• OPEC output cut could force government to slash excise duty on fuel, bring relief for upstream firms

    The latest decision by the Organization of Petroleum Exporting Countries (OPEC) to cut crude oil output to rein in oversupply and prop up prices may have a significant impact for India, experts say. The announcement to slash output by 1.2 million barrel per day may force the government to cut excise duty on fuel, provide relief to upstream firms and also influence the petroleum subsidy budget for the next fiscal.

    For consumers, the development translates into higher retail prices for petrol and diesel. “The government may continue with fortnightly adjustment in fuel prices until crude reaches $60 a barrel. Beyond that they may want to use the cushion of excise duty and keep the retail prices at a level that will not hurt consumers and fuel inflation,” said Debasish Mishra, Partner at accounting and consultancy firm Deloitte Touche Tohmatsu India.

    The 14-member global crude oil cartel on Wednesday agreed for the first output cut since 2008 after a mega global glut pulled down benchmark prices to less than $35 per barrel from a peak of $110 per barrel in mid-June, 2014. During the slump, the Modi government had hiked excise duty on petrol and diesel nine times to mop up additional revenue. In all, it raised excise duty on petrol by Rs 11.77 a litre and that on diesel by Rs 13.47.

    OPEC output cut could force government to slash excise duty on fuel, bring relief for upstream firmsOPEC output cut could force government to slash excise duty on fuel, bring relief for upstream firms – Image
    Experts also say the production cut from OPEC and the subsequent hike in crude oil prices will come as a relief for the upstream companies including Oil and Natural Gas Corporation (ONGC) and Oil India (OIL). “The upstream segment was taking a major hit in their margins due to historically low crude oil prices,” said Salil Garg, Director-Corporates at research firm India ratings.

    He added the development may not translate into good news for the downstream refining and marketing companies. “An upward movement in crude will also impact natural gas prices which will increase the cost of production for the downstream segment as many of the crude derivates are used for their own industrial use,” Garg said.

    Experts also said in the event of a sharp and sustained increase in crude oil prices, the options before the government to cushion the consumers could include asking upstream firms to bear the burden of Oil Marketing Companies’under-recoveries or relieve the refiners through budgetary support. The three OMCs – Indian Oil (IOC), Bharat Petroleum (BPCL) and Hindustan Petroleum (HPCL) — suffered Gross Under-Recoveries (GURs) of Rs 7,826 crore on subsidized sales of LPG and Kerosene in the first half of current fiscal alone.

    The government had budgeted for a petroleum subsidy outgo of Rs 26,900 crore for the current financial year. According to the oil ministry, every $1 increase in crude oil price leads to additional under-recovery burden to the tune of Rs 1,180 crore for the OMCs.

    While the production cut will impact the government’s calculation of petroleum subsidy outgo for the next year’s budget, analysts stated the impact may be limited. “There will definitely be a slight increase in subsidy requirement for 2017-18 but it is uncertain whether prices will remain increased for a long time,” said K Ravichandran, Senior Vice President at ratings agency ICRA.

    He cited two reasons for doubting sustained higher levels of crude prices. The OPEC members’ ability to stick to committed production cuts is still to be tested and US shale producers may jack up output in response to increased crude prices. Dominic Moore Jersey

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