Better fiscal incentives, such as rationalising the tax structure, for pre-New Exploration Licencing Policy (NELP) and Nomination blocks can aid oil and gas companies in investing more in high-cost oil recovery technologies to improve crude oil production.
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Pre-NELP and nomination blocks account for around 90 per cent of India’s crude oil production, which has been declining consistently since the last 10 years ending FY24.
For instance, Petroleum Planning and Analysis Cell (PPAC) data show that oil production fell from a record 35.9 million tonnes (mt) in FY15 to 27.2 mt (provisional) in FY24 with both state-run exploration and production (E&P) firms as well as JV companies/private sector reporting a fall in output.
Analysts and industry players said that given the maturity of these blocks, their operators will have to incur additional investments in secondary and tertiary recovery methods to sustain production. These technologies/methods are capital intensive and require higher fiscal incentives.
India has 26 sedimentary basins covering 3.36 million sq km, with 10 of them accounting for 51 per cent of the area and 59 per cent of the resources located offshore, as per the International Energy Agency (IEA).
India has around 2,500 million barrels of proven plus probable (2P) reserves, with the Mumbai Offshore, Rajasthan Basin and Assam Shelf holding 80 per cent among the three of them. ONGC holds two-thirds of the remaining 2P reserves on their books with Vedanta and Oil India each owning around 13 per cent.
Budget expectations
Industry players and analysts said the government should offer better fiscal incentives to Pre-NELP and nomination blocks to encourage companies to enhance production from depleting fields.
Senior officials from both public and private sector companies emphasised that government liberalised the E&P sector with NELP and Hydrocarbon Exploration and Licencing Policy (HELP), which has infused some traction in the largely stagnant domestic E&P industry.
“However, Pre-NELP and Nomination blocks face higher levies. For instance, Pre-NELP blocks tax outgo is almost 70 per cent compared to roughly 55 per cent in the NELP and HELP regimes. Reducing levies will lead to more investible surplus with companies that can be invested in recovery technologies,” said one of the top officials, who did not wish to be quoted.
Deloitte India Partner Anoop Kalavath said that Oil Industry Development (OID) cess of 20 per cent ad-valorem and Special Additional Excise Duty (SAED) that is presently levied at ₹6,000 per mt impacts the companies doing crude exploration in coastal/ onshore regions.
“As per interim Budget FY25, estimated collection for OID cess and SAED is around ₹19,400 crore and ₹1,52,080 crore. Cess is almost 30-50 per cent of the PAT of large exploration companies. Cess and SAED (in the form of windfall tax) directly impacts profitability of oil exploration companies. Cess applies only to pre-NELP blocks where government does not share many entrepreneurial risks. Given that oil exploration is generally risky and capital-intensive, the government may reduce cess and SAED and leave a higher surplus for investment in the hands of companies,” he said in his budget expectations for FY25.
OID cess and SAED also puts domestic crude at a significant disadvantage to imported crude oil.
Another senior official with an E&P company said the upstream oil and gas industry faces a skewed scenario as procurement of key goods and services as inputs is under the GST, while output is outside GST. Multiple tax regimes apply to different parts of the value chain.
“Instead of having specific elements of the value chain under GST, the entire Oil & Gas sector should be subsumed under GST. This shall provide seamless credit to E&P players and help boost investor confidence,” he added.
Declining production
The IEA in its India Oil Market Outlook 2030, which was released at the India Energy Week 2024 in February, pointed out that oil production has been on a managed decline for more than a decade, following its peak at just over 900,000 barrels per day (b/d) in 2011 to just under 700,000 b/d in 2023, of which crude oil production was 600,000 b/d and remainder was natural gas liquids (NGLs).
Production declined by around 4 per cent per year between 2018 and 2023, lower than the global average annual rate of 7 per cent.
Field output declines are expected to continue at a similar rate through 2030, bringing total oil output down to 540,000 b/d, and crude production to 460,000 b/d, as growth in the Krishna-Godavari and Mumbai Offshore Basins help support legacy fields, it added.
“It is still too early to determine the impact of recent OALP rounds on overall production rates, yet it is unlikely that any new major projects will reach first oil before the end of the decade. While the KG-D5 block is expected to add 45,000-50,000 b/d when it fully ramps up, there are no other material projects in the queue that have reached final investment decision (FID). Until then, de-bottlenecking, optimisation and infill projects should mitigate the country’s decline to 4 per cent annually,” IEA said.