Pradhan for crude oil cess cut, taking up matter with FinMin

The Petroleum Ministry is talking to the Finance Ministry on reducing the cess that the industry has been seeking since the steep fall in crude prices beginning June 2014, Union Minister Dharmendra Pradhan said on Tuesday. “Time has come to revisit the oil cess issue. We want oil cess to be on an ad-valorem basis. I want this to be a win-win for all stakeholders so that the government revenue does not suffer greatly, at the same time the companies also not suffer much,” the Petroleum Minister told reporters on the sidelines of an industry conference.

Currently, the oil exploration companies are charged 30 per cent cess or Rs 4,500 per tonne on crude. Since 2006, the government has linked crude prices and oil cess, which means as prices have always rising, the government has been regularly increasing the cess as well. Speaking at the same event, Carin India Managing Director and Chief Executive Mayank Ashar told reporters that it is not fair for the government to continue to levy crude cess at 30 per cent when prices have fallen by around 60 per cent since June 2014. 

“We want the cess to be rational and ad valorem charged on a real-time basis. You can’t have only duties static and only prices falling continuously,” Ashar told reporters, adding that 30 per cent cess is very high and unacceptable in the given circumstances.

On Cairn India licence extension row for the Rajasthan block, Ashar said, the company continues to believe that the production sharing contract is a valid one and therefore it has to continue without any modifications till the validity of the contract period. The two state-owned oil producers ONGC and Oil India, as well as private sector Cairn India have been asking the government to cut the cess on crude oil in the view of slump in prices. 

The producers want the government to levy ad-valorem rate of cess which will result in higher payouts when prices are high and lower payout when rates fall. Currently, ONGC and Oil India pay a cess of Rs 4,500 per ton on crude oil they produce from fields given to them on nomination basis. 

Cairn has to pay the same cess for oil from the Rajasthan block. Oil producers’ association, PetroFed, last week had written to Revenue Secretary Hasmukh Adhia and Oil Secretary KD Tripathi seeking levy of 8 per cent cess on price of crude oil realised.  The Oil Industry Development Act of 1974 provides for collection 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 the production cost of crude. 

The cess was levied at Rs 60 per tone in July 1974 and subsequently revised from time to time. It can be noted that during 2005-06, when crude prices rose from an average of $40 to $60 a barrel, cess was increased from Rs 1,800 to Rs 2,500 per tonne from March 1, 2006. Again, when crude rose to over $100 a barrel, the cess was jacked up to Rs 4,500 per tonne or $10 per barrel from March 17, 2012. 

This means that the government had effectively linked the cess rate to prevailing crude oil prices in the past. Crude has been hovering around $50 a barrel while the cess continues at the same rate as prevailing when crude oil was around $100 per barrel. It can be noted that in the low oil price environment several countries, including the US, Britain, Colombia, Russia and China have changed their fiscal systems to increase production and promote investments. 

Most crude oil produced in the country comes from pre-NELP and nomination blocks and is liable for payment of cess. While blocks under the new exploration licensing policy like Reliance Industries’ KG-D6 fields area are exempt from cess, pre-NELP discovered blocks like Panna, Mukta, Tapti and Ravva pay a fixed rate of cess of Rs 900 per tonne.

On whether the Oman government owned RasGas has agreed to waive off $1 billion penalty as reported by media, Pradhan said, these are corporate decisions and the firms concerned are talking.