INDIA-High cess a threat to oil investment

The slump in global crude prices can lead to exploration companies such as ONGC and Cairn India cutting their capital expenditure plans as they are burdened by the cess on domestic crude production.

Industry sources said ONGC and Cairn India were looking at a possible cut in their capex plans for this fiscal, which could have an impact on future production.

They plan to put pressure on the oil ministry to quickly take up the issue of cess on crude production, which is impacting their revenues. 

Sources said ONGC might put in abeyance further development of the much-touted deepwater block KG-DWN-98/2 in the Krishna-Godavari basin, which entails investments worth $6-7 billion to pump out oil and gas by 2018.

Cairn India has slashed its capex, which can accelerate the fall in output from the country’s largest onshore oil block at Barmer in Rajasthan.

Cairn has made its highest annual capital expenditure of $1.1 billion in 2014-15 on existing assets as well as on new explorations as part of its $3-billion capex programme for 2014-15 to 2016-17. This was projected to rise to $1.2 billion in 2015-16. However, because of a slump in crude prices it has cut its investment to $300 million in this fiscal.

The cess imposed on domestic crude production is hurting the revenues of the producers, following the slump in global prices. The cess was increased when global prices had spiked to over $100 per barrel.

“Prices are expected to remain at low levels in the near term because of high supplies, modest global demand and the decision of Opec to defend market share. Therefore, the profits of upstream companies are expected to be under significant pressure in the near to medium term,” rating agency Icra said.

K. Ravichandran, senior vice-president and co-head, corporate sector ratings at Icra, said, “It may be imperative to make cess an ad valorem levy, which moves in line with the oil prices for the industry to make meaningful cash generation in this high-risk industry.”

The oil ministry is pitching for a change in cess to ad-valorem as the global crude price has slumped to an 11-year low of under $35 per barrel. The cess translates into one-third of the realisation going away in just a single levy.