Cairn India has asked <g data-gr-id="51">government</g> to cut the cess levied on crude oil produced from its Rajasthan fields as the levy was taking away nearly a fifth of revenue at a time when oil prices have halved. A cess of Rs 4,500 per ton (about $9 per barrel) is levied on crude oil produced by state-owned ONGC and Oil India from fields given to them on nomination basis.
It is also levied on Cairn’s prolific Rajasthan field but is not levied on areas awarded under New Exploration Licensing Policy (NELP) like KG-D6 of Reliance Industries.
Sources said Cairn and its partner Oil and Natural Gas Corp (ONGC) have written to the government seeking relief on levy of cess citing the Production Sharing Contract (PSC) for Rajasthan field which is silent on such a levy and does no specify any rate.
Cairn had also initiated an arbitration against the levy but had to drop it as part of the conditions laid down by the government for approving <g data-gr-id="43">takeover</g> of the company by Vedanta Group. The company has pointed out that a cess is applicable only on pre-NELP blocks. And even there the rate is fixed at Rs 900 per ton on 26 blocks awarded prior to 1999. Only in <g data-gr-id="42">case</g> of Rajasthan is the cess levied at Rs 4,500 per ton.
Sources said the <g data-gr-id="36">cess</g> has become a burden for producers after international oil prices halved to around $50 per barrel. The Oil Industry (Development) Act, 1974 provides for <g data-gr-id="48">collection</g> of cess as a duty of excise on indigenous crude oil. Cess incurred by producers is not recoverable from refineries and thus forms part of <g data-gr-id="47">cost</g> of production of crude oil. The cess was levied at Rs 60 per <g data-gr-id="37">tone</g> in July 1974 and subsequently revised from time to time. During 2005-06, when the crude oil prices had increased from an average of $40 per barrel to $60 per barrel, OID Cess was increased from Rs 1,800 to Rs 2,500 per ton from March 1, 2006.
Again, when the crude oil prices increased to over $100 per barrel, the rate of cess was increased by Government to Rs 4,500 per ton with effect from March 17, 2012. While the cess had in the past been linked to prevailing crude oil prices when it has hiked, the same principle should be applied when rates have fallen, sources said.
Sources said Cairn has told the government that its Rajasthan block has completed 300 million barrels production in six years and has contributed over Rs 60,000 crore to the exchequer. However, shares of oil exploration & production companies such as Oil and Natural Gas Corporation (ONGC), Cairn India and Oil India were trading higher by up to 6% on the BSE in the early morning trade on rise in crude oil prices. Cairn India has rallied 6% to Rs 169, ONGC gained 3% to Rs <g data-gr-id="40">255,</g> while Oil India up 2.5% to 455 on the BSE. The S&P BSE Sensex was trading flat at 26,926 at 09:23 am.
Global benchmark Brent crude rallied for a third straight day and closed above $50 a barrel the first time in a month. In post-settlement trade, it briefly jumped $3 after an industry group reported an unexpected weekly drop in U.S. crude stockpiles, the Reuters report suggests. Higher crude prices will result in higher <g data-gr-id="38">realisation</g> for these oil exploration companies and result in increased profitability for them. All these three stocks have underperformed the market by falling in the range of 23% to 34% as compared to 2% decline in the Sensex till Tuesday.