Cess reduction to benefit upstream oil and gas companies: India Ratings

Oct 14,2020

Rating agency India Ratings and Research has opined that a cess reduction on oil and gas sector is likely to benefit upstream firms such as Oil and Natural Gas Corporation and Oil India.

"Together, these developments (likely cess reduction and change in the gas price regime), if implemented, will be a big positive for their cash flows from operations; however, this may not necessarily translate to higher free cash flows as the dividend payouts could increase," the India Ratings and Research agency said in a statement.

"These discussions come at the back of the current lower crude and gas price environment, continued higher taxation (cess, royalty) and dividend distribution by these companies, which results in lower risk capital available with them, thus lowering the potential exploration, hampering increase in the output of domestic crude and natural gas."

According to the India Ratings and Research agency, the cess is calculated as a per cent of the crude price realised by the upstream companies on their nominated blocks.

"During FY20, the upstream companies paid a total of INR 148 billion in cess to the central government on a total crude production of 22.4MMT from the nominated blocks," it said.

"Given that bulk of upstream oil and gas production comes from the nominated blocks on which the companies share a 20 per cent cess with the central government on the crude price realised, a higher cess will result in lower profitability for them."

Consequently, if the cess is reduced, the cost of production would decline for them, leading to higher Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA).

"The change in the cess computation methodology and the rates has also been effected in the past to align the same with the crude price scenario," it added.

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