Policy overhaul, windfall tax withdrawn to draw global oil companies to India

New Delhi: India’s move to broaden the scope of its exploration policy beyond petroleum and natural gas while lately abolishing a windfall tax on domestically produced crude oil will likely draw in private and foreign entities to the upstream energy sector, according to S&P Global Commodity Insights.

The sector has witnessed an uneven growth trajectory over the past decade. Rajya Sabha last week passed a Bill seeking to amend the Oil Fields (Regulation and Development) Act of 1948 by expanding its scope to include shale oil, shale gas and coal bed methane, in addition to oil and gas.

It also proposed a series of other changes to the decades-old act — such as freedom to pursue international arbitration in the event of disputes, as well as offering a longer lease period. The amendment needs to be passed in Lok Sabha, the lower house of the Indian parliament, to become a law.

The new bill, once notified, will empower the central government to make rules on several matters like regulating the grant of leases, terms and conditions of leases including the minimum and the maximum area and the period of the lease, conservation and development of mineral oils, methods for producing oil, and manner of collection of royalties, fees, and taxes.

“The objective of the changes to the Oilfields Act is to create a more investor-friendly environment and enhance the global competitiveness of future oilfield contracts by addressing long-standing concerns of exploration companies,” said Rahul Chauhan, upstream technical research country lead at S&P Global Commodity Insights.

India in recent years has undertaken a series of upstream reforms, such as greater marketing freedom to producers.
Previously, the operator of a field could not directly sell locally produced crude into the market and needed government permission to sell crude and condensates within the country. Under the new policy, the government ceased its function of allocating domestic crude and condensate output.

India also decided to abolish a windfall tax on domestically produced crude that was in effect since July 2022. India slapped the windfall tax on crude oil producers and on exports of gasoline, diesel and the aviation fuel in July 2022, to regulate private refiners who wanted to sell fuel overseas instead of locally, to gain from firm refining margins.

The tax rates were typically being reviewed every two weeks based on average oil prices of the immediate past fortnight.
“The windfall tax was extremely unhelpful for the oil producers that were just emerging from a difficult period of low or barely remunerable prices. In an ideal scenario, India should pursue the opposite of windfall taxes, that is aggressively expanding and incentivizing production growth by all means necessary, because in an energy transition world, the risk of stranded assets is rising,” said Rajeev Lala, director for upstream companies and transactions at S&P Global Commodity Insights.

A tax levied on an unforeseen or unexpectedly large profit is called a windfall tax. India imports oil and gas from various geographical regions including countries from the Middle East, Africa, Europe, North America, South America and South-East Asia.

India depends on imports for over 80 per cent of its crude oil requirement. Various steps have been taken by the government to increase the production of domestic crude oil and bring down imports. (ANI)