The Brent crude oil prices decreased 47% on a YoY basis to USD 58 per barrel in February 2015 but rose 15% on a QoQ basis. For Q3FY’15 Brent crude oil prices were down 30% on a YoY basis and 25% on a QoQ basis to USD 77 per barrel. Oil prices had been on an upward trend since mid-January 2015 amid hopes that the supply glut is coming to an end due to cuts in capital spending by the oil majors and lower activity from US shale drilling. Earlier crude oil prices had plunged since June 2014 due to ample global crude oil supplies.

Falling crude prices have resulted in lower under-recoveries and working capital requirements for oil marketing companies (OMC). However, it has affected the profitability of upstream companies such as ONGC and OIL.

Budget 2015: Complete Coverage

Oil and exploration companies shared almost 68% of the total under recoveries of the PSU Oil marketing companies in Q3FY 2015. Under recovery is a notional loss in revenue to the extent the international price of the fuel is higher.  Currently under recovery for PDS kerosene stands at Rs 13.32 per liter and Rs 139.23 per cylinder for domestic LPG. Diesel prices have been de regulated since 19 October 2014.

India’s refining capacity has more than tripled over the last fifteen years from 69.99 MMT as of 1.4.1999 to 215.066 MMT as of 1.4.2014.  The domestic consumption of petroleum products was 158.2 MMT during 2013-14.  Thus the present refining capacity is more than the demand of petroleum products in the country and the country is now a net exporter of petroleum products. The refining capacity of the country is projected to reach upto 307.366 MMTPA by end of 2016-17 as per the Draft Report of Working Group on Refinery for 12th Plan.

Pipeline network to carry crude oil, petroleum products, LPG and natural gas has seen a substantial increase in the country. At present, there are 35 product pipelines with a length of 11771 km and capacity of 82 MMTPA. There are also 25 crude pipelines measuring 9588 km with capacity of 132 MMTPA. In addition, 2312 km of LPG pipelines with capacity of 4 MMTPA and natural gas pipelines of 15,340 km having capacity of 395 MMSCMD have been commissioned.

About 10,000 km of gas pipelines with a capacity to transport 250 MMSCMD of natural gas are expected to be commissioned by 2016-17. In addition 2000 km of pipeline network is under bidding process of Petroleum & Natural Gas Regulatory Board (PNGRB) which will add further capacity to transport 45 MMSCMD by 2017-18.

In addition to the natural gas pipelines the Natural Gas Infrastructure consists of R-LNG terminals and city Gas Distribution (CGD) networks. During 2013-14, Kochi LNG terminal having 5 MMTPA capacity for regasification has been commissioned. With commissioning of Kochi Terminal, the total re-gasification capacity of four R-LNG terminals has increased to 22 MMTPA (79.2 MMSCMD). The capacity of existing 4 R-LNG terminals is likely to be increased further to 32.5 MMTPA (117 MMSCMD) by 2016-17.

The CGD sector comprises of Compressed Natural Gas (CNG) and Piped Natural Gas (PNG) customers. As on 31.12.2013, there are a total of 936 compressed natural gas (CNG) stations across the country and 24,14,288 households with Piped Natural Gas (PNG) connectivity.

Industry expectations

Oil & Gas exploration & allied services

• Government should clarify that for the availability of tax holiday, the definition of 'mineral oil' includes natural gas retrospectively irrespective of the NELP round and that the benefit would also be available to Coal Bed Methane

• Extend the benefit under section 80-IB(9) of the Income Tax Act from 7 years to 10 years to companies engaged in production of mineral oil and natural gas. It may further be provided that benefit under section 80-IB(9) of the act shall not be restricted only to blocks licensed under a contract awarded till March 31, 2011 and the period March 31, 2011 be extended till March 31, 2017.

• Definition of infrastructure sector in the explanation to Section 80-IA of the Income Tax Act should be amended to include exploration and refining activities. Accordingly, exploration and refining undertaking may be allowed deduction for 10 consecutive assessment years as against 7 years at present out of 15 years period.

• Scheme for refund of service tax paid by E&P companies on the services consumed for exploration and production purposes.

• It should be explicitly provided that the premium paid to acquire any Exploration and Production asset abroad is intangible asset eligible for depreciation under section 32 of the Act @ 25%

• Oil exploration and production companies should be exempted from the purview of MAT to promote the domestic exploration and production. This will reduce import dependence of the nation
  

Budget 2015: Complete Coverage

Petroleum Products

• Definition of infrastructure sector in the explanation to Section 80-IA of the Income Tax Act should be amended to include exploration and refining activities. Accordingly, exploration and refining undertaking may be allowed deduction for 10 consecutive assessment years as against 7 years at present out of 15 years period.

• Expects removal of National Calamity Contingent Duty on crude oil levied at Rs 50 per MT

• Expect zero custom duty on imported equipments, machinery and other material required for substantial expansion of refining capacity.

• Expect specific rate of duty to be introduced for ATF in place of ad valorem rate of excise duty.

• Expect ATF should be given a declared goods status whereby sales tax on ATF could be fixed a ceiling of 5%.

• The excise duty concession may be enhanced from 50% to 100% for the long-term sustenance and viability of the North East refineries

 Natural Gas Storage, Distribution & Supply

• Expects to grant exemption from payment of custom duty on import of LNG across all users of LNG aligning it with crude petroleum

• Expect nil custom duty on import of materials viz. pipes; valves; flanges; data communication system for laying the petroleum products and gas pipelines

• LNG facility at port location should be given infrastructure status for the purpose of 10-year tax holiday under section 80-IA

• Include Natural gas and LNG as declared goods on which sales tax of more than 5% cannot be levied in any state irrespective of where the product is sold.

• A weighted deduction of 150% in respect of capital expenditure incurred should be allowed to specified business of laying and operating a cross country natural gas/ crude/ petroleum oil pipeline network for distribution. Currently weighted deduction is 100%.

Analysts/market expectations

The government could consider re-instatement of 5% custom duty on crude imports to improve its finances which would be positive for Cairn India while mildly negative for PSU OMCs and remain neutral for PSU upstream companies while it may also allow clarifications to extend the tax holiday to natural gas sector to boost natural gas production

It is unlikely that any of the demands of the Natural gas industry would be met.

Stock to watch

Reliance Industries, ONGC, Cairn India, Oil India, Indian oil, BPCL, HPCL, GAIL, Gujarat Gas Company, Indraprastha Gas, Gujarat state Petronet

Outlook

We expect Budget 2015-16 to provide clarity on the subsidy sharing formula for oil companies.

The government could consider re-instatement of 5% custom duty on crude imports to improve its finances which would be positive for Cairn India while mildly negative for PSU OMCs and remain neutral for PSU upstream companies. Currently 7 year tax holiday is applicable only on crude oil production which the government may consider to extend it to natural gas production which will encourage domestic natural gas production.

Diesel deregulation and lower international crude oil prices together are expected to lead to a substantial drop in the under recoveries of the Indian oil sector for this fiscal year. Oil prices are currently low, diesel is de-regulated, and direct transfer for LPG has begun.  Interest costs have fallen sharply due to overall lower debt levels. Earlier refining companies have had to rely on short-term borrowings to meet their working capital requirements while they waited for the government to compensate them for their under-recoveries.

Budget 2015: Complete Coverage