Oil drilling: Industry glossed over by the Budget

Amidst sweeping changes expected in the customs and excise duties, the entire industry was glossed over by the Union Budget 2011-12

Budget provisions

The following announcements have been proposed in the Union budget 2011-12:

Direct Taxes Code (DTC) to be finalized for enactment during 2011-12. DTC proposed to be effective from April 1, 2012.

Central Excise Duty to be maintained at standard rate of 10%. Base rate on excise duty raised to 5% from 4%

Current surcharge of 7.5% on domestic companies proposed to be reduced to 5%

Minimum Alternative Tax (MAT) increased from 18% to 18.5% of book profits. However, adjusted for surcharge reduction the effective rate remains the same

Lower rate of 15% tax on dividends received by an Indian company from its foreign subsidiary Service tax rate held at 10 percent

Direct cash subsidy to people below poverty line to be implemented in phased manner.

. . .

Budget impact

None of the expectations of the oil drilling and allied services were full filled in the Union Budget 2010-12. Non MAT tax paying companies would be marginally benefited with reduction in surcharge from 7.5% to 5%.

Stocks to watch

ONGC, RIL, Cairn India, Oil India

. . .

Outlook

Crude oil prices are on boil. The Indian basket of oil prices for January was $93.87 per barrel up from $89.78 per barrel in December 2010, $84.26 per barrel in November 2010, $81.11 per barrel in October 2010 and $76.09 per barrel in September 2009.

Crude oil prices have risen due to significant increase in demand for crude oil with recovery in world wide economic scenario and expected fall in supply due to political disturbances in Middle East.

Higher crude oil prices is expected to benefit more to private oil drillers (Cairn India) than PSU exploration companies (ONGC and Oil India) as they have to share under recoveries of the PSU refiners for selling diesel, kerosene and LPG below market prices.

Overall Union Budget 2011-12 was neutral for Oil drilling and allied services sector.