Budget 2012: Hike Cess on crude petroleum oil hurts

Union Budget 2012-13 has hiked the cess on crude petroleum oil produced in India from Rs 2,500 per tonne to Rs 4,500 per tonne. This is highly negative for upstream companies producing crude oil because the companies have to absorb the hike in cess as crude oil prices are priced based on the landed cost of imports.

As per annual report, ONGC produced about 27278278 tonne of crude oil in FY 2010-11. Assuming no increase in crude oil production, the incremental cess on crude oil produced by ONGC is about Rs 5,455 crore based on production for FY 2010-11.

Similarly, Oil India produced about 3598305 kilolitre of Crude Oil in FY 2010-11. This translates into incremental cess on crude oil of nearly Rs 720 crore for Oil India, based on production for FY 2010-11.

Outlook

Union Budget 2012-13

was negative for the oil drilling and allied services sector. Hike in cess on crude petroleum oil produced in India revised to Rs 4,500 per metric tonne from Rs 2,500 per metric tonne has put up extra burden on the sector. Earlier also the public sector exploration companies are impacted by sharing of under recoveries of oil marketing companies.

Fuel prices (diesel, PDS kerosene and Domestic LPG) are decided by government of India. As a result OMC are currently incurring daily under recovery of Rs 474 crore on sale of diesel, kerosene and LPG.

Diesel under recovery is Rs 12.17, PDS kerosene is Rs 28.66 and Domestic LPG is Rs 439. Upstream companies have to bear a portion of under recoveries of OMCs thus impacting their profitability. Overall Budget 2012-13 proved negative for the sector.