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Nelp bids may slip on tax turbulence
June, 25th 2008

Bids for oil and gas blocks in the seventh round of the new exploration licensing policy (Nelp) are likely to be modest, or even lower than the bids in the previous rounds, despite the high global oil prices. This is primarily because oilcos looking at investing in the country are completely unsure of the tax regime for the sector. The bids for Nelp-VII are set to be filed on Monday, June 30.

Tax holidays enjoyed by oil and gas companies have now been restricted to oil manufacturing companies alone. Industry sources say that most bidders will include the tax component as a cost and will bid accordingly. The profit petroleum to be bid could fall by almost 20% if the bidder takes the tax implication into account, an industry source said.

Profit petroleum, the share of the profits that the exploration company gives to the government in the earlier rounds was as high as 90% in some cases. Even on a weighted average, profit petroleum for the government would be 70%. This time around, the government would have to make do with a profit share of 50-60% from the serious players.
Profit petroleum is directly proportionate to global prices as exploration companies stand to make bigger profits when prices are high.

However, the current uncertainty over taxes, which will impact bids of oil companies, will deprive the government from raking in the upside of high global oil prices. According to government sources, this would play out more for deepwater blocks where there is more moolah. The bidding norms have been tweaked this time to give more weightage to profit shares, and the government believes the oilcos should share more given the high oil prices.

The tax holiday enjoyed by the oil and gas sector under Section 80(IB)(9) of the Income-Tax Act has come under cloud following the finance ministrys clarification that the waiver was restricted only to crude manufacturing companies. The tax waiver was given to the oilcos to encourage investment in exploration activities so that the country could reduce its dependence on imports to meet the growing energy demand.

However, Budget 2008 led to a fresh set of confusion with uncertainties creeping into the tax-exemption regime. Finance ministry maintains that only crude manufacturers will be eligible for the tax holiday while gas-producing companies will have to pay tax on their income. This comes at a time when global warming and carbon emissions are assuming centrestage in all policy matters, and the governments decision to tax the green fuel, gas, instead of crude is puzzling.

The governments decision to continue the tax holiday for crude manufacturers while denying it to gas producers is particularly confusing as no block can be identified as a crude or gas-bearing block at the time of bidding. So, the bidder would take into account the cost implications of tax while bidding for profit petroleum.

Also, given the success in the past rounds, investors are expecting more gas finds than oil. Moreover, there is a fair amount of associated gas each time there is an oil discovery. A differential tax treatment on the two products will certainly be cumbersome.

The case, however, may be different when it comes to smaller players. Sources say the marginal blocks and the growth in the sector has generated enough interest, and this round of bidding is expected to see a large number of bids from first-time players. There are reports of real-estate companies planning to enter the exploration business in partnership with other oil companies.

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