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Budget 2013 - Oil and Gas

Tuesday 19 March 2013

Union Budget 2013 powers Oil and Gas positively.

The Union Budget 2013 announcement has announced a review of the natural gas pricing policy so as to remove the "uncertainties" on the issue. This move is expected to encourage further exploration and boost domestic gas output in the country.

The Budget announcement has further announced that the New Exploration Licensing Policy (NELP) blocks which were awarded earlier but are stalled will be cleared on priority basis. This move is expected to boost oil and gas production and restore confidence in International Investors. Also, in order to boost India's energy security, do expect a policy to encourage exploration and production of shale gas which is turn is expected to have a long term positive impact on the economy.

However, the proposed additional surcharge of 5% will lead to an increase in tax liabilities of companies with the outgoings on tax likely increase by about 1.5. This in turn is expected to marginally impact profit margins.

So who wins this year?

The Union Budget is extremely beneficial for all upstream oil and gas exploration companies. However, while the proposed shift in Oil and gas exploration contracts from profit to revenue-sharing is in line with the recommendations of the Rangarajan committee, if implemented, it will enhance the risk profile of exploration and production companies. In order to increase the risk appetite of the operator, it will be better to have a cost sharing basis, as whatever a Company spends on exploration, it will recover if the discovery is made. However, here also there is a risk that whatever the company spends may not be totally recovered and will be linked to revenue sharing.

The Union Budget is more generic in nature rather than specific at any point. However if the same is implemented properly then it can boost domestic oil and gas production to best meet the energy needs of the country.

Want the stalwart of the industry analyze the budget for you? Click here.

Looking to invest in the Oil and Gas sector? Click here to open an account with Kotak Securities.

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