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Ashu Sagar, Secretary General, Association of Oil and Gas Operators (AOGO)

01 Mar 2011

Established on August 1, 2006, Association of Oil and Gas Operators (AOGO) is a platform for upstream oil and gas industry to take up the operational issues that it faces with the government.

Sagar in an interaction with InfralineEnergy's Sangeeta Tanwar shares the industry's expectations from the Budget such as the industry's long-standing demand of rationalising high service tax and making seven year tax holiday more flexible for the players.

Edited Excerpts

What are the major issues for the industry before the budget?
We crafted New Exploration Licensing Policy (NELP - IX) to get more private equity in the country by giving certain benefits to attract the potential investors. But the government started chipping it away simply in the fond belief that India is not so poor in oil and gas resources. The myopic view of drawing comfort from huge reserves of oil and gas at KG D6 and Rajasthan oil fields might hit us badly in the long run. The reality is that with time and advancement in technology, we know our geology only as much better but any given day, it is still the same.
What are the specific areas and taxation policies governing oil and gas sector that appear ambiguous?

I am basically referring to tax benefits. The government is tying itself into knots on the issue of mineral oil definition. Even in the Direct Tax Code (DTC) by insisting on defining mineral oil as crude oil, the government has done nothing but added to the confusion.

The definition at one place says mineral oil as crude oil, but in another place when services are provided for finding mineral oil, the tax treatments are different. During exploration phase, what will come out is not sure -oil or gas. You do not drill for oil or gas separately. The government will have to come up with 10 to15 different clarifications of different clauses at different places to make DTC work.

Minimum Alternate Tax (MAT) is another anomaly, which was brought about because some people used heavy depreciation, but the truth is that you were in reality engaged in exploration. Does it make any sense that on the one hand the government is giving benefits and at the same time it keeps taxing those related services in the name of alternate tax?

"There is a genuine need for rationalising high service tax at least during exploration phase. This is required because nine out of 10 exploration attempts are a failure."

Then the complexities one has to face while working on a block of oil and gas. When you work on a block, you may discover something in certain part of it and something else in another part of the land. But to claim the expenses for part of the land where you have not found anything, you have to return it back to the government effectively leaving you only the discovery area to write off the entire expense.. Now the question is who is gaining by this practice?

The person who is operating on the given piece of land knows the possibilities of the land. As the new technology emerges, the company may tomorrow need to analyse the same data to come up with alternate geological models. There are issues within Section 42 of the I-T Act (the act relates to E&P companies claiming farm-in costs as exploration expenditure), which is meant to give you certain benefits in addition to other benefits, but somewhere this works only if it's mentioned in the Production Sharing Contracts (PSC). However, some PSCs do not mention these benefits and so lot of benefits are not available to the companies.
What are the issues that you see with NELP-IX in view of uncertainty regarding implementation of DTC?
Certain benefits would be available to you only if you sign the contract before new DTC comes into effect. So if I'm bidding for NELP-IX, I do not know on what date my contract will be signed nor do I know when the DTC will be put in place. There is uncertainty on both the dates. Given such uncertainty on the subject how do you expect the players to bid?
What are the fiscal incentives that you would recommend to encourage Indian companies and global players to invest in the sector?

The high service tax that the oil and gas industry is subjected to needs to be relooked at. The government's logic for levying high service tax is that it's cost recoverable. But there is a genuine need for rationalising high service tax at least during exploration phase. This is required because nine out of 10 exploration attempts are a failure. Further, by adding another 10.3 per cent Service Tax, the government ends up making these nine unsuccessful explorations very expensive for the contractor.

"We have Government induced huge uncertainty in Cairn-Vedanta deal. The big question is that can we as operator have at least a better certain environment from at least the Government side?"

In addition, unlike other industries, where CAPEX is high and service element is low, in case of upstream industry, services form a major part of the expenses.

How appealing are the salient features of NELP IX in encouraging Indian as well as global oil and gas companies to make a bid for these blocks?

What is optimistic for this NELP round is that oil prices have rebounded well. The latest development of tie-up between Reliance Industries Limited (RIL) and BP also makes for big news for the industry. However, at the same time, we are fighting for the elusive promised tax holiday. Then we have Government induced huge uncertainty in Cairn-Vedanta deal. The big question is that can we as operator have at least a better certain environment from at least the Government side?

Separately, on the marketing freedom front, the recent Supreme Court's judgment has substantially restricted the practical freedom. The Supreme Court says it's the government's primary duty to do an equitable distribution of natural resources of the country. Now this does not create a level playing field for a company which wants to sell gas according to its business priority.

It was last year that the government announced the deregulation of petrol prices? To what extent has the decision resulted in cutting down the losses made by oil marketing companies and reducing the burden of oil subsidiaries on government coffers?
There is only one solution to all these subsidies in any areas - offer direct reimbursement to the final user and let the market go in whichever way it goes.
What are the means and ways to check fuel adulteration at the retailers' end?
Another way of tracking unexplainable consignment of oil is by putting markers in the fuel. The way a marker works is that you adulterate oil-gas with known material. It acts like a code and each code is distinct. You can just scan the code and you can tell the batch number and transport details as to where the consignment came from. One can track the whole chain of people involved and the overall system can be hauled.

(InfralineEnergy thanks Ashu Sagar, Secretary General, AOGO for sharing his valuable insights with our readers. The column ‘In-Conversation’, is a platform to engage experts from various sectors to share their views on the different transformations in the Indian energy sector.)