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India Oil & Gas, Chemicals
Feedstock- Vol XXV: Spotlight on Auto fuel taxes
• Spotlight on auto fuel taxes: Recent news flow has indicated that while
it may not be feasible for the government to raise diesel prices, a
rationalization of government levies could be on the cards. We analyze
the impact of possible government actions on fuel tax on subsidies and
SOE oil company’s margins.
• Prices are high, but so is the govt. take: While auto fuel prices are
high in India, a significant proportion of this is accounted for by govt.
levies - 49% for petrol and 39% for diesel. Ad valorem levies have a
cascading effect on retail prices at higher fuel price levels.
• Excise duty reduction likely: Excise duty on petrol and diesel was
hiked by Re1/lt in the previous budget - a rollback would reduce losses
on diesel by ~Rs90bn, and would raise the breakeven for petrol to $92-
$93/bbl (from $90-$91/bbl currently).
• Customs duty impact: Cut in crude oil customs duties (without
corresponding cut in product taxes) reduces govt. revenues and aids
GRMs (increasing tariff protection). A cut only in petrol/diesel customs
duty would lower tariff protection for refining and transfer margins from
the refining division to the marketing division.
• But limited headroom available: While a rationalization of govt. levies
on auto fuels would be a welcome step towards de-regulation without
raising consumer prices, we note that given the high dependence of the
govt. on revenues derived from petro products (12% of total central govt.
revenues) room for maneuver is limited in this regard as well.
• Margin watch: Benchmark GRMs remained firm, averaging $5.5/bbl
since December (vs. $4.55/bbl in 3Q). Diesel spreads remained strong
($14.6/bbl), driven by strong demand in Asia, and a harsh winter. Light
heavy crude differentials widened to over $3.6/bbl.
• Fuel marketing watch: While petrol prices were raised ~Rs2.5/lt in
January, crude continues to remain elevated, with Brent crossing
$100/bbl. With the R&M companies losing over Rs8/lt on diesel, we
estimate losses of ~Rs85bn in January.
Spotlight on fuel taxes
Government levies on auto fuels have been in the spotlight recently – statements from
the new Oil Minister that raising diesel prices is not feasible in the current
environment have given currency to expectations that the government would need to
streamline levies on auto fuels.
Prices high, but so is government take
While auto fuel retail prices in India are quite high, a large component of the price is
made up of taxes and other government levies – 49% for petrol and 39% for diesel.
An issue that compounds the problem is that the sales tax is an ad valorem levy,
which increases along with an increase in crude/retail prices. Further, being state
govt. determined, rationalization of this tax would prove to be problematic for the
central government.
As a result, we are more likely to see changes on central govt. levies – excise and
import duties in the union budget. However, with oil revenues accounting for ~12%
of total receipts, room for maneuver given fiscal deficit targets is limited.
Excise
The Union Budget last year saw a Re1/lt hike in excise on petrol and diesel – a
rollback of this measure would lead to a reduction of ~Rs90bn in diesel subsidies,
with a 45% reduction at $80/bbl crude. On petrol, breakeven level would rise to $92-
$93/bbl vs. the current $90-$91/bbl.
Assuming a Rs2/lt reduction in excise duty on diesel, we look at the sensitivity of
subsidies.
A Rs2/lt reduction in excise leads to a ~Rs150bn reduction in diesel subsidies. At
$80/bbl crude, we estimate that the reduction in diesel subsidies is 78% - even at
$100/bbl (current level of Brent), this results in 25% lower losses, thereby
significantly reducing diesel subsidies without raising consumer prices. A similar
excise duty reduction on petrol would raise the breakeven level to ~$95-$96/bbl -
from the current $90-$91/bbl.
Customs duty
Currently, the govt. imposes a 5% customs duty on crude oil imports, and 7.5% on
petrol/diesel imports - thus providing refiners with positive tariff protection for
refining. A removal of this duty on crude oil would be a positive for refiners, aiding
refining margins.
However, a reduction in the duty only on the finished products would be negative for
refiners, reducing their refining margins, with these margins being shifted to the
marketing side of the business. While this would reduce the headline subsidy
number, downstream SOE companies will not benefit as possible government
subsidy support will reduce in line with the reduction in headline subsidy.
Lack of action would accentuate the problem
While the government will have little room to maneuver due to high budgetary
dependence on oil/oil product revenues, current crude prices will also put pressure on
the government to absorb a part of the oil subsidy
News Feed
Govt. subsidy for 3Q at Rs80bn: The government announced that it would provide
Rs80bn as subsidy support to the R&M companies for the third quarter – this is
below the Rs100bn requested by the Oil Ministry.
ONGC to relinquish Egyptian blocks: ONGC announced that it had informed
Egyptian authorities of its intention to give up its North Ramadan and NEMED
exploration blocks.
Gujarat Gas raises CNG prices: Gujarat Gas hiked CNG rates by Rs2.8/kg to
Rs35.25/kg, in response to a higher LNG component in its gas mix .
Canadian firm invites OIL/GAIL to invest in shale gas: Canadian firm Americas
Petrogas (15% owned by IFFCO) has invited Oil India and GAIL to invest in its
shale gas exploration projects in Argentina.
ONGC/IOC heads retire: A.K. Hazarika and S.V. Narasimhan were appointed as
the interim heads of ONGC and IOC respectively, replacing R.S. Sharma and B.M.
Bansal
RIL writes to Atlas on Chevron deal: RIL has written to Atlas Energy, seeking
clarifications about its proposed acquisition by Chevron, and seeks assurances about
its Marcellus shale JV with Atlas.
Oil India to relinquish Libyan blocks: Oil India Chairman Mr. N.M. Borah
announced that the company plans to relinquish its 2 blocks in Libya. While these
blocks did show the presence of hydrocarbons, there were not considered
commercially viable.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Oil & Gas, Chemicals
Feedstock- Vol XXV: Spotlight on Auto fuel taxes
• Spotlight on auto fuel taxes: Recent news flow has indicated that while
it may not be feasible for the government to raise diesel prices, a
rationalization of government levies could be on the cards. We analyze
the impact of possible government actions on fuel tax on subsidies and
SOE oil company’s margins.
• Prices are high, but so is the govt. take: While auto fuel prices are
high in India, a significant proportion of this is accounted for by govt.
levies - 49% for petrol and 39% for diesel. Ad valorem levies have a
cascading effect on retail prices at higher fuel price levels.
• Excise duty reduction likely: Excise duty on petrol and diesel was
hiked by Re1/lt in the previous budget - a rollback would reduce losses
on diesel by ~Rs90bn, and would raise the breakeven for petrol to $92-
$93/bbl (from $90-$91/bbl currently).
• Customs duty impact: Cut in crude oil customs duties (without
corresponding cut in product taxes) reduces govt. revenues and aids
GRMs (increasing tariff protection). A cut only in petrol/diesel customs
duty would lower tariff protection for refining and transfer margins from
the refining division to the marketing division.
• But limited headroom available: While a rationalization of govt. levies
on auto fuels would be a welcome step towards de-regulation without
raising consumer prices, we note that given the high dependence of the
govt. on revenues derived from petro products (12% of total central govt.
revenues) room for maneuver is limited in this regard as well.
• Margin watch: Benchmark GRMs remained firm, averaging $5.5/bbl
since December (vs. $4.55/bbl in 3Q). Diesel spreads remained strong
($14.6/bbl), driven by strong demand in Asia, and a harsh winter. Light
heavy crude differentials widened to over $3.6/bbl.
• Fuel marketing watch: While petrol prices were raised ~Rs2.5/lt in
January, crude continues to remain elevated, with Brent crossing
$100/bbl. With the R&M companies losing over Rs8/lt on diesel, we
estimate losses of ~Rs85bn in January.
Spotlight on fuel taxes
Government levies on auto fuels have been in the spotlight recently – statements from
the new Oil Minister that raising diesel prices is not feasible in the current
environment have given currency to expectations that the government would need to
streamline levies on auto fuels.
Prices high, but so is government take
While auto fuel retail prices in India are quite high, a large component of the price is
made up of taxes and other government levies – 49% for petrol and 39% for diesel.
An issue that compounds the problem is that the sales tax is an ad valorem levy,
which increases along with an increase in crude/retail prices. Further, being state
govt. determined, rationalization of this tax would prove to be problematic for the
central government.
As a result, we are more likely to see changes on central govt. levies – excise and
import duties in the union budget. However, with oil revenues accounting for ~12%
of total receipts, room for maneuver given fiscal deficit targets is limited.
Excise
The Union Budget last year saw a Re1/lt hike in excise on petrol and diesel – a
rollback of this measure would lead to a reduction of ~Rs90bn in diesel subsidies,
with a 45% reduction at $80/bbl crude. On petrol, breakeven level would rise to $92-
$93/bbl vs. the current $90-$91/bbl.
Assuming a Rs2/lt reduction in excise duty on diesel, we look at the sensitivity of
subsidies.
A Rs2/lt reduction in excise leads to a ~Rs150bn reduction in diesel subsidies. At
$80/bbl crude, we estimate that the reduction in diesel subsidies is 78% - even at
$100/bbl (current level of Brent), this results in 25% lower losses, thereby
significantly reducing diesel subsidies without raising consumer prices. A similar
excise duty reduction on petrol would raise the breakeven level to ~$95-$96/bbl -
from the current $90-$91/bbl.
Customs duty
Currently, the govt. imposes a 5% customs duty on crude oil imports, and 7.5% on
petrol/diesel imports - thus providing refiners with positive tariff protection for
refining. A removal of this duty on crude oil would be a positive for refiners, aiding
refining margins.
However, a reduction in the duty only on the finished products would be negative for
refiners, reducing their refining margins, with these margins being shifted to the
marketing side of the business. While this would reduce the headline subsidy
number, downstream SOE companies will not benefit as possible government
subsidy support will reduce in line with the reduction in headline subsidy.
Lack of action would accentuate the problem
While the government will have little room to maneuver due to high budgetary
dependence on oil/oil product revenues, current crude prices will also put pressure on
the government to absorb a part of the oil subsidy
News Feed
Govt. subsidy for 3Q at Rs80bn: The government announced that it would provide
Rs80bn as subsidy support to the R&M companies for the third quarter – this is
below the Rs100bn requested by the Oil Ministry.
ONGC to relinquish Egyptian blocks: ONGC announced that it had informed
Egyptian authorities of its intention to give up its North Ramadan and NEMED
exploration blocks.
Gujarat Gas raises CNG prices: Gujarat Gas hiked CNG rates by Rs2.8/kg to
Rs35.25/kg, in response to a higher LNG component in its gas mix .
Canadian firm invites OIL/GAIL to invest in shale gas: Canadian firm Americas
Petrogas (15% owned by IFFCO) has invited Oil India and GAIL to invest in its
shale gas exploration projects in Argentina.
ONGC/IOC heads retire: A.K. Hazarika and S.V. Narasimhan were appointed as
the interim heads of ONGC and IOC respectively, replacing R.S. Sharma and B.M.
Bansal
RIL writes to Atlas on Chevron deal: RIL has written to Atlas Energy, seeking
clarifications about its proposed acquisition by Chevron, and seeks assurances about
its Marcellus shale JV with Atlas.
Oil India to relinquish Libyan blocks: Oil India Chairman Mr. N.M. Borah
announced that the company plans to relinquish its 2 blocks in Libya. While these
blocks did show the presence of hydrocarbons, there were not considered
commercially viable.
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