Budget 2005-06: Energy
The Indian petroleum sector has witnessed major shifts in policy matters over the last few years with the dismantling of the APM and entry of private players into retail marketing business. The required effect of these measures was to bring in more transparency, however, not much has changed with the government still in control of product prices. 

Budget Measures Customs duties on crude oil halved to 5 per cent from 10 per cent. Customs duties on petrol and diesel reduced to 10 per cent from 20 per cent. Customs and excise duties on LPG and kerosene eliminated. Customs duties on all other petroleum products other than above, being reduced to 10 per cent from 20 per cent. Excise duties on petrol and diesel to be fixed as a combination of ad-valorem and specific duties. Cess on petrol and diesel to be increased by 50 paise per litre.  Budget Impact The reduction in customs duties on crude oil is likely to have a positive impact on the downstream oil refining and marketing companies, as it is likely to help reduce the import parity cost of crude at the refinery gate. Also having a positive impact on these companies is the elimination of customs and excise duties on LPG and kerosene, as it would help reduce under-recoveries on these two highly subsidized products. Elimination of customs duties on LPG and kerosene and the reduction of duties on petrol, diesel and all other petroleum products are likely to reduce the protection enjoyed by the refineries as a result of which realizations are likely to have a negative impact. It should be noted that petroleum products are priced at the refinery gate, taking into consideration the landed costs of products (notional imports) as a result of which, customs duties and transportation costs directly add to the margins and a reduction of the same is likely to reduce margins. Realizations for ONGC [Get Quote] are likely to decline as a result of lower customs duties on crude oil, thereby affecting import parity crude oil prices.  Sector Outlook While the oil marketing companies had a forgettable FY05 on the back of rising product costs at the refinery gate on one hand and lack of freedom to increase product prices in the domestic market, the measures announced by the FM in the current budget are a big positive as it would help reduce costs while at the same time, expand marketing margins. On the other hand, refining margins are likely to decline as a result of lower duty protection in the face of reduced customs duties.  Industry Wish List Specific duties on refinery products instead of advalorem. Halve customs duty on crude & naphtha from 10 per cent to 5 per cent Reduce excise duty on LPG & SKO Allow 50% deduction on profits for drilling firms, domestic & foreign E&P companies Halve customs duty to 10% on fuels like furnace oil & LSHS  Budget over the years Budget 2002-03 Budget 2003-04 Budget 2004-05 Schedule date for deregulations of petroleum products to be adhered (April 2002) Subsidy on essential commodities notably LPG and kerosene to continue, albeit at a lower rate. This included the freight subsidy to far-flung places. As a result prices of LPG cylinder increased by Rs 40 per cylinder and kerosene by Rs 1.5/litre. Such subsidies to be reduced over a 3-5 year time frame. Cess on crude increased from Rs 900/tonne to Rs 1800/ tonne. Excise duty on kerosene reduced from 8 per cent to 4 per cent. 50p cess on diesel to be levied to fund additional outlays on infrastructure projects. Capital goods imports for LNG (liquefied natural gas) degasification plants customs duty reduced from 25 per cent to 5 per cent. Higher thrust on concrete roads in road projects and lower excise duty on cars and CV's Excise duty on LNG (liquefied natural gas) exempted. Countervailing duty (CVD) exemption to continue. 2% cess levied on all taxes including excise. No credit of cess on motor spirit, high-speed diesel and light diesel oil. Existing exemption on naphtha/LNG used for generating synthetic gas or ammonia for manufacture of Heavy water extended to naphtha/LNG for generation of steam. Excise duty on gas stoves with a maximum retail price of Rs 2,000 per unit reduced from 16 per cent to 8 per cent.
Key Positives Change in the current price revision policy from fortnightly to monthly or quarterly would result in higher stability. Rationalization of tariffs on key petroleum products such as MS (petrol) and gradual phasing out of subsidies is expected to provide a big boost for players in the sector, as it will positively affect marketing margins in the medium term. Approval to acquire oil fields abroad shall help reduce import dependence and at the same time induce better technology as Indian majors compete in the global arena. Entry of private players in the marketing segment likely to result in high competition and better quality products resulting in benefits to the consumers.		Key Negatives Demand for petroleum products continues to be low while refining capacities are being hiked resulting in surplus products. Only certain products such as aviation turbine fuel (ATF) and LPG have registered better growth Delay in the appointment of the independent petroleum regulator may hamper operational freedom and players will continue to dependent on the government for policy related issues. Sharp spurt in crude prices have a negative impact on the players' margins in the short term, as product prices have a tendency to increase gradually due to political ramifications. Subsidies on LPG and kerosene are likely to play havoc on oil marketing companies as government extends the phasing out of the subsidies by one more year.

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