This Year’s Budget is Low on Energy

Powering up for Make in India. Credit: Shome Basu

Powering up for Make in India. Credit: Shome Basu

The single major announcement on petroleum that is relevant to the common citizen is the ambitious program to extend LPG connections in the name of women in BPL households.

Already the LPG subsidy voluntarily relinquished by 75 lakh households provides adequate resources to the government to extend new LPG connections to 1.8 crore households.  The finance minister has now set aside an allocation of Rs. 2000 crores to kick-start this initiative. The government expects to extend LPG connections to 5 crore households in the next two years.  With the PSU oil marketing companies fully equipped to implement this measure, this single initiative would be a landmark achievement since piped gas is unlikely to be available to poor households even in urban areas. In fact, BPL households in urban areas often pay more than double the price of a subsidised LPG cylinder in the black market to obtain their cooking fuel while in rural areas, fuel wood and biomass substitute for kerosene that is diverted from the public distribution system to adulterate diesel.

Finance Minister Arun Jaitley’s third budget offers little cheer to the oil and gas industry except for select upstream players engaged in deep sea exploration coming up with new discoveries.

New exploration and production (E&P) areas in deep sea, ultra deep and high temperature, high pressure exploration will have two important incentives – calibrated marketing freedom to producers who now can, presumably, by-pass GAIL to enter into supply contracts directly with consumers and crucially, pricing freedom of sorts.  The pricing flexibility offered by the budget envisages switching to a pricing regime that will be indexed to (and at a discount to)  alternative fuels. For instance, power generators using gas turbines could get gas at the price of naphtha and city gas distribution companies would be eligible for supplies indexed to furnace oil widely used in industry.   But that would be for new discoveries in deep sea areas.

While the finer details of the scheme are awaited, the general direction of this policy is welcome since exploration and production in the deep sea has considerable risks and uses expensive technologies and hence needs incentives to justify the significantly high costs involved.  However, this may not benefit already discovered fields in the KG Basin.  Besides, as long as the government retains its gas allocation and utilisation policy, such marketing and even pricing freedom might turn out to be a chimera.

From the FM’s speech, it appears that the budget does not envisage any changes in the excise duty regimes which could pass on the benefit of the lower crude prices to the consumers at the pump.  In fact, the government has been tinkering with excise duties on petroleum products frequently to take advantage of the decline in crude prices that began in June 2014.  Yet, there is no attempt to set aside at least a portion of these revenues for a buffer fund that could be used to shield domestic consumers during the next high crude price cycle.

On electricity, the budget makes the ambitious promise of 100% electrification of all villages by May 2018 for which the FM has set aside Rs. 8500 crores under the Deendayal Upadhyaya Gram Jyoti Yojana or the Integrated Power Development Scheme.  The UPA government had made similar promises to electrify all villages by 2012, but fell far short of the target. Besides, the amount currently allocated in this budget is too meagre for such an ambitious target. Jaitley also said the government is preparing a comprehensive plan for nuclear power generation and allocation “could be up to Rs 3,000 crore per annum.”

The budget makes a nodding concession to the environment by hiking the clean energy cess on coal from Rs.200/tonne to Rs.400/tonne.  An additional cess of 4% has been levied on SUVs, more to mobilise resources than dissuade the prosperous Indian consumer. However, without a corresponding plan for earmarking this additional cess to clean energy initiatives, the additional resources raised could easily be squandered elsewhere in the economy.

The FM announced tax exemption for certain categories of capital goods in minerals and petroleum and has also indicated the government’s intention to tinker with duties on other similar goods. However, the details are not available.

One glaring omission in this year’s budget is any provision for filling up the Strategic Petroleum Reserve. All fuel importing countries maintain an SPR of at least 45 days whereas OECD now has 90 days’s stock. Low oil prices provide a golden opportunity to stockpile crude/products. While the rock caverns in Vishakapatnam are still being built and the other two SPR locations in Mangalore and Padur are far from ready, it is still possible to maintain floating crude stocks in ships moored offshore.  It is disappointing that the government does not deem it necessary to utilise this golden opportunity to build a stockpile for India.

Sudha Mahalingam is an independent energy consultant and former Member, Petroleum and Natural Gas Regulatory Board