Budget 2016: What it means for the oil & gas sector

If there is one issue more bothersome than incrementalism and slow decision-making, it is the lack of transparency in objectives and outcomes in the oil and gas sector. The Union Budget 2016-17 has highlighted this facet yet again.

The Finance Minister brought up the sector in a few instances in his budget speech, correctly linking it to development outcomes and the impact it has on its fiscal landscape. However, it left many important concerns unaddressed. It goes without explicit mentioning that the budget is not meant to provide a comprehensive roadmap for the sector: that ought to be addressed separately. The aspects of the budget that impacts or is impacted by the sector should, however, be mentioned, given how strategic the sector continues to be to the economy.

To begin with, there were omissions in the form of silence on the next round of oil and gas block auctions (that are meant to increase production and lead to greater revenues for the government). The latest round of auction has been due since 2014. There was also silence on whether the current policy (called NELP) would be replaced by a new unified licensing framework which the government has been hinting at for some time now.

The minister also provided no clarity on the tax incidence on petrol and diesel. Over the past few months, the government has increased the excise duties on these fuels, coinciding with low crude oil prices. However, there is no indication over what the policy would be should crude oil prices rise again. Transparency over this is crucial as the environment ministry (MOEFCC) referred to such tax incidence as an "implicit carbon tax" in its Biennial Update Report (BUR) to the United Nations. If such excise duties are reduced later to keep petrol and diesel prices stable, it would mean that the government's agenda on carbon taxes would suffer.

A related point is on the price differential between petrol and diesel, which has led to the "dieselation" of the economy. As the use of diesel leads to far greater particulate pollution than the use of petrol, there is a need to discourage diesel use in the economy. Over the years, the price differential has narrowed due to marginally higher tax increases on diesel compared to those on petrol, however, the differential is still over Rs. 10 per litre. The Union Budget 2016-17 failed to lay out a clear path towards further narrowing of this differential in order to address the air pollution crisis.

Next, even though the Finance Minister mentioned the price premium for oil and gas that is costly to extract, there was no clarity over what the premium would be. This price premium decision has been announced in the past by the Ministry of Petroleum and Natural Gas, but the quantum of the actual premium remains elusive. The Minister did, however, reiterate the provision of market linked prices for additional gas produced from fields, which the industry has been demanding (although note that there is no single market price for gas in India).

Curiously, in a rebuff to the concept of homo economicus who otherwise does everything she can to avoid paying taxes, the Finance Minister announced that 75 lakh households have given up LPG subsidies. This, coupled with the adoption of direct transfer of benefits scheme (DBT), has led to the drop in the quantum of subsidies. Interactions with stakeholders, however, reveal that the eligible poor often do not receive this subsidy. This could have both developmental and electoral consequences. The government would be advised to conduct a thorough appraisal of the DBT scheme and make public the efficacy of it. There continues to be a lack of proper understanding of the real decline in the quantum of subsidies due to the curbing of leakages through DBT.

Finally, highlighting one key energy-development link, the Finance Minister emphasized on the harm that burning biomass (such as wood) has on human health. There undoubtedly are strong reasons to ensure a transition from biomass towards LPG for cooking, to significantly cut down on indoor air pollution. With this in mind, a Rs 2000 crore allocation for the uptake of LPG cylinders among the rural poor was announced, with the intention of reaching 1.5 crore households. While this is undoubtedly a good step, TERI's studies show that considerable impediments remain in transitions from biomass to LPG, including the inefficiency of the supply chain and the unavailability of banking facilities that impacts the direct transfer of the subsidy and the adoption of LPG in rural India. This programme will therefore have to be complemented with a redressal of such issues in order to ensure success. Further, a study titled 'Analysing Rural Energy Transitions and Inequities' (TERI, 2014) shows that 91% of rural households surveyed that have an LPG connection continue to use biomass alongside. Therefore, the problem of indoor air pollution will not be fully addressed by this LPG scheme alone, and will have to be complemented by other initiatives.

In sum, in spite of a few positive statements and announcements that impact the oil and gas sector, considerable omissions remain. The sector appears to be shining on the outside, but the tinted windows hide what lies underneath.