The nation celebrated the new year in a subdued way due to restrictions due to the spread of Omicron – but there are also other reasons for the citizens’ lack of enthusiasm.

The main cause is rising food inflation, which is fueled by the high price of petroleum products. Transportation is vital for the delivery of goods from producers to consumers through the network of distributors and retailers.

As we enter 2022, the selling price of a liter of petrol and diesel is still hovering around Rs 100 and Rs 90 respectively.

This payment spending by the rich as well as the poor is going to have a K-shaped impact on the economic recovery.

The visible symptoms are subdued consumer spending by households and the absence of healthy investment sentiment among businesses. We know that GDP depends on four parameters, which are public expenditure, the difference between exports made and imports made, consumption and investment made.

With the trade balance remaining in the negative category for more than a decade due to imports exceeding exports, government capital spending alone cannot increase GDP until there is a complementary private investment and ever-increasing demand from the population for goods and services.

Imports of crude oil and its products represented 27.62% in November 2021 of the total import basket. Nearly 85% of our domestic needs for petroleum products are met by imports.

This proved to be a destabilizing factor for the government budget deficit. According to data available from the Ministry of Petroleum and Natural Gas, the national import bill for crude oil and its products has caused the import bill to increase by more than $100 billion per year.

India plans to reduce its dependence on oil imports from 10% to 67% by 2022 (baseline 2014-2015), but this dream is far from becoming a reality unless domestic production increases almost several times from the current value of 32.17 million tons per year to match the consumption of 214.17 million tons per year.

Surprisingly, despite favorable initiatives such as the Hydrocarbon Exploration and Licensing Policy (HELP), 2016 which eliminated the tax to be paid for oil exploration, reduced royalty rates as well as a single license for the exploration of conventional and unconventional hydrocarbons, the statement of the Directorate General of Hydrocarbons of India is shocking as it states that as per provisional figures, in FY 2021 domestic crude oil production fell by 5% and natural gas production by 10% despite repeated pleas from the Prime Minister to make the country ‘atmanirbhar‘.

There is a direct correlation between the satisfaction of national oil needs by internal production and the selling price of products paid by consumers. The greater the local production and processing, the less will be the reduction in India’s foreign exchange reserves to make import payments.

This will strengthen the rupee and reduce the budget deficit, which will reduce inflation, resulting in affordable prices across the spectrum. Beyond that, our trade deficit would also shrink, which would have a favorable impact on national income. But that is easier said than done, unless the current government is ready to implement its very ambitious philosophy.

It is surprising to know that the oil and gas sector is not subject to the GST, but the equipment necessary for the extraction of oil and gas is subject to the GST at the rate of 5% and no tax credit on inputs is granted on the products sold. .

In addition, interstate inventory transfers of refined petroleum products are subject to GST. The Ministry of Petroleum and Natural Gas has often cited insufficient domestic production of crude oil and natural gas leading to over-reliance on imports, but the fact is that domestic sales of crude to refineries are subject to the central sales tax, which makes domestic crude 2-3% more expensive than import, which has a chilling effect on companies involved in domestic oil and gas exploration.

Furthermore, marketing freedom is not available to these companies and the designation of specific oil refineries to refine locally extracted crude oil limits their bargaining power. For example, Indian Oil and Hindustan Petroleum have been appointed by the government to buy crude oil from the Cairn India oilfields in Rajasthan, but as the appointed refiners do not have refining facilities in the state, they are obliged to transport crude oil out of state, which invites interstate tax.

Such a policy is counter-productive.

According to data available on the website of the Ministry of Petroleum and Natural Gas, 99% of India’s production comes from old and aging fields, which include the 28 exploration blocks that were awarded between 1990 and 1997, known as name of pre-NELP exploration blocks. .

These blocks are spread across the Gulf of Khambhat, Bombay High, Krishna-Godavari Basin and Brahmaputra Valley in Assam. Extraction from these fields requires capital-intensive technology due to the increasing depth from which crude oil and gas must be extracted.

Investment in these oilfields is becoming more important because between 1999 and 2012, the Indian government signed oil and gas production sharing contracts under the new exploration and development policy. licensing. [NELP] for 254 blocks under the NELP regime, of which a total of 148 blocks are active and have been abandoned, due to operational failures.

This indicates the lack of technology to properly map the bedrock, to precisely locate oil and gas reserves.

Since 2017, 105 oil blocks have been awarded after six rounds under Open Acreage & Licensing Policy [OALP] but it is important to note that it takes at least five years before desirable production levels are achieved. This proposition depends on whether the oil exploration company has succeeded in locating the resource or has it discovered a “dry” well.

Over the past eight years, nearly half of the oil wells drilled in the exploration blocks have been identified as dry, with no oil available. This has made private and foreign companies skeptical about participating in India’s oil exploration, which has resulted in declining production from domestic fields over the past decade.

The data available from the Hydrocarbons Branch of India highlights an astonishing fact. Since 2003, the level of private investment in national oil exploration has fallen to zero and state-owned companies ONGC and Oil India have been mainly responsible for 2/3 of national production.

All these facts point to the urgent need to address two issues, namely the development of a favorable exploration policy and the creation of a uniformly adapted fiscal regime.

Companies involved in exploring the aging field awarded prior to NELP implementation are subject to unsustainable taxation, which includes 20% royalties, 20% cession, 60% government share of Profit Petroleum and 5% tax of sale.

As a result, up to 70% of the operator’s revenue ends up going to the treasury, leaving it with a negligible surplus that can be reinvested.

This leads to hampering production and leads to less than normal extraction than is possible. On the other hand, blocks allocated under the NELP are only subject to a 12.5% ​​royalty (the HELP regime has a different royalty mechanism with different tranches), but failed to increase the domestic crude oil production over the past two decades.

To successfully safeguard the nation’s energy sovereignty, a multi-pronged strategy accompanied by unwavering decision-making is required. As a first step, the central government should review the tax levies and apply them uniformly according to the type of basin rather than differentiating the blocks according to the Pre-NELP, NELP and HELP contracts.

Second, the oil and gas sector should be subject to the GST to ensure that a common tax rate applies to gasoline and diesel, which would result in the elimination of the price difference across India.

Finally, the Indian government should encourage the participation of companies such as Baker Hughes, Schlumberger, Halliburton, among others, who have the necessary expertise in the successful application of modern technologies for enhanced recovery of existing and aging oilfields.

An incentive could be provided by capping the government’s share of oil profits at 20% instead of the current 60%, so that advanced procedures like seismic mapping, remote drilling based on artificial intelligence and plasma pulse, which is an alternative clean method of fracturing requiring no chemicals, could be used to improve crude oil recovery by 30-60%.

Any elected government claims to be made by the people and for the people with socio-economic well-being as its primary objective. Now is the time for central and state governments to embrace the spirit of cooperative federalism and abandon their need to maximize domestic exploration revenues, thereby enabling the efficient use of our oil blocks and gas.

This would not only benefit the people by reducing their expenses by lowering the cost of petroleum products, but would also improve our economy by lessening the dependence on the OPEC cartel, which forces India to pay the infamous Asian premium on the value of crude oil purchased, above the sale price.