Budget wishlist: Stable fiscal regime in oil & natural gas needed to attract investments

According to the Ministry of Petroleum and Natural Gas, India’s crude oil production during April-November 2016 was 23990.26 TMT which is 3.53 percent lower than the production during corresponding period of 2015. Similarly, natural gas production during April-November 2016 fell by 3.7 percent from the production during corresponding period of 2015 to 21148.54 MMSCM. The total area of sedimentary basins in India is 3.14 million square kilometres and for almost half of such area, no geo scientific data for hydrocarbons is available. Further, large areas of the sedimentary basins are not well explored despite the best efforts of the stakeholders. The demand for natural gas in India is likely to increase from 446 MMSCMD in 2016 to 606 MMSCMD by 2022. The data clearly indicates that there will be a heavy reliance on imported LNG. Power, fertilizer and CGD sectors are the highest consumers of natural gas and the projects in these sectors will not be feasible if there is considerable dependency on imported LNG. [caption id=“attachment_1961981” align=“alignleft” width=“380”]  Representational image[/caption] The Government intends to increase investment in E&P sector in order to expand the share of gas in the energy mix to around 20 percent by 2025. In order to meet this robust goal, it is imperative for the Government to come out with a stable fiscal regime which is able to attract large investments. On the regulatory front, the Government has taken the right steps by allowing marketing and pricing freedom in the recently concluded Discovered Small Field Bid Rounds. The Hydrocarbon Exploration and Licensing Policy for upcoming rounds of oil and gas acreage includes such freedoms and also allows single license for exploration of all hydrocarbons, open acreage licensing, favourable fiscal regime and graded system of reduced royalty rates. However, in order to meet the aforementioned objective to increase the share of gas in the energy mix, the regulatory regime and policy needs to be backed by impetus in the budget for the O&G sector. For the upstream sector, the government may consider fiscal benefits like longer tax holiday period especially for deep-water, ultra-deep-water and high pressure-high temperature areas for which there has not been much interest from private sector. For the downstream sector, it is necessary to extend benefit to city gas distribution entities including making the capital expenditure incurred by such entities eligible for deduction under section 35AD of the Income Tax Act. Such incentive will provide more private sector participation in the city gas distribution sector, which is not only critical for expansion of the city gas distribution network but also to reduce subsidy for LPG. Further, for midstream, concessions to the LNG sector and safe harbour for LNG imports is important in view of the spot market and increasing dependency on LNG in the O&G basket. For India’s energy security, it is critical that we incentivise investment in the entire value chain of oil and gas sector including pipelines, CGD network and LNG. The Government needs to take into account the concerns of all the stakeholders and evolve a more investor friendly regime which is able to attract significant E&P players. Such enabling framework will lead the way in establishing a robust gas market and in achieving gas on gas competition in India. Further, exploration of vast sedimentary basins and having a proven gas reserve for core infrastructure sectors will be in line with the constitutional mandate and the public trust doctrine. (The author is Partner, Khaitan & Co) For full coverage of Union Budget, click here