Govt’s ‘oil shock’ for domestic players – The Hindu BusinessLine

Clipped from: https://www.thehindubusinessline.com/opinion/govts-oil-shock-for-domestic-players/article65617536.ece

The recent excise and export duties levied on the oil sector have left both industry and consumers high and dry

While the G7 leaders’ proposal to cap Russian crude oil price has sparked a debate in the Indian energy space, the government seems to be extracting the maximum from the crude oil producers as well as oil refiners, giving an ‘oil shock’ to the industry.

On the issue of capping, industry trackers feel that the negatives far outweigh the positives, as some ideas that look good on paper are hard to implement on the ground.

While some G7 members have argued that it will help achieve the twin goals of sharply reducing Russian revenue and stabilising global energy prices, the industry fears that in the short term Russia may not agree. Besides, it will throw global oil market in disarray with supply getting disrupted and worsening the inflation situation, hitting the uncertain recovery of nations.

More importantly, a cap on price is not enough to stabilise the market. The G7 reportedly proposes to implement a cap through North America and Europe-based insurance companies providing covers to oil tankers. For this, the EU members will also need to review the shipping ban. One also needs to see whether the European insurance companies will be willing, and able, to implement the price cap.

Then comes the decision of the key buyers — India and China. India is not inclined towards a price cap. Major importing countries can ill afford high prices and supply disruptions. Also, lifting US sanctions on Iranian and Venezuelan crude will take some time and cannot totally replace 6 mmbbl per day oil exported by Russia.

According to reports, Russian Security Council Deputy Chairman Dmitry Medvedev stated on his Telegram account on Tuesday (July 5) that should Japan’s proposal for the price cap on Russian oil be adopted, the price of crude could soar above $300 per barrel.

“There will be significantly less oil on the market, and its price will be much higher,” Medvedev asserted. Furthermore, he said Japan “would have neither oil nor gas from Russia, as well as no participation in the Sakhalin-2 LNG project”.

Japan earlier had said that it plans to defend its interests in the Sakhalin-2 project after Russian President Vladimir Putin issued a decree by which the ownership of the project is to be exclusively transferred to a limited liability company formed by Moscow.

The next important question is, who will decide the cap and how?

As Yaw Yan Chong, Director of Oil Research – Asia, at Refinitiv, an LSEG Business, points out, “…the G7 jury is yet to decide on what the oil price cap will be. There is no assurance that the G7 summit nations will deliver oil to buyers at a price lower than what Russia is currently asking for it. The Russians are already exporting oil at steep discounts and nothing prevents them from giving cargoes at even greater discounts should the outright prices climb higher.”

“Overall, Asia’s refiners, especially Indian refiners, are focused on price. If it’s cheap enough, it’s good enough, and there is nothing the G7 summit nations can do to stop the buyers from purchasing Russian oil at a cheaper prie, short of a full UN sanction. There are also no guarantees that Russian oil will not be cheaper than oil from alternative sources,” he added.

Indian move

Delhi, through a notification issued on June 30, levied a cess of ₹23,250 per tonne (by way of special additional excise duty or SAED) on crude oil.

The argument was that “crude prices have risen sharply in recent months. The domestic crude producers sell crude to domestic refineries at international parity prices. As a result, the domestic crude producers are making windfall gains. Taking this into account, a cess of ₹23,250 per tonne has been imposed on crude. Import of crude would not be subject to this cess.”

“This cess will have no adverse impact, whatsoever, on domestic petroleum products/fuel prices. Further, small producers, whose annual production of crude in the preceding financial year is less than 2 million barrels will be exempt from this cess. Also, to incentivise an additional production over preceding year, no cess will be imposed on such quantity of crude that is produced in excess of last year’s production by a crude producer,” the government said.

It has also levied a special additional excise duty/cess on exports of petrol and diesel at the rate of ₹6 per litre on petrol and ₹13 per litre on diesel.

“While crude prices have increased sharply in recent months, the prices of HSD and Petrol have shown a sharper increase.

The refiners export these products at globally prevailing prices, which are very high. As exports are becoming highly remunerative, it has been seen that certain refiners are drying out their pumps in the domestic market,” the government said.

A special additional excise duty (SAED) of ₹6 per litre has been imposed on export of Aviation Turbine Fuel.

According to analysts new taxes imposed on oil exports is bearish for Indian refiners as they have been capitalising on the booming demand from Europe following Russia’s invasion of Ukraine. But an export tax will reduce India’s competitiveness and further reduce outflows.

The players adversely affected by this decision include ONGC, Cairn, Reliance Industries, and Nayara Energy. While the industry is optimistic that the government will review its decision, there are also growing concerns that companies will cut production to maintain high prices.

Advantage government

Domestic explorers argue that “windfall” is a false notion. Besides, almost 70 per cent of the revenues go to the government in the form of cess, royalty and profit petroleum, and some portion as corporate tax.

So, with the latest decision, companies will be left with barely 4-5 per cent of revenues, as they will end up paying almost 80 per cent as taxes. This leaves nothing to re-invest in this high capital intensive sector.

The grey areas of this decision are — how will the government calculate the oil price, and what will be benchmark for levying this tax?

Also if Russia agrees to the cap — it depends on at what level the cap is fixed or the basis of the cap, which in itself is a complex issue.

While the domestic players are hopeful that the government will give a patient hearing and re-look its decision, the global market is closely watching the persuasive skills of the G7.

The consumers till then continue to be seared by high prices.

Published on July 08, 2022

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