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ONGC wants the government to scrap windfall tax, $10 gas price

India’s top oil and gas producer ONGC wants the government to scrap the windfall profit tax levied on domestically produced crude oil and instead use the dividend route to reap bumper earnings as a result of rising global fuel prices.

The firm favors a natural gas floor price of $10 per million British thermal units — the rate currently dictated by the government — to help bring deposits in challenging areas into production, two of the sources said.

The management of state-owned Oil and Natural Gas Corporation (ONGC) has said during discussions with government officials that it is unfair to impose a windfall profit tax on domestic oil producers, while reaping rich savings from buying discounted oil from Russia.

He said buying Russian crude at discounted rates, which was shunned by the West after the Ukraine conflict, helped save Rs 35,000 crore and these savings should be plowed back by increasing domestic production.

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The ONGC management told the government that savings from Russian oil purchases should be allowed to be transferred to the company investing in identified projects.

It feels that companies should be allowed to reap more revenues and profits from higher oil and gas prices instead of imposing a windfall profit tax on prices above the threshold.

This excess profit could then be tapped for dividends which would be a more equitable way of distributing wealth, the company’s management told the government.

As per existing guidelines, ONGC pays a minimum annual dividend of 30 percent of net profit or 5 percent of net worth, whichever is higher.

Following this policy, the firm pays high dividends to the government and other investors, which holds around 59 per cent stake in the firm, which boosts confidence in the company. This increases the company’s share price and valuation, yielding more profits to the government.

The route will allow the company to retain enough cash to spend on finding oil and gas in unexplored areas and bringing even smaller resources into production, which will ultimately help the nation cut its imports, sources said.

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India first imposed a windfall profit tax on July 1, joining a growing number of countries taxing energy companies’ supernormal profits. An export duty of Rs 6 per liter ($12 per barrel) was imposed on petrol and aviation turbine fuel and Rs 13 per liter ($26 per barrel) on diesel. A windfall profit tax of Rs 23,250 per tonne ($40 per barrel) was also imposed on domestic crude production.

Tariffs were partially adjusted and removed for petrol exports in five rounds on July 20, August 2, August 19, September 1 and September 16.

Tax on domestically produced crude oil is currently Rs 10,500 per tonne, export duty on diesel is Rs 10 per liter and ATF is Rs 5 per litre.

Sources said ONGC believes that allowing free market pricing of oil and gas will help attract large companies with technological know-how and financial muscle.

He said the temporary tax would increase financial uncertainty for investors.

Following this same principle, the government should allow companies to find the market price of natural gas and only tax profits of at least $10 per mmBtu threshold and above.

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Although crude oil is priced at par with international rates, the government currently sets natural gas prices bi-annually based on prevailing rates in gas-surplus countries such as the US and Russia. This gas pricing is also now being reviewed with a view to reducing prices for consumers.

He said the cost of producing gas from deep-sea and difficult areas such as high-pressure, high-temperature fields is very high and any attempt to artificially control rates will not make investment in such fields economically viable.

ONGC told the government recently that it has found a price of $22 per mmBtu that users are willing to pay for its coal-bed methane (CBM) gas. Sources said the government could look at taxing anything above $10.

The government-mandated gas price for ONGC’s legacy fields for the six months ending September 30 is $6.1 per mmBtu. For difficult fields such as the deep sea, the rate is closer to $10 per mmBtu. These rates are expected to rise to $9 and $12 per mmBtu, respectively, starting October 1.

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