India imposes windfall tax on oil producers, here’s the impact on the oil producers

India Imposes Windfall Tax on Oil Producers; Find the Impact on the Oil Producers

The government announced a windfall tax on oil and gas producers on July 1, 2022, in response to the crude cost increase of over 50% in 2022, which has shocked refiners including ONGC and Reliance.

The management of ONGC and Oil India recently stated that they did not expect such a move by the government at the end of May. Reliance Industries, the most valuable firm in India and an oil-to-retail behemoth, lost $19.35 billion in the market if its shares dropped in price by 8.7 percent, the worst intraday decline since November 2, 2020.

Refiners like Reliance Industries Ltd (RIL) and Nayara Energy, which is partially owned by Russian oil major Rosneft, along with oil producers of Oil and Natural Gas Corp, Oil India Ltd, and Vedanta Ltd., will experience a decline in revenue which lead to a result of the new taxes, which were announced in government orders.

“Reliance is experiencing a sharp reduction when the government placed taxes on windfall revenues produced by local refineries. Earlier, Reliance was operating fully, but for now that the commodity cycle is taking a turn where there is a pause in its refinery operations, Santosh Meena, Swastika Investment Ltd., said.

Following the news, shares of Vedanta, Oil and Natural Gas Corp (ONGC), Mangalore Refinery and Petrochemicals, and Reliance Industries all experienced precipitous declines.

What is the Windfall Tax?

A windfall tax is a higher tax amount levied on a certain business or sector on unexpectedly large profits. A windfall is a one-time tax on businesses that have had very high profits due to favorable market conditions alone.

When oil prices climbed to an almost 14-year high of $139 per barrel internationally in the March quarter, companies like ONGC and others reported large revenue.

Moreover, levying a windfall tax on oil companies who have gained profit from increasing prices globally. Additionally, it requires exporters to first fulfill the necessity of the home market.

According to Finance Minister Sitharaman, the government was gratified that exports were taking place and businesses were generating money. We are glad that exports are providing them. However, they are unique times. International oil prices are right now out of control. We pay that much money to purchase imports for a country like India, which depends heavily on imports “She spoke.

Domestic oil producers sell their crude oil to domestic refineries for prices that are competitive internationally. As a result, local crude producers are benefiting unexpectedly. A cess of Rs 23,250 per tonne has been placed regarding crude in light of this. Crude imports would not be charged this cess.

We need some oil for our population if it isn’t available and is being sold for such high revenue, she continued. The finance minister does not think that this deters exports or India from being a center for refining. ” This will be assessed to see how things are working out every 15 days,” Sitharaman promised.

Finance Minister referred to “phenomenal gains” that refiners based on unusual prices they received from exporting products as the cause for supplementary fees.

On every rupee that ONGC makes, the government is thought to receive 65–66 paise in taxes. The leftover part is utilized for exploration or looking for further oil and gas.

The government will get up to Rs 7,000 crore per annum from the tax on petroleum, which follows record earnings alone, on roughly 30 million tonnes of domestically crude oil.

How does Windfall Tax help the government?

The Indian rupee, which on July 1 hit a new low of 79 to the dollar, will benefit from the indirect import and export limitations through duty adjustments that are intended to lessen the burden on the CAD.

According to Madhavi Arora of Emkay Global,  this policy move by the government comes after the Reserve Bank of India (RBI) consistently intervened in all currency trading venues to convey its support.

On July 1, despite weakening in domestic markets and the US currency holding steady abroad, the Indian rupee made its first-ever touch of 79 against the US dollar. The native currency was under strain due to rising oil benchmarks.

After OPEC+ announced it will keep to its planned oil output increases in August and investors were concerned about the resilience of the global economy, global oil prices have risen slightly.

Overview of the Decision taken by the government

On Friday, the government imposed a tax on gasoline, diesel, and jet fuel exports to deter private refiners Reliance Industries and Nayara Energy from making international sales without first fulfilling domestic obligations. It also imposed an additional duty on domestic crude to recoup some of the windfall profits from higher prices brought on by the conflict between Russia and Ukraine.

The export of gasoline and jet fuel was subject to special additional excise duty (SAED) of Rs 6 per litre, or roughly 7 cents, while the export of diesel was subject to a penalty of Rs 13 per litre, or nearly 16 cents.

The tax will not apply to Reliance’s SEZ (special economic zone), which makes up about half of its Jamnagar refining plant in Gujarat. a unique An additional excise tax of Rs 23,250 per tonne, or around $40 per barrel, was imposed on producers who pump more than 2 million tonnes of petroleum annually.

The tax on the additional output above the baseline of last year’s production will not apply to minor players, those that have won found small fields bid rounds and are estimated to produce less than 2 million tonnes of oil yearly, or large producers.

Now the production and price levels, the levy on crude will reduce ONGC, OIL, and Vedanta’s realization from each barrel by 40% but is anticipated to increase government revenue by more than Rs 67,000 crore annually.

As a result of the announcement, oil and gas stocks, including those of Reliance Industries, ONGC, Oil India, and Indian Oil, fell up to 15% on the stock exchanges.

The tariffs, according to finance minister Nirmala Sitharaman, were prompted by the “phenomenal profits” that refiners made from selling their products abroad at outlandish rates.

“We have nothing against people making money. But if oil isn’t readily available (at gas stations), and they’re still being shipped and making incredible profits. We have adopted this twin-pronged strategy because we need at least some of it for our citizens, she added, adding that the levy was implemented because of the extraordinary circumstances.

The fuel crisis that occurred last month in areas with a major presence of private merchants is where the idea for the fuel export tax first emerged.

The private companies increased exports and decreased domestic sales by starving shops or charging Rs 3-5 per litre more because the government retailers, who control over 90% of the market, continued to sell below cost.

Even after operating their refineries at above 100% capacity, state-run refiners were forced to import gasoline and diesel to fill the gap left by private companies due to an exceptional increase in demand.

However, As private refiners record refining margins of up to $25 per barrel, the export tax is too small to have a major deterrent effect.

“Even with the tax, there will still be more than enough. Instead of losing an estimated Rs 12–15 on each litre, they sell in the domestic market, this will be an enhancement. But they must pay attention to it and keep their pumps running.

The Universal Service Obligation framework was extended to gas stations by the oil ministry last month to compel the private players to maintain their pumps open, stocked with fuel, and selling at a “fair” price. BP and Reliance have a total of 1,400 gas stations. Nayara has 6,500 locations and 1,200 are being built.

The export of gasoline and aviation turbine fuel (ATF) is subject to a Rs 6 per litre tax and the export of diesel is subject to a Rs 13 per litre levy.

Following Russia’s invasion of Ukraine, oil refineries made a killing by exporting petroleum to underdeveloped regions like Europe. According to media sources, some oil businesses processed discounted Russian crude oil after the West spurned it and exported fuel made from it.

How Government windfall tax will affect oil and Companies?

Following the government’s decision to levy a duty on vehicle gasoline exports and apply a windfall tax on locally produced crude oil, shares of oil and gas businesses plunged on Friday.

The price of Reliance Industries’ stock decreased by 7.19 percent on Friday, falling more than 8% over the day. On the BSE, shares of ONGC and Oil India’s finished more than 13% and 15% lower, respectively.

According to experts at Morgan Stanley Research, “Export taxes, restrictions, and windfall taxes on oil producers are a global trend and underline the tighter energy.” Analysts predict that India’s declaration will have a little negative impact on industry valuations.

ONGC is highly affected, while Reliance Industries can manage the changes relatively better.

On gasoline and aviation turbine fuel (ATF) exports, the government has levied a special excise levy of $6 per liter, and $13 per litre on diesel exports. Analysts predict that this will have an impact on exporters and refiners like Reliance Industries and Nayara Energy (Vadinar refinery).

It is possible that the government imposed the levies as a result of the profits that these refiners most likely made from exporting refined crude products. The robust and increasing outlook for its oil to the chemical sector, which is primarily driven by good refining margins, was helping Reliance Industries see regular upgrades.

The government’s decision to impose a 23,250 rupee per tonne cess on domestic crude oil production may affect the profits of state-owned oil companies like ONGC Ltd, Oil India Ltd, and private sector Vedanta Ltd. The producers had been creating incredible profits with crude prices over $100 per barrel.

“Gasoline and diesel make up the major part of Reliance’s refining output, accounting for 72% of it “According to analysts at Jefferies India Private Ltd., output.

They project a mixed impact on RIL of $7 per barrel, excluding any exemptions given that more than 58% of RIL’s refined products are exported, the combined impact on Reliance may be $3.40 per liter or $7 per barrel, according to the company. “margins,” according to a study by experts at Jefferies India Pvt Ltd.

However, if the SEZ refinery were excluded, the effect on RIL’s GRM would only be $1 per barrel.

State-owned oil and gas producers ONGC and Oil India are anticipated to be more affected. Vedanta Ltd. produces a variety of natural resources and its subsidiary Cairn India only contributed roughly 10% of revenues and 13% of Ebitda in FY22, increasing taxes may have some effect on the company’s earnings.

Not surprisingly, Vedanta stock prices fell by only 4.04 percent compared to the higher drops experienced by ONGC and Oil India stock prices.

A $40 per barrel increase in the cess on domestic oil output for ONGC and OIL India came as a shock and should signal downside risks for the industry, according to experts at Morgan Stanley Research. They remarked that it has a 36 percent and a 24 percent impact on ONGC and OIL India’s respective FY23 earnings.

According to economists, the higher margins that oil and gas businesses were enjoying because of rising crude prices and gross refining margins (GRMs) should now return to normal.

Stock prices are adjusting to the new reality as the industry tailwind fades, according to Manish Jeloka, co-head of products & solutions at Sanctum Wealth. The medium-to-long-term returns will rely on company-specific fundamentals when the news’ impact fades, noted Joleka.

The quick action by the government makes experts off guard. the government has not set a deadline for these taxes. Additionally, researchers noted that there are no slabs indicating the level of crude oil prices at which taxes are applicable because the prices may not stay high indefinitely.

The government will re-evaluate the petroleum windfall tax and the levy on exporting motor fuel every 15 days, according to Tarun Bajaj, the revenue secretary, who made the announcement on Friday.

edited and proofread by nikta sharma