Windfall tax review more likely than expected after sharp fall in global crude prices

A massive crash in refining margins of diesel, petrol and ATF coinciding with a cool-off in crude oil prices from their peaks in June has diminished the super-profits of refiners, a report said on Wednesday.

In a surprise move, the government on July 1 slapped export duties on petrol and ATF (Rs 6 per litre or $12 per barrel) and diesel (Rs 13 a lire or $26 a barrel) and imposed a windfall tax on domestic crude production (Rs 23,250 per tonne or $40 per bbl).

At that time, the finance ministry stated that the taxes will be reviewed every fortnight.

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"The last two weeks have seen a massive crash in the refining spreads (or margins) of diesel, gasoline (petrol) and aviation fuel (ATF) coinciding with a cool-off in crude prices from their respective peaks seen in June," brokerage CLSA said.

"This questions the need for the continuation of the windfall tax imposed about two weeks back," it said.

Post-windfall tax, the realised spread on diesel and gasoline has fallen to near loss-making levels while the realisation on aviation fuel and crude have also gone below 15-year averages.

"A $12 per barrel windfall tax on this takes the realised refining spread down to a near loss-making level of just $2 per barrel. Similarly, the diesel spread after the export tax of $26 per barrel would be a meagre $2 a barrel," it said.

At the time of announcing the windfall tax, government officials took pains to explain that this should be seen as an extraordinary step at a time of super-normal gains for oil companies. They also promised a review of this tax every 15-days.

"With the next review due later this week, this sharp decline in global prices may force a re-think of this tax. One may not expect the government to react so quickly but we see a good chance for relief in one of the subsequent reviews this quarter if the price remains around current levels," the brokerage said.

If this tax remains for long, it may hamper the positioning of India as an export and manufacturing-friendly regime.

"We expect a rethink in one of the fortnightly reviews promised by the government if current prices continue," it said. "Any relaxation would be a big trigger for ONGC and Oil India and a relief for Reliance Industries Ltd."

While the windfall tax on domestic crude oil production was seen hitting state-owned Oil and Natural Gas Corporation's (ONGC) earnings severely, the export duties could shave off up to $12 per barrel in refining margins for Reliance, which had in recent months ramped up fuel exports to capture demand in Europe and elsewhere.

Stating that windfall tax review was more likely than expected, CLSA said in the last few days have seen a reasonably large fall in crude prices as well as spreads for key refined products on the back of rising worries over oil demand as recession fears grow.

The refining spread for diesel has almost halved from the $55-60 per barrel peak seen in June to $30 a barrel. Similarly, ATF spreads crashed from $50-55 per barrel to $25-30. Gasoline spreads have also been slashed from $30-35 per barrel last month to $10-15.

At the same time, the Brent crude price has also cooled off by $15-20 per barrel in the past 2-3 weeks to about $100 per barrel.

"This quick and dramatic fall in crude and product spreads significantly reduces any 'super-normal' gains for refiners as well as crude oil producers and possibly questions the need for the continuation of the windfall tax imposed about two weeks ago," the brokerage said.

Although the spot Brent crude and ATF spreads are still above 15-year averages, post-windfall tax implies realisations way below their 15-year averages.