/oil-ministry-asks-finmin-to-review-20-cess-on-crude-oil/story-baKGqHz2tomYfVJl73IPVO.html