Budget and the downstream oil and gas sector

Federal Budget 2019-20 announced yesterday turned out to be a tougher one in general driven largely by removal of many exemptions and concessions as expected. While it remained quite silent for the upstream oil and gas exploration and production sector, some nuggets from the budget speech and documents suggest that the government has picked out some revenue collection opportunities from the downstream oil and gas sector, particularly the oil marketing sector.

On reliefs and concessions, the federal government has set aside Rs24 billion as a subsidy to the LNG sector for providing gas to industry on lower rates - something that was not budgeted last year. It has also proposed the exemption of duty on the import of plant and machinery for setting up hydrocracking plants for oil refining to encourage investment in the capital intensive projects - much needed for the refining sector.

Calling it simplifying and ensuring similar tax treatments, the government has however proposed a few changes to address the changing energy mix in the country. Liquefied natural gas (LNG) has fast replaced furnace oil (FO) where the country now relies more on Regasified LNG and other fuel sources like coal and hydel than furnace oil. Furnace oil along with other petroleum products imported by the OMCs whose prices isn't regulated have been proposed to be excluded from three percent value addition tax and be included in the list of regulated petroleum products that enjoy exclusion of VAT. While it gives the impression that the import bill will decrease to some extent, it must be noted that furnace oil import that used to be the single largest petroleum product imported a while ago has been banned since the beginning of this year, and its imports only resumed recently for the summer season to meet rising demand. In such a case the relief to the OMCs seems limited.

Another attempt to rationalise taxes came in the form of brining LNG from exemption of custom duty to a levy of 5 percent custom duty on its import. The rationale for this revenue measure given is that LNG has replaced furnace oil that was subject to 7 percent custom duty. While this might not affect most OMCs in general, increase in duties and taxes at import stage are passed onto the consumers, which means higher LNG rates. Add to this the increase in FED on the import of LNG. Currently, FED on LNG is Rs17.18 per 100 cubic meters, which is significantly lower that the FED on local gas. The FED on LNG import is proposed to be increased to Rs10 per MMBTU to bring in in line with indigenous gas.