Fitch expects windfall tax to be phased out in 2023

Fitch Ratings on Tuesday said it expects the five-month-old tax on windfall profits made by oil companies to be phased out in 2023 on the back of moderating oil rates.

The government had on July 1 levied a new tax on domestically-produced crude oil as well as on the export of petrol, diesel and jet fuel (ATF) to take away windfall gains accruing to oil companies from a global surge in energy prices following Russian invasion of Ukraine.

The tax rates are revised every fortnight based on prevailing international rates. The levy on petrol export has since been abolished.
"We expect the windfall taxes on domestic crude oil production levied by the government in 2022 to be phased out in 2023 with moderating prices," Fitch said in its APAC Oil & Gas Outlook 2023.

Domestically-produced crude oil, which makes up for 15 per cent of all oil consumed in the country, is priced at international rates. With global oil prices rallying to a decade high in the aftermath of the Russia-Ukraine war, state-owned Oil and Natural Gas Corporation (ONGC) and Oil India Ltd (OIL) raked in windfall profits.

Fitch projected USD 85 per barrel price for Brent crude oil, down from USD 100 in 2022.

It expected India's petroleum product demand recovery to be supported by a GDP growth estimate of 6.7 per cent.
"We also expect oil marketing companies (OMCs) marketing margins to recover and partly recoup 2022's losses, given our modestly lower crude-price assumptions," it said.

The three OMCs - Indian Oil Corporation (IOC), Hindustan Petroleum Corporation Ltd (HPCL) and Bharat Petroleum Corporation Ltd (BPCL) - posted back-to-back quarterly losses this fiscal year as they froze petrol and diesel prices to help the government contain inflation.

"However, refining margins may ease to mid-cycle levels from all-time highs though still remaining healthy, which should support improvement in OMCs' credit metrics," Fitch said adding upstream companies will see robust cash flow despite some moderation from very high levels in 2022 and higher domestic gas prices.

"We expect ONGC's upstream production volumes to rise by 3 per cent during financial year ending March 2024 (FY24), driven by production ramp-up at its KG basin; OIL's upstream volumes are likely to grow by 4 per cent on volume-enhancement projects at existing fields," Fitch said.

The rating agency said downstream oil refining and fuel retailing companies will continue to have high capex during FY24 as they invest in expanding refining capacity and retail networks.
Capex for upstream companies (ONGC and OIL) will be driven mainly by their continuing efforts to expand production.

"Reliance Industries' large investment plans for its existing oil-to-chemicals and new energy businesses are likely to be funded largely through internal accruals, supporting its low leverage," it said.

On the other hand, limited balance-sheet buffers and neutral-to-negative free-cash-flow limit HPCL's and BPCL's credit profit headroom in FY24, despite improving profitability and lower working-capital needs.

Fitch expected credit profit headroom for IOC to improve, aided by its more diversified operations than the other two OMCs.

"We believe strong upstream cash flow of ONGC and OIL should support their financial profiles in FY24 despite high capex intensity mainly at their subsidiaries; ONGC's strong upstream operations offset HPCL's downstream losses during 2022," it added.