After its profitability took a hit due to a fall in crude oil prices, Cairn India has once again demanded a review of the cess being levied on its Rajasthan oil field output.
While maintaining that the production sharing contract (PSC) for Rajasthan is silent on cess, Cairn and its joint venture partner in the block ONGC, want the Government to reduce the cess to ₹2,500 a tonne from ₹4,500 a tonne now. The joint venture proposes to approach the Ministry for Petroleum & Natural Gas shortly.
The Government levies cess on domestic crude oil production as a duty of excise. According to a company source, thecess of ₹4,500 a tonne was imposed in the 2012-13 Budget when the crude price was over $100 a barrel. But the crude price has since dropped significantly.
Cairn’s net profit for the first quarter of the current fiscal was ₹834.98 crore and the cess paid was ₹691 crore. The cess will result in estimated revenue impact of $2.5 billion for the life of the field, the official added.
“If the Government considers our request and brings down the cess amount to the quantum when Brent was around $62 a barrel, the additional cess liability which is adversely impacting the exploration and production activity, especially when oil prices are around $50 or below, will lessen the impact,” another official said.
When the Government had doubled the cess amount Cairn had approached the then Prime Minister’s Office seeking review as it was only the Rajasthan block production sharing contract which was materially affected by the increase.
While the Petroleum Ministry had then agreed that it would adversely affect Cairn, it had left the private sector explorer to fight its own battle. NELP (New Exploration Licensing Policy) PSCs are exempted from cess. For most other blocks, offered before the licensing rounds and producing crude oil, like Ravva and Panna-Mukta-Tapti joint venture fields, cess is fixed at ₹900 a tonne.
Besides, the nomination blocks — awarded to PSUs ONGC and OIL — are different as they were not bid out on a competitive basis and have no obligation to share profits with the Government.