There are three stages in the process, upstream: exploration and downstream: refining and marketing. After extracting crude oil from the reserves, it is processed in refinery to yield various petroleum products, which are further marketed. Petroleum products are obtained through a two-stage process: distillation and chemical processing. Distillation involves breaking crude oil into light distillate, medium distillate and heavy distillate. Chemical processing is done to add value to products.

Budget Measures Advalorem component of the excise duty on petrol and diesel reduced from 8% to 6%. Infrastructure status to Cross-country natural gas distribution network, including gas pipelines and storage facilities integrated to the network, and to navigation channel in the sea. Extension of service tax to services outsourced for production of oil and gas. Custom duty on plastics reduced from 12.5% to 7.5%, while the custom duties on DMT, PTA and MEG reduced from 10% to 7.5%. Dividend distribution tax raised from 12.5% to 15% on dividend distributing companies.  Budget Impact Government recently reduced the prices of petrol and diesel by Rs 2 and Rs 1 per litre respectively. Reduction in excise duty is likely to offset the under-recoveries by 50 paise per litre and balance is likely to be funded through oil bonds. Thus the move is neutral for oil marketing companies. However, if the duty cut is to be passed to the end users, the under-recoveries are set to increase further. Infrastructure status to cross-country gas distribution network is likely to accelerate the monetisation process of the gas finds in the KG (Krishna Godavari) basin. Extension of service tax to the outsourcing of the oil and gas production is likely to be marginally negative for the upstream players. PSU oil companies have a high dividend track record, thus the increase in dividend distribution tax is likely to have a marginal negative impact on these companies. Reduction in the custom duty on petrochemical products is likely to benefit textile sector and non-integrated PSF (polyester staple fibre) and PSY (polyester filament Yarn) producers.  Sector Outlook Energy security is one of the priorities of the government. In order to accelerate hydrocarbon discoveries, increased emphasis was laid on E&P via NELP, which has yielded benefits as huge gas discoveries in KG basin and oil discoveries in Rajasthan were made. We expect government to continue with its favourable policies as the country is still under explored (more than 50%). With incentives announced in the union budget, the monetisation process of the reserves is expected to accelerate. Thus, prospects of the upstream and midstream oil and gas sector look bright. The downstream segment however, continues to suffer on account of government regulations. Till a sustained reduction in the crude oil prices is observed, the prospects of the oil marketing companies largely linger on the adhoc government policies.  Company Impact PSU OMCs are not likely to benefit from the reduction in excise duty, as reduction is compensatory in nature. Infrastructure status to the natural gas distribution network is likely to benefit Reliance, GAIL, GSPL and gas marketers. Increase in dividend distribution tax is likely to affect energy major ONGC, Reliance and IOC.  Industry Wish List Assocham, FICCI and industry experts: Infrastructure status to pipelines (including cross country pipelines) for faster commercialization of the new gas finds in the KG basin. Crude oil product and gas pipelines, storage terminals and other related facilities for transportation and storage should be classified as infrastructure facilities. Oil and gas exploration and production industry should be given infrastructure status Infrastructure status to LNG regasification terminals. Reduction in the excise duty on petrol and diesel. Dual pricing for domestic LPG, wherein only the lower middle class and BPL families are provided with the subsidized LPG.  Budget over the years Budget 2004-05 Budget 2005-06 Budget 2006-07 Excise duty on LNG (liquefied natural gas) exempted. Countervailing duty (CVD) exemption to continue. 2% cess levied on all taxes including excise. No credit of cess on motor spirit, high-speed diesel and light diesel oil. Existing exemption on naphtha/LNG used for generating synthetic gas or ammonia for manufacture of Heavy water extended to naphtha/LNG for generation of steam. Excise duty on gas stoves with a maximum retail price of Rs 2,000 per unit reduced from 16% to 8%. Customs duties on crude oil halved to 5% from 10%. Customs duties on petrol and diesel reduced to 10% from 20%. Customs and excise duties on LPG and kerosene eliminated. Customs duties on all other petroleum products other than above reduced to 10% from 20%. Excise duties on petrol and diesel fixed as a combination of ad-valorem and specific duties. Cess on petrol and diesel increased by 50 paise per litre. Cess on petroleum crude oil under the Oil Industry (Development) Act 1974 stands increased from Rs1, 800 per tonne to Rs 2,500 per tonne Tariff rate of customs duty on petroleum crude reduced from 10% to 5%. Effective rate continues at 5%. Tariff rate of customs duty on petroleum products reduced from 15% to 10%. Effective duty has been kept at 10%. Customs duty on naphtha reduced from 10% to 5 %. Customs duty on natural gas, propane and butanes falling reduced from 10% to 5%
Key Positives Exploratory successes: The country has seen a spate of successful oil and gas discoveries over the past 4-5 years. This could be attributed to favourable government policies for E&P segment. With success of NELP, the exploration acreage is increasing at a faster clip. However, still 52% of the exploration acreage is not explored or poorly explored, which promises good potential. With commercialization of the said reserves, the demand supply scenario of the natural gas in the country is set to reduce. Robust demand growth: Demand for petroleum products is dependent on the level of economic activity of a nation. The per capita consumption of India is one of the lowest in the world. In the past, we have seen a fair degree of correlation between the growth in petroleum products and the growth in the overall economic activities. With economy expected to register a decent growth going forward, the demand for petroleum products is likely to be on the higher side.		Key Negatives Regulatory hindrances: With a view to move towards market-determined prices of petroleum products, APM (administered pricing mechanism) was dismantled in 2002. However, the subsequent steep rise in the crude oil prices had forced government to regulate the prices once again. Thus, profitability was severely dented. Subsidy burden: Under-recoveries on the sale of sensitive petroleum products continues to hurt companies operating in the segment. Upstream players (ONGC and GAIL) continue to share 33% of the gross under-recoveries. This has constrained the growth in profitability to a large degree. Also, downstream segment continues to suffer from lack of visibility due to ad-hoc subsidy sharing mechanism. Lower tariff protection: India has a surplus refining capacity, which is further likely to increase over the next few years. This is due to various brownfield and greenfield projects undertaken both by public sector as well as private sector enterprises. With current favourable demand dynamics, companies are able to reap benefits from export of petroleum products. However, with significant global refining capacities coming up post 2008, refining margins are likely to soften from the current levels. Considering the long gestation period and large investments required for setting up a new refinery, the direct margins required to cover the capital cost would be well over US$ 10/barrel (source: IOC). However, with lower effective protection and the less remunerative nature of exports, payback period is likely to be on the higher side.

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