The oil and gas (O&G) industry has been experiencing turbulence recently, marked by economic uncertainty, geopolitical risks such as sanctions on O&G-producing countries that have an impact on long-term deals and transactions, and market unrest, with supply side spiking against muted demand.
In such an environment, ability of O&G companies to maintain their profitability, and more so in a sustainable manner, cannot be bargained against the odds. With the government having equal interest that is underpinned by strong growth in O&G demand, it would be imperative to see how the government reacts to address the situation.
With ongoing vulnerability that O&G industry is experiencing due to global volatility, critical imperatives for the government in its second term would be to boost domestic production and expand gas infrastructure, while also ensuring the need to strengthen energy security and reducing carbon emissions. There is also a need to transition from a price volatility to a relatively certain state by closing in the gap between demand and supply forces.
During financial year 2018, India met its 87 percent of crude oil requirement and 50 percent of natural gas requirement through imports, indicating significant level of dependency on imports which is expected to only increase further with strong growth in demand. Reducing dependency on imports will require doubling of existing production capabilities. After a successful first round in 2018 where 55 blocks were awarded, the government is soon expected to clear allotment of 37 blocks in second and third Open Acreage Licensing Policy rounds under new Hydrocarbon Exploration Licensing Policy. And, it would be a welcome move by GOI in its first budget of this term, to substantiate incentivisation of investments into upstream sector by re-introducing a 10-year Income tax holiday for newer investments. This is sure to encourage O&G players to explore more opportunities and GOI may only gain in the long run as this would exempt profits only if India were to discover new reserves and bring them to production.
Further to strengthen energy security, the government should look for opportunities to acquire interest in O&G projects abroad and create additional capacities for foreign companies to store crude and build strategic petroleum reserves for itself.
To meet increasing demand, there have been recent ideations around development of integrated gas infrastructure by building well-connected gas transmission networks and city gas distribution (CGD) networks across the country to improve last-mile connectivity. Additionally, encouraging investments by public and private players in developing LNG import terminals, boosting refining capacities and expanding retail networks, would help the government address this objective. To strengthen efforts in this direction, the government can consider reducing/exempting basic customs duty on import of LNG thereby bringing natural gas at same level of taxation as applied to crude oil. Further, bringing natural gas within the goods and services tax (GST) ambit should serve the dual purpose of catering to pricing problems as well as providing infrastructural attractiveness. CGDs are capital intensive projects and inclusion of natural gas within GST framework along with reducing import duty should imbibe investments in this sector.
With respect to price volatility, the government is still in the process of refining recently introduced GST regime; which is also expected to entail deliberation on inclusion of five petroleum products viz. crude oil, petrol, diesel, natural gas and aviation turbine fuel within the GST ambit as it can provide transactional cost efficiency by way of set-off of input liability on procurements against onward supplies.
The government could also exploit the learnings gained from international experiences – the UAE, Oman, Mexico, Russia, New Zealand or Kazakhstan -- to create a forward-looking regulatory environment, which is key to attracting investments and expertise in developing O&G resources and creating a robust infrastructure.
As a whole, adopting a more aggressive approach will not only help India in fulfilling underlying objectives which will require large capital investments across the value chain of the sector, but more importantly also transforming itself into a self-reliant economy. The next few years under this government could well be expected to serve the focus, build up opportunities for India’s growth plans and give O&G sector the direction and approach which is seen to be used to attract investments by developed economies.
Raju Kumar is Tax Partner at EY India. The views expressed in the article are personal.