Tax on windfall profit on crude oil, export of diesel, ATF hiked
The government on Saturday hiked windfall tax on domestically produced crude oil by more than a third while doubling the rate on export of diesel and re-introducing the levy on overseas shipment of jet fuel (ATF) in line with rise in international oil prices. The tax on crude oil produced by firms such as state-owned Oil and Natural Gas Corporation (ONGC) was increased to Rs 11,000 per tonne beginning October 16 from Rs 8,000, a government notification showed. In the fortnightly revision of windfall tax, the government doubled the rate on export of diesel to Rs 12 per litre from Rs 5 a litre. The levy on jet fuel, which was brought down to nil at the beginning of this month, was re-introduced at Rs 3.50 a litre. The levy on diesel includes Rs 1.50 per litre road infrastructure cess (RIC), the notification showed. The hike reverses the reduction in two previous rounds in September. This follows the rise in international oil prices. The basket of crude oil that India imports has risen to USD 92.91 per barrel in October from an average of USD 90.71 in the previous month. The basket had averaged USD 116.01 in June which was used as a base to introduce the levy for the first time from July 1.When the levy was first introduced, a windfall tax on export of petrol alongside diesel and ATF too was levied. But the tax on petrol was scrapped in subsequent fortnightly reviews. While the windfall profit tax is calculated by taking away any price that producers are getting above a threshold, the levy on fuel exports is based on cracks or margins that refiners earn on overseas shipments. These margins are primarily a difference of international oil price realised and the cost. The international price of petrol, which was used as reference for the levy of windfall tax on exports, was USD 148.82 per barrel in June but has since declined to USD 91.37 this month. It had averaged USD 93.78 a barrel in September. In contrast, the international price of diesel has firmed up to USD 133.35 per barrel in October from USD 123.36 in the previous month. The rate was USD 170.92 per barrel in June. International oil prices have fallen to pre-Ukraine war levels last month but have risen this month as producers cartel OPEC and its allies cut production. While private refiners Reliance Industries Ltd and Rosneft-based Nayara Energy are the principal exporters of fuels like diesel and ATF, the windfall levy on domestic crude targets producers like state-owned ONGC and Oil India Ltd as well as private players such as Vedanta Ltd. India first imposed windfall profit taxes on July 1, joining a growing number of nations that tax super normal profits of energy companies. At that time, export duties of Rs 6 per litre (USD 12 per barrel) each were levied on petrol and aviation turbine fuel and Rs 13 a litre (USD 26 a barrel) on diesel. A Rs 23,250 per tonne (USD 40 per barrel) windfall profit tax on domestic crude production was also levied. The duties were partially adjusted in the previous rounds on July 20, August 2, August 19, September 1, September 16, and October 1. The adjustments, while still ad hoc, highlight the producer oil price cap of around USD 75 per barrel and profitability of USD 20-22 a barrel.
Low bidders’ interest: BPCL on ‘wait and watch’ mode for strategic disinvestment
The government has indicated that the disinvestment of Bharat Petroleum Corporation Limited (BPCL) is still on its priority agenda, said a senior government official. Earlier in May, the government called off the disinvestment process citing lack of bidders’ interest. “BPCL is on ‘wait and watch’ mode for strategic disinvestment. Decision on timing depends upon improvement in geo-political situation,” the senior government official told BusinessLine. However, he admitted that the current geo-political situation are not conducive and bidders’ interest are low. In addition to owning 52.98 percent of BPCL, the Centre also controls its management. The government on November 20, 2019, gave in-principle approval for strategic disinvestment of government’s shareholding in BPCL excluding BPCL’s shareholding in Numaligarh Refinery (NRL). Further, as per the above approval, BPCL’s shareholding in NRL has to be divested to a Central Public Sector. BPCL has already sold the entire investment in equity shares of NRL to a consortium of Oil India and Engineers India and to the government of Assam during FY2020-21 at a total consideration of ₹98.7596 billion. Earlier, the government issued an Expression of Interest (EoI) for selling its stake along with management control. The Department of Public Asset and Investment Management (DIPAM) said multiple EoIs were received and they also initiated due diligence of the company. Covid-19 impact However, on May 26 this year, it said that the multiple Covid-19 waves and geo-political conditions affected industries globally, particularly the oil and gas sector. Owing to prevailing conditions in the global energy market, most of the Qualified Interested Parties (QIPs) have expressed their inability to continue in the current process of disinvestment of BPCL. “In view of this, based on decisions of the Alternative Mechanism (Empowered Group of Ministers), the government of India has decided to call off the present EoI process for strategic disinvestment of BPCL and the EoIs received from QIPs shall stand cancelled,” said DIPAM, while adding that decision on the re-initiation of the process will be taken in due course of time. New PSE Policy The disinvestment of BPCL also needs to be seen from the point of view of the new Public Sector Enterprises (PSE) Policy. The policy has listed petroleum in one of the four groups known as ‘Strategic Sectors’. It has been said that the Central Public Sector Enterprises (CPSEs) in the Strategic Sector/Non-Strategic Sector are to be taken up for privatisation, merger, subsidiarisation with another CPSE or for closure. “Only a bare minimum presence of CPSEs in the Strategic Sector is to be maintained,” it said. As on date, the petroleum sector is dominated by CPSEs such as ONGC, Indian Oil, BPCL, GAIL, Oil India, etc. which shows why BPCL disinvestment is important for the government.
Russia Will Terminate Natural Gas Supplies If A Price Cap Is Implemented
Any decision to impose a price cap on Russian natural gas exports would result in the suspension of said exports, the chief executive of Gazprom, Alexei Miller, said in response to reports the EU is considering such a move. “Such a one-sided decision is of course a violation of existing contracts, which would lead to a termination of supplies,” Miller said on Russian TV, as quoted by Reuters. Russian gas deliveries to Europe have already declined substantially since the Ukraine invasion as the EU rushed to diversify its sources of the commodity and Gazprom reduced flows via the Nord Stream 1 pipeline before it got blown up last month. The European Union has been hard at work trying to find a way to reduce its gas bill, with price caps among the most actively promoted options. However, there is no agreement yet on the kind of price caps to be implemented. A group of 15 members has called on the Commission to implement price caps on all gas imports, both from Russia and from countries such as Norway, Algeria, and the United States. The Commission and some other EU members including Germany and the Netherlands, however, have warned against such a move as it would put the security of supply at risk. The Commission has instead proposed a price cap on Russian gas supply only, prompting a reaction from the Russian side. EU leaders are meeting again at the end of this week to discuss their options, with the Commission expected to make its official proposal on the issue. “Impatience is growing with member states,” an unnamed EU diplomat told Reuters this weekend. “So we changed gear and put everything that is being floated… on the table. It is a way of putting pressure on the Commission to come up with the most concrete possible proposals.”
Japan’s Government Will Buy LNG If Private Companies Can’t Afford To
Japan’s government is amending laws that will allow state firm Japan Oil, Gas and Metals National Corporation (JOGMEC) to buy liquefied natural gas this winter if private companies cannot afford to do so, Industry and Trade Minister Yasutoshi Nishimura said on Friday. Japan and all other large importers of LNG in Asia have been in intense competition with Europe this year to procure gas cargoes as the EU races to replace Russian pipeline supply while Russia has significantly restricted its gas exports to Europe. Japan’s new legislation also allows the trade and industry minister to order gas use restrictions at large consumers if supply further tightens or in case of a gas emergency, Nishimura said at a news conference carried by Bloomberg. Japan is heavily dependent on imported energy for a lack of local resources. Amid the current crunch following the Russian invasion of Ukraine and the Western sanctions on Russia, Japan is even considering giving nuclear a second chance in a reversal of the stance Japanese leaders have had since the 2011 Fukushima disaster. The heightened competition of LNG supply just ahead of the winter has sent LNG prices high, and freight rates to record highs, as Europe looks to import as much gas as it can to avoid a winter of blackouts and rationing. Higher prices in Europe have so far this year drawn more spot LNG supply there, unlike in previous years when Asia with its top importers Japan and China dictated demand on the LNG market. Earlier this week, LNG carrier rates hit an all-time high, driven by growing prompt demand for gas in Europe as the continent tries to procure supply ahead of the winter. The freight rate to charter an LNG carrier in the Atlantic basin surged to $397,500 per day on Tuesday, according to Spark Commodities estimates. The race to buy LNG and charter LNG carriers could create the next big shortage in the energy market—not enough vessels to transport LNG from exporters to buyers, analysts and traders say.
India offers over 2,40,000 sq.km of land and sea for oil and gas E&P
About 36 blocks in these regions are estimated to have an oil and gas resources potential of 1,775 metric million tonnes of oil equivalent (MMTOE). In the highest ever bid on offer to find new oil and gas fields, the Director General of Hydrocarbons (DGH) has offered over 2,00,000 square kilometres of India’s land and sea for exploration and production of oil and gas. A DGH notification says the Offshore Bid Round (OALP Bid Round-IX) under Hydrocarbon Exploration and Licensing Policy (HELP) will offer 26 blocks spread over 9 sedimentary basins covering an area of approximately 2,23,000 Sq.km for Exploration and Development through international competitive bidding. About 36 blocks in these regions are estimated to have an oil and gas resources potential of 1,775 metric million tonnes of oil equivalent (MMTOE). Interested parties can submit their Expression of Interest (EoI) in three rounds throughout the year until March 2003. Since the launch of HELP on March 30, 2016, replacing the New Exploration Licensing Policy (NELP) 1999, with more attractive incentives for E&P, India had offered about 2,00,000 sq. kilometers rounds of bidding for 134 blocks. Winners of Round-VIII blocks of 36,316 sq km are yet to be announced, and if that is also added, the total area on offer will increase to 2,44,007 sq km. Under HELP, the hydrocarbon licensing policies were re-modelled to make E&P investment commercially attractive with incentives like lower and graded royalty rates, no revenue sharing for category II and III basins which are less prospective, 100% Participating Interest (PI) allowed for foreign/private players etc. DGH says of the 26 blocks on offer, 15 are in ultra deep-water, 8 are in shallow water and 3 blocks are on land. Ultra deep-water blocks cover an area of 1,59,439.82 Sq. km in Krishna Godavari, Mahanadi, Saurashtra, Andaman-Nicobar and Bengal-Purnea shores. Shallow water blocks covering an area of 59,925.27 sq.km are spread over Mumbai Offshore, Krishna Godavari, Saurashtra and Bengal-Purnea areas. These three categories belonging to the ‘Government offer’ category constitute about 15 blocks. Another 8 blocks at Cauvery, Cambay, Assam Shelf and Saurashtra basins will be bidded out based on Expression of Interest (EoI) from potential investors. Besides, the DGH is offering 16 CBM blocks in a special bid round spread over Madhya Pradesh(4), Chhattisgarh, Telangana (3 each), Maharashtra, Odisha (2 each), Jharkhand and West Bengal (one each). The DGH was established in 1993 as an independent regulatory body under the Ministry of Petroleum & Natural Gas for regulating the leasing, licensing, development, conservation, and management of oil and natural gas resources in India.
France Sends Germany Natural Gas To Ease Its Energy Crisis
On Thursday, France started sending natural gas directly to Germany in an attempt to alleviate the energy crisis in Europe’s biggest economy, which used to rely heavily on Russian gas supply before the war in Ukraine. As of October 13, French gas network operator GRTgaz is transporting natural gas to Germany at the Obergailbach interconnection point, the French firm said in a statement today. “In an unprecedented energy context linked to the war in Ukraine, France is in solidarity with its German neighbor by sending gas directly to it,” GRTgaz said. The marketing of the first physical flows of gas has already taken place, the company added. The only existing interconnection point between France and Germany at Obergailbach was originally designed to operate in the Germany-to-France direction. GRTgaz and its German counterparts have made the necessary technical adjustments so that gas can now flow in the direction from France to Germany. Klaus Müller, the president of the German Federal Network Agency, Bundesnetzagentur, thanked GRTgaz in a tweet and said that the French gas deliveries help Germany’s security of supply. Germany’s energy regulator insists that “significant” gas and energy savings are necessary to avoid a winter of rationing and gas emergency. Households, industry, and businesses need to cut consumption by at least 20%, the regulator’s head Müller said earlier this month. Germany may be unable to avoid a gas emergency this winter if all consumers don’t significantly cut consumption in Europe’s biggest economy, the regulator and its president have said multiple times since the summer. Gas storage sites in Germany are now 95% full, the regulator said in its latest update on the gas supply and demand situation on Thursday. Wholesale gas prices are very volatile but remain at very high levels. Businesses and households need to prepare for significantly higher gas prices, the regulator said and called once again for gas and energy savings.
OPEC+ Cuts Could Lead To Supply Deficit In Oil Markets
Last week, OPEC+ said it would reduce its oil production target by 2 million barrels daily, with actual cuts of between 1 and 1.1 million bpd. The announcement pushed prices higher. By the end of the week, the resulting oil price rally had run out of steam, and prices were once again sliding on recession fears. And these fears might mask how the oil market tips into a shortage. When the cartel said it would be cutting production, OPEC officials explained the reasons for the decision had to do with anticipating a drop in demand and saving spare production capacity for the eventuality of a sudden output outage such as one in Russia following the EU embargo entering into effect at the end of the year, for example. The U.S. signaled it saw the move as a political one, amounting to a snub by Riyadh, which will be one of three OPEC members actually reducing production, and a declaration of siding with Russia. The latter Riyadh already did six years ago when OPEC+ was born, so it shouldn’t have come as a surprise, but the snub appears to have come as a shock to Washington, prompting President Biden to threaten “consequences” of a yet unidentified nature. While the White House ponders its options, some analysts have noted that the move of OPEC+ would tighten an already tight oil market. Recession worry seems to be reigning in oil markets right now, but the risk of an oil shortage is there, and none other than OPEC has been warning about it, most vocally Saudi Arabia in the face of its energy minister. Meanwhile, there is more bad news: global oil inventories are in a decline that would be difficult to reverse. This is what Reuters’ John Kemp noted in a column this week, saying U.S. inventories have shed 480 million barrels in the past two years, to reach the lowest level for this time of the year since 2004. The situation with fuel inventories is even more worrying, with U.S. distillate inventories down to the lowest since records began in 1982, and European distillate inventories at the lowest since 2002. Distillate inventories in Singapore are also at a multi-year low, shedding 9 million barrels over the past two years. The fall in distillate inventories is perhaps even more concerning than the decline in crude stocks because distillates are used to make diesel fuel, and diesel fuel is used in the freight transport of goods, which is vital for every economy. A reserve depletion means price hikes, and price hikes mean good fuel for inflation. Still, despite the precarious state of global oil and distillate inventories, Saudi Arabia just said this week that the decision to reduce output was a purely economic one. In an official response to U.S. accusations, the Saudi foreign ministry issued a statement that said: “The Kingdom clarified through its continuous consultations with the U.S. administration that all economic analyses indicate that postponing the OPEC+ decision for a month, according to what has been suggested would have had negative economic consequences.” Whatever the motives for the decision, it has been made, and those unhappy with it have few options at their disposal for punishing those that made it. Oil prices remain subdued, meanwhile, although analysts updated their fourth-quarter price forecasts after the OPEC+ decision. Again, this is largely because the fear of recession has been fuelled by a stable flow of pessimistic forecasts, the latest coming from the IMF this week. Indeed, the immediate future of the global economy does not look good, and when the economic outlook is bad, so is the oil price outlook. Yet a shortage of oil could certainly change this, especially when it coincides with an oil embargo and a price cap.
Biden Says Saudi Arabia Will Face Consequences For OPEC+ Decision
There will be some consequences for Saudi Arabia for its decision together with Russia to steer OPEC+ into a large oil production cut, U.S. President Joe Biden told CNN in an exclusive interview on Tuesday. It is time the U.S. rethinks its relationship with Saudi Arabia after the Kingdom, together with Russia, decided at last week’s OPEC+ meeting to slash oil production by the most since 2020, President Biden said. “I am in the process, when the House and Senate gets back, they’re going to have to – there’s going to be some consequences for what they’ve done with Russia,” President Biden told CNN’s Jake Tapper. Last week, OPEC+ announced the biggest cut to its collective target since 2020. Despite insistence from Russia and all of OPEC+ that the production cut is based on technical market assessments and is aimed at “stability,” many analysts, as well as the White House, saw the move as a political one. Late on Monday, U.S. Democratic Senator Bob Menendez, chairman of the U.S. Senate Foreign Relations Committee, blasted Saudi Arabia for announcing the oil production cut and called for an “immediate” freezing of U.S. cooperation with the Kingdom, including arms sales. Asked about whether he would consider freezing arms sales to Saudi Arabia, President Biden told CNN, “I’m not going get into what I’d consider and what I have in mind but there will be consequences.” President Biden also reiterated his insistence that he didn’t visit Saudi Arabia this summer to beg for more oil. “I didn’t go about oil, I went about making sure that we made sure that we weren’t going to walk away from the Middle East,” he said. The President’s comments come after several prominent Democrats, including Senator Menendez, called for a re-evaluation of the U.S. relationship with Saudi Arabia. The White House has criticized the Kingdom for “aligning with Russia” and for the “disappointing and short-sighted” decision to cut oil production.
IMF Recession Warning Deals Blow To Oil Prices
Crude oil prices extended their slide after the International Monetary Fund reported an update to its global economic projections for this year, which deepened fears of recession. In the latest edition of its World Economic Outlook, the IMF said that global economic growth will slow from 6 percent in 2021 to 3.2 percent this year, while inflation rises from 4.7 percent to 8.8 percent this year. As a result, “Risks to the outlook remain unusually large and to the downside. Monetary policy could miscalculate the right stance to reduce inflation. Policy paths in the largest economies could continue to diverge, leading to further US dollar appreciation and cross-border tensions. More energy and food price shocks might cause inflation to persist for longer,” the Fund said. Central banks’ approach to handling inflation appears to be of particular concern to the International Monetary Fund, with the report suggesting that the “soft landing” promoted so actively by Fed chairman Jerome Powell and other senior officials might not, in fact, materialize. The threat of a recession in the world’s wealthiest economies is a very real one, according to the Fund, with emerging nations suffering a debt crisis as a result of these economic developments. No wonder, then, that oil prices slid fast after the publication of the report, after getting buoyed by the decision of OPEC+ to reduce the supply of oil by about 1 million bpd, formally by 2 million bpd. At the time of writing Brent crude was trading at $93.82 per barrel, after topping $97 per barrel earlier this week. West Texas Intermediate was changing hands for $88.77 per barrel, after trading above $90 per barrel following OPEC+’s decision. That said, as OPEC officials have warned, the supply of oil remains constrained. Inflation and dollar appreciation would no doubt cause demand destruction but with its decision to cut production OPEC+ effectively put a floor under oil so it’s unlikely we’ll see a crash similar to the one we witnessed in the first year of the pandemic.
India to weigh Russia’s offer on Sakhalin-1 oil project
India maintains a “healthy dialogue” with Russia and will look at what is offered following an announced ownership revamp to the Sakhalin-1 oil and gas project, Petroleum Minister Hardeep Singh Puri has told the Reuters news agency. Russia last week issued a decree allowing it to seize Exxon Mobil’s 30 percent stake and gave a Russian state-run company the authority to decide whether foreign shareholders, including India’s ONGC Videsh, can retain their participation in the project. “We’ll look at what is the state of play and what’s on offer,” Puri told Reuters on Monday following meetings with United States oil executives in Houston, Texas. India is “actively monitoring” Saudi Arabia’s Asia premium over oil prices after OPEC+ last week agreed to cut oil production by 2 million barrels per day beginning next month, Puri said. “At the end of the day, consumers start playing a role when situations like this evolve,” he said referring to the global energy balance and the “unintended consequences” of the OPEC+ decision. Too-high oil prices could exacerbate inflation and tip the global economy into recession, reducing oil demand, he added. On the proposed European Union price cap on Russian oil purchases, Puri suggested it is not yet firm. “If the Europeans come with a plan, let’s see how it evolves,” he said. Puri this week met US Energy Secretary Jennifer Granholm and Energy Security Adviser Amos Hochstein in Washington, DC, where they discussed collaborations on biofuels and clean energy in addition to energy security. “At no stage have we ever been told not to buy Russian oil,” Puri said, referring to talks with officials on global energy supplies. In Houston, he met executives from Exxon Mobil, oilfield service provider Baker Hughes and liquefied natural gas producers after launching a bidding round for offshore oil and gas exploration areas.