Budget: A goose egg for the upstream sector

With the energy situation reaching the cusp of collapse, the E&P sector stumbles under the messy mispricing of hydrocarbons which has led to an accelerated depletion of indigenous gas reserves versus production from the new discoveries. So much for the importance of the oil and gas sector, the Budget FY13 remained largely voiceless on the E&P front. Given the diminishing indigenous reserves coupled with slackening investor interest, the E&P players were looking forward to some activity on the fiscal scope that would catalyse investment in the sector. Expectations were sanguine and proposals were countless, especially during the year of political transition. Though hopes were not sky high, the optimism sputtered with the wrapping up of the Finance Ministers budget speech. Though the outlook for the down-stream sector has crawled up an inch after the provisions in the Federal Budget, whatever sanguinity that exists for the upstream sector has very little to do with the budget. There was no surprise for the exploration and production companies. Besides revealing realistic dividend targets for OGDC and PPL, the Federal Government, of the little that it offered, has given the E&P companies a one time opportunity to avail 40 percent income tax rate in FY12 compared to the rate as high as 55 percent, as prescribed in the concession agreements. But, what is of more weight is the relief such a provision is likely to bring to the upstream sector at a time when the country is in dire need of an up tick in exploration and production activity. The provisions and the added condition of withdrawing all litigation cases with liabilities paid in full in the recent Federal Budget seem to be tactically designed to hasten the revenue collection more than sector respite. Moreover, the ambitious Gas Infrastructure Development Cess (GIDC) and Petroleum Levy (PL) plans will also boost the government revenues and support IP gas pipeline funding, but little will it bag investment or push exploration activity in the country. As something is better than nothing, the Federal Government set for the privatisation target proceeds of Rs.74 billion which signaling the SPO of PPL likely in the coming fiscal year. Meanwhile the GIDC can provide some support to the E&P sector indirectly till the time the gas prices under Petroleum Policy 2012 kicks in as it aims to reduce oil-gas tariff parity. The cumulative earnings of the E&P sector that contributes almost 30 percent towards government revenues grew by 30 percent during 9MFY12 versus 9MFY11. If at all possible, FY13 could see enrichment in production flows due to falling Rupee against dollar and higher oil prices coupled with enhanced drilling in high potential blocks like Tal, Nashpa and Makori. However, with recent price plunge in international oil market, E&P companies might also want to brace for some underperformance in the short run.