At the recently concluded United Nations Climate Change Conference (COP 26),many countries pledged for a sustainable future and energy transition. This is an important development for the oil and gas sector both internationally and domestically. As the clamour for energy transition amplifies, developing countries are trying to bridge the gap between their own growth targets and global sustainability expectations. With India setting 2070 as its deadline to achieve net zero carbon emissions, in an atmosphere of ambitious economic goals and mounting population needs, the upcoming Budget would be key to determining the future of India’s energy journey, particularly for the oil and gas sector that has long been demanding for pragmatic reforms.

India’s oil and gas sector has two distinct regimes. The first includes the oil blocks that enjoy all the benefits of the government’s forward-looking policies such as New Exploration Licensing Policy (NELP) and Open Acreage Licensing Policy (OALP); and the second category includes the pre-NELP or nominated oil blocks that do not enjoy the fruits of latest oil policy reforms. Instead, pre-NELP and nominated blocks are heavily taxed, so much so that the combined effect of royalty, cess and the government’s share of profit petroleum and corporate taxes redirects almost 70 per cent of operator revenues to the government. Unfortunately, about 85 per cent of India’s current production comes from these pre-nominated blocks which are ageing, and in parallel, need additional investments to sustain current production levels. For major oil players in the country, these pre-NELP blocks are proving to be financially unfeasible despite forming the bulk of production and income. Budget 2022-23  could be an opportunity for the government to allay fears pervasive across this critical sector.

The country is experiencing the double whammy of rising energy demands and diminishing domestic production. The ageing oil fields require capital and technology intensive interventions to sustain and increase production. However, the arduous levy structure leaves little investible surplus with operators to employ such techniques. For long, domestic players have been requesting a relaxation in levies to improve business viability. This proposition, though desirable, is challenging as the government remains heavily dependent on revenue from the sector. The oil and gas sector would remain relevant in India's energy mix. Hence, our priority should be to reduce import dependence and introduce forward looking fiscal policies aimed at increasing domestic production.

Conversations on including exempted hydrocarbon fuels into the GST mix are gaining pace. Currently, crude oil and natural gas do not fall within the purview of the GST system. Moving them from the current model, where oil companies shed 69 per cent of their revenue to the government,to even the highest 28 per cent slab under GST will lead to substantial revenue loss for the government. The 45th Goods and Services Tax (GST) Council meet deliberated this on an order of the Kerala High Court. Naturally, the proposition was rejected – especially by the states for whom sales tax/VAT on petroleum products forms a bulk of income.

Nonetheless, a simplified uniform tax structure, like GST, would usher positive returns and outrightly rejecting the proposition could be unproductive, in the long run. For this, the need of the hour is astute policy intervention – and Budget 2022-23 could set a positive precedence towards this end.

To win gains for both the government and the domestic producers, the central government should take the first step towards revising tax rates without fearing outright loss. This move would send positive indications and reign in investor sentiment. Simultaneously, the government can incentivise domestic producers upon reinvestment of revenue saved from taxes in technology for enhanced recovery of ageing fields. This will bring tax benefits for domestic producers and allow them to swiftly gain more from existing secure resources. Additionally, the government’s immediate revenue loss will be compensated with long-term savings on the growing import bill, gains from levies upon the increased production and, finally, energy autonomy. While tax revisions can be debated, the philosophy of the GST system–i.e., simplification, uniformity and incentivising fair business–is the desirable way for the oil and gas sector too.

As the world’s third largest importer of crude, India spends over $100 bn on just crude imports. This is undesirable and antithetical to the goals of achieving aatmanirbharta and moving towards becoming a $5-tn economy while also attending to global calls of carbon neutrality and ambitious goal of achieving net zero emissions by 2070. Thus, unless India improves its own domestic crude capacities today, the dream of emerging as a superpower will remain unignited and bleak.

The author is Partner at Khaitan & Co

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