Govt's move to tax fuel export will impact policy change in energy sector

The export tax on fuels and cess on domestic crude oil production are likely to add to the climate of policy uncertainty in the energy sector

The ease of doing business is slowly turning into the unease of doing business, at least as far as the energy sector is concerned.

The imposition of export taxes on fuels, and a usurious cess on domestic crude production will make the government richer by Rs 1 trillion this fiscal, around 0.37 per cent of GDP, according to Nomura, but it leaves barrels of uncertainty and many unanswered questions for Indian explorers, refiners, and prospective marquee investors led by Saudi Aramco, Adnoc, Exxon, Total and Shell.

Private refiners are scrambling to clarify if the new tax applies to exports from special export zone (SEZ) facilities such as Reliance’s 704,000 barrels a day plant in Jamnagar, which accounted for 11 per cent of India’s refining throughput in May, an industry official said. Led by Reliance and Nayara, private refiners have a share of 81 per cent in India’s fuel exports. Oil products contributed 16 per cent of India’s total merchandise exports of $422 billion in 2021-22, with the high growth in fuel sales playing a major role in India crossing the $400-billion export target, said Prahalathan Iyer, chief general manager, India Exim Bank.

“Increasing export duties on petroleum products is expected to impact export volumes in the short term, but it is not expected to completely stop exports of petroleum products by private players,” said Hetal Gandhi, director, CRISIL Research. Crack spreads — or the pricing difference between a barrel of crude and the petroleum products refined from it — of over $20 a barrel for petrol and over $30 for diesel made exports very profitable, said Prashant Vasisht, co-group head, ICRA.

The party poopers come at a time when the government is keen to draw foreign investors to India’s energy sector, alleviate a crippling 85 per cent dependency on foreign oil, make India a global refining hub such as Singapore or Rotterdam, and increase exports to $1 trillion by 2030. Such long-term goals are nursed to fruition by consistent, business-friendly policies, because they involve trillions of dollars in private investments.

“We need more investor-friendly policies since we require foreign technology and capital to tap into our production and exploration potential forcefully to stop ever-growing dependence on imports,” said Narendra Taneja, an independent energy expert. “And therefore, the consistency in terms of policies and taxes is imperative.”

India’s overseas oil dependence will increase to 90 per cent in the next few years as it plans to double its refining capacity by 2030. “The increased capacity could facilitate the requirements of other developing nations who are not as fast on transitioning to cleaner modes of transport,” Iyer said.

If the finance ministry had taken a cursory glance at the concluded, failed and forthcoming deals — all during the Modi government’s tenure — it would have revealed the concerns that investors have had over India’s flip-flop policies.

Reliance’s plans to sell just a fifth of its oil to chemicals business for $15 billion to Saudi Aramco came undone; New Delhi was forced to scrap BPCL’s privatisation for lack of buyers while Japan’s Seven & i Holdings paid $21 billion for Marathon Petroleum’s gas stations in US at the peak of Covid-19.

BP paid $1 billion for a 40 per cent stake in Jio-bp, and along with Reliance is investing $5 billion in the deep waters off Krishna Godavari; Russian Rosneft paid $12.9 billion to buy Essar Oil’s downstream operations. Vedanta, India’s second biggest oil producer after ONGC, plans to invest as much as $5 billion over the next two or three years to nearly triple oil production. And chances to revive the $55-billion Ratnagiri refinery-cum-chemical venture in Maharashtra with Aramco and Adnoc look bright with the Bharatiya Janata Party back in Maharashtra.

It was against this backdrop that the government chose to slap an export duty of Rs 6 a litre each on overseas sales of petrol and aviation turbine fuel, and Rs 13 a litre on high-speed diesel, translating into 10-23 per cent of current crude prices. The Indian crude basket averaged $116 a barrel in June. In addition, exporters must declare that 50 per cent of the exported quantity in each shipping bill will be supplied domestically in the fiscal. A crippling windfall tax in the form of a cess of Rs 23,250 a tonne, or $40 a barrel, was imposed on domestic crude production. The levies are open-ended, and will be reviewed every fortnight.

Some oil refiners are making phenomenal profits on fuel exports, Finance Minister Nirmala Sitharaman contended, without explaining what phenomenal profits mean. She said the taxes will improve the supply of diesel and petrol in the domestic market because private refiners concentrate on serving Europe and Asia. She clarified that the fiscal measures are not meant to discourage exports nor discourage India’s ambition to become a global refining hub and nor was it against profit earning.

But what was left unsaid was that oil use is surging, with consumption in the first 14 days of June of diesel and petrol growing 48 and 54 per cent respectively from a year earlier, and reported shortages of fuel are limited to certain pockets for short durations, and not a widespread phenomenon. What was also left unsaid was that both exports and domestic sales were chugging along until New Delhi forced state oil companies to keep pump rates unchanged for months amid rising global crude prices, translating into losses of Rs 17-20 a litre on retail sales. And when ONGC complained about dirt cheap state-set domestic natural gas prices hurting deep sea drilling, the government did not jump to the explorer’s rescue.

“Lower domestic prices have incentivised refiners to export products at higher prices, resulting in domestic fuel shortages,” Nomura analyst Sonal Varma said in a note. The measures are positive for the Centre’s fiscal finances, Varma said. Prior to these announcements, the fiscal deficit was tracking around Rs 2.2 trillion above budget estimates due to higher subsidies and cuts in fuel excise duty. The new fuel taxes could narrow the fiscal slip by nearly half.

The impact on investments would be limited because the high GRM (gross refining margins) prevalent today are unlikely to sustain, and most investment decisions assume more normalised GRM through the cycle, said Vivek Jain, director-corporate ratings, India Ratings and Research. Also, most private refineries are implementing capex towards crude-to-chemicals rather than crude-to-petroleum products, he added. The private sector accounts for only 25-30 per cent of the total capex of Rs 2.8 trillion planned in the refining sector during fiscal 2023-2027, Gandhi added.

Industry executives said that the overall image of the country is hurt by such policy flip flops.

“If the measure is temporary, say for three to six months, it’s understandable,” Taneja said. “But if it’s for a longer duration, and linked to oil prices, which are expected to stay strong, it will scare new players and investors away.”

“We can’t do without oil and gas if we have to sustain a high growth rate of 7-8.5 per cent and achieve our $10 trillion GDP ambitions,” he added.