Budget 2015: Oil and gas industry gets short-changed

Watchers of the oil and natural gas industry are bound to be disappointed by the 2015-16 Union Budget presented by the finance minister Arun Jaitley. Petroleum products and natural gas are undoubtedly important to India’s energy security interests: they fuel India’s transport almost entirely and are increasingly being adopted for cooking and power generation. While power generation can be substituted by other energy sources (such as solar or wind), transport and cooking will continue to be fuelled by petroleum products and natural gas for the foreseeable future due to cultural and technological reasons. The importance of securing affordable supplies thus cannot be overstated.

However, securing supplies comes at a cost: close to 80 per cent of India’s oil consumption and 20 per cent of natural gas consumption is imported, which impacts the nation’s balance sheets as well as the security of supply. To make matters more complicated, energy subsidies in India are large (although falling), which impacts the state’s spending capacity and promotes the use of polluting fuels.

The industry had been looking for a push of domestic production, infrastructure and greater clarity over fiscal and pricing related issues in this Budget. However, the sector was mentioned only in the passing, with only insignificant measures being proposed. The mention of oil and gas was avoided to the extent that the massive impact that falling crude oil prices have had on the government’s finances and the current account balances was not even mentioned in the speech.  

There were absolutely no new supply side or infrastructure related initiatives that were proposed in this Budget. No comment was made on production sharing frameworks that would be employed in future rounds of oil and gas blocks licensing. Further, last year, the finance minister proposed to accelerate the production of coalbed methane (which is natural gas that is extracted from coal beds), and also proposed the construction of a natural gas pipeline grid of 15,000 km. However, while supplementary Budget documents show that progress has been made in the planning of both these projects, there was no explicit mention of the capital outlay for these projects – or any other information on them.

One other key infrastructural project – the construction and filling up of Strategic Petroleum Reserves (SPRs), which store crude oil that could be used in case there are supply disruptions or to moderate price fluctuations – also found no mention. Since crude oil prices have fallen, now would be the ideal time to fill up the completed SPRs and the budgetary allocation for this should therefore have been made explicit.

What the Budget did talk about, however, were minor changes in taxation of petroleum products. In the run up to the implementation of the GST, a few changes to the duties levied on these petroleum products have been proposed, however, the total incidence of these duties on these two petroleum products remains unchanged.

Additionally, the education cess levied on these products is proposed to be subsumed in the Basic Excise Duty and Rs 4/litre of existing excise duty is proposed to be converted to a road cess to fund road infrastructure investments.

Next, in context to the Green India initiative, the Budget interestingly refers to existing taxes on petroleum products as a “de facto carbon tax”, which compare favourably to those of other countries, according to the finance minister. This observation, of course, is aimed at foreign observers, since petroleum taxes in India are primarily meant to fill government coffers.

The only statement made in context to petroleum subsidies was when the finance minister prodded individuals in the top income brackets to voluntarily give up their LPG subsidies, which is now transferred directly to consumers. The Ministry of Petroleum and Natural Gas has long been encouraging the giving up of such subsidies by individuals, but it is unlikely to have any significant impact on the quantum of LPG subsidies. Additionally, no statement on the removal of subsidies on kerosene – which is a highly polluting fuel – and the subsidy sharing arrangements between the government and companies was made.

And that was that. No other significant information on the direction the government wishes to take the oil and gas sector was given out. This is not to say that the government has been ignoring the sector. Far from it: they have continued the subsidy reforms that were started a few years ago, and have gone on to implement direct subsidy transfers nationwide. They have also come out with transparent pricing mechanism for natural gas. However, the Union Budget is the primary financial document of the country, and the lack of mention of such a critical sector to the economy is undoubtedly underwhelming.