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Petroleum minister Murli Deora today launched the ninth round of the new exploration and licencing policy, or NELP IX, under which bids for 34 blocks have been invited. Oil secretary S Sundareshansays positive feedback on NELP IX was received from around 48 companies last week in London.
S Sundareshan, Oil Secretary said, "The response was excellent. We had 48 foreign companies apart from the Indian companies who participated. There were 48 foreign companies among 104 participants. We could sense a complete changed interest in India and in exploration in India."
He added, "As far as NELP IX and beyond is concerned, the DTC has already been cleared by the Cabinet of India, which has removed profit linked incentives in all sectors. So in the case of oil and natural gas too for exploration, you would have really investment linked incentives which is absolutely acceptable to the investor. He has clarity, he knows what he is bidding for and there is going to be in an absolutely stable fiscal regime."
BMR Advisors, and Sunil Shah - Partner, Deloitte Haskins & Sells gave their perspective on the NELP-IX and the lack of clarity on tax incentives for investors.
Below is a verbatim transcript of the interview. Also watch the accompanying video.
Q: We have just heard the Oil secretary S Sundareshansaying that 45 foreign companies actually participated in the road show, they are looking very confident but the fact that there is still no clarity on the investment linked incentives is that going to be a big dampener as far as this round is concerned?
Chaudhri: When we look at the developments over the last couple of years, the tax holiday for the natural gas has become a matter of controversy and that?s created concerns in the minds of the investors. As India moves onto a transition to a direct tax code, companies are carefully looking at as to whether in the new code they will be able to avail of tax holidays in relation to production sharing contracts that get signed pre the coming in of the DTC which is on April 1, 2012.
When we look at DTC, the DTC talks about the fact that there is a grandfathering in relation to production sharing contracts, which have been signed prior to that date. So the investors are going to be very keenly looking at as to what confirmatory signals come in from the government on the availability of tax holidays in the post DTC regime under the grandfathering clause provided for the transition mechanism between the Income Tax Act and the direct tax code.
Q: Given the fact that there still is no clarity on what this will eventually look like in terms of tax incentives, how are companies going to respond to this round?
Shah: It is going to be somewhat difficult for a company to judge what the cash flows will be and what its tax liability will be as a result of bidding under NELP IX. Assuming that the award is made before the direct tax code comes into operation i.e. before April 2012, the tax holiday will be available on a profit basis. The entire profit will be exempt from tax for a period of seven years. But it is not known whether that tax holiday will be confined to mineral oil or will extend to natural gas as well.
At the time of bidding, a bidder or a company does not know on what eventually it is going to find. It may find oil, it may strike gas, or it may find both. Therefore it is going to be difficult for a prospector to visualize on what its cash flows and return on investment is going to be because it does not know what it is going to strike and if it strikes a natural gas then whether it will be given the tax holiday or not.
Q: Do we know what the nature of these incentives likely to be from a taxation stand point and what are the concerns for investors?
Shah: So far the incentive is a simple profit based incentive. It is a tax holiday of 100% of the profits for a period of seven years. The issue here and litigation for quite some time has been on whether this tax holiday, the seven-year profit based tax holiday whether it applies only to mineral oil or extends to natural gas also.
In the past there has been some litigation on this and there was a clarification in last years budget that so far as NELP VIII is concerned i.e. last year?s NELP round is concerned the tax holiday will extend to natural gas as well. This clarification is not there so far as NELP IX is concerned or even in the grandfathering clause of the DTC. So this is one concern which investors would have.
The other concerns which investors may have is that if the award takes place after March 2012 then the new tax regime under the DTC will be operative for upstream an oil and gas operator. Under that regime, there is no profit based tax holiday. It will simply be an investment based incentive and that simply is a deferment of tax rather than a permanent tax holiday.
Q: Aside of the issue of the lack of clarity as far as tax incentives are concerned lets talk about marketing freedom. How big a concern is that going to be because I understand that, that has been a dampener in the past?
Chaudhri: Historically, companies walked into India with the assurance from the government that they will have full and absolute freedom in the marketing of crude oil and natural gas that they discover in India. Therefore, the recent Supreme Court judgment wherein it was held that the Government of India has a full right to step-in in relation to allocation of gas as well as intervene on the pricing of gas is something which caused a lot of concern to companies because that took away their absolute freedom of marketing the successful discoveries.
That certainly is an element of concern because some of the larger global giants would look at building integrated projects and integrated supply chain for energy in any jurisdiction that they operate in. They do not look at themselves as pure play explorers. They also want to make sure that they have the ability to build downstream businesses, build midstream businesses and that they can only do if the have full and unfettered right to market the produce.
Q: One of the other issues that we have got an indication from the oil secretary this morning was that hopefully this is going to be the last NELP round. There perhaps will not be a NELP X. That seems to suggest that we are going to move into the open acreage system. Given that do you actually see companies investing heavily in NELP IX?
Shah: For the time being, it is NELP IX that is available and open. In fact bids have been invited up till March 2011. Those companies that want to get into India quickly or that are energy hungry would certainly take a chance under NELP IX as well because there is no real need to wait till the open acreage or the open auction system begins. One can always participate under that as and when it commences.
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