Oil cess: If Reliance can escape it, why not Cairn?

In the Union Budget, finance minister Pranab Mukherjee raised the cess on oil by Rs 2,000 per metric tonne. In response, Cairn India and Reliance Industries’ shares shed 6 percent and 3 percent, respectively, the same day (16 March).

But now it seems Reliance Industries might not face a hike in cess; only Cairn India will take a hit.

It turns out that Reliance Industries, along with other private players like BG India and Videocon, operating under the pre-New Exploration and Licensing Policy (NELP), have their cess cappedatRs 900 per tonne.

[caption id=“attachment_255616” align=“alignleft” width=“380” caption=“Cess has been at the heart of a long-standing dispute between Cairn and the government. And another high-profile confrontation seems to be brewing. Reuters”]  [/caption]

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Cairn, however, isn’t so lucky.Initial estimates suggest Cairn India could be hit by 10 percent at the operating profit level, equivalent to about Rs 1,000 crore. It is the sole private player to be affected; the others are state-owned ONGC and Oil India.

Cairn India has thus written to the prime minister , protesting the unfair burden it faces because of the hike in cess and the impact on its bottomline.

According to a Business Standard report, Cairn India CEO and MD Rahul Dhir, in a letter to oil minister Jaipal Reddy wrote, “This increase has come as a complete surprise to Cairn India and has had an immediate and significant impact on our value, wiping almost $1 billion from our market cap on Friday, March 16. Indeed, the total impact on Cairn India is $2.5 billion assuming the proposed rate of Rs 4,500 per metric tonne.”

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Cess has been at the heart of a long-standing dispute between Cairn and the government. Cairn, which is Vedanta-controlled, was asked to pay a cess of Rs 2,500 per tonne on its 70 percent share of an oil field in Rajasthan. Cairn had initiated an arbitration case against the government to not pay the cess. However, it later withdrew the case and agreed to pay the cess and royalty as it attempted to smoothen relations with the petroleum ministry.

This time around, Cairn looks unlikely to yield. Given that this is the first hike in cess since 2006-07, the government is also unlikely to soften its stance.

Another high-profile confrontation seems to be brewing.