Surprisingly, the new GST on oil and gas exploration and drilling services — raised from 12 percent to 18 percent – comes into effect from September 22, only a week after the prime minister spoke about the need for stepping up the search for oil and gas in the country. Such a high increase in the GST rate is bound to raise the costs for oil and gas exploration companies covering services like seismic surveys, drilling operations, and offshore support vessels. While the input tax credit (ITC) is available for these services, the exclusion of crude oil and natural gas from GST means producers will face higher overall costs and potentially reduced profitability. It may discourage the country’s fossil fuel search initiatives, especially in the context of poor global exploration success rate for conventional wildcat wells, which are the first wells drilled in a new area. The success rate has been almost constantly declining, hitting a low of 10.6 percent in 2020.

In fact, the combination of higher operating costs and potentially falling global crude and gas prices may further squeeze profit margins for oil exploration companies in India. The rising cost burden raises concerns about the potential of such measures to restrict investment in domestic oil and gas exploration and production activities. The oil exploration industry as well as the market have already reacted strongly against the government decision as the stock prices of major oil and gas companies, including ONGC and Oil India had dripped. Analysts have warned that the sudden big GST hike on oil and gas exploration, coupled with falling international prices, presents a difficult scenario for the sector. The industry’s expectation to attract Rs. 218,475 crore (US$ 25 billion) investment in exploration and production looks unlikely to fructify under such circumstances. Oil exploration efforts have always proved to be a big gamble. Making explorers pay high taxes on investment in such high-risk initiatives makes little sense.

In the last five years, the overall global exploration success rate was approximately 32 percent, although Infrastructure-led exploration achieved a higher success rate of 42 percent. The success in oil exploration rarely came easy. Drilling in ultra-deep waters (depths greater than 2,500 meters) has shown disappointing results, with very few commercial discoveries in recent years. The commercial success rate in high-impact wells is just around five percent. The success rates from targeting larger oil reserve finds have lately seen a downturn, with some analyses indicating extremely low achievement rates for supermajors. Drilling in ultra-deep waters (depths greater than 2,500 meters) has shown disappointing results, with very few commercial discoveries in recent years. With exploration companies now subjected to a much higher GST rate, not many hydrocarbon explorers would be ready to gamble big with their investment. The higher GST rate effectively goes against the prime minister’s latest focus on exploration. It looks like that a section in the government is happier to import oil than to spend on uncertain domestic oil search.

The India Brand Equity Foundation (IBEF) has projected that the country’s oil demand will register a 2x growth to reach 11 million barrels per day by 2045. Diesel demand in India is expected to double to 163 MT by 2029-30, with diesel and gasoline covering 58 percent of India’s oil demand by 2045. India’s crude oil imports increased by 4.2 percent to 242.4 MT in FY25. The country’s natural gas consumption is projected to grow by nearly 60 percent by 2030, reaching 297 million standard cubic metres per day (mmscmd), up from 188 mmscmd in FY24. In the absence of higher local supplies of crude oil and gas, the country will be even more dependent on imported hydrocarbons bringing further pressure on India’s energy security. The country must not forget its experience during 1971 Bangladesh liberation war when the then pro-Pakistan US government tried to choke oil supplies in India for its active support to the Bangladesh Liberation Army. It is in the country’s strategic interest that it should vigorously pursue expensive domestic oil and gas exploration efforts despite low success rates.

Lately, India’s oil discoveries in the Andaman Sea by ONGC and OIL have been quite encouraging. Initial findings from deep-water drilling indicate an active petroleum system, comparable to successful regions in Myanmar and Sumatra. ONGC has made hydrocarbon discoveries in 20 blocks, estimating reserves of around 75 million metric tonnes of oil equivalent (MMTOE). OIL has reported seven discoveries in the past four years, with an additional 9.8 million barrels of oil and over 2,700 million standard cubic meters of gas. The country has significantly raised its exploration acreage by opening nearly one million square kilometres of previously restricted offshore areas.

Last April, the government amended the Oilfields (Regulation and Development) Act in order to modernise the regulatory framework and offer policy stability for oil and gas producers. The approval process for exploration and production has been simplified, reducing the number of necessary approvals. More recently, the onshore oil searches by ONGC have also produced encouraging results in Uttar Pradesh and West Bengal. Latest reports suggest that ONGC’s crude oil discoveries include a potentially large reserve in Ballia, Uttar Pradesh, with drilling initiated at a depth of 3,000 meters. In West Bengal, the ONGC has also made several discoveries at Ashok Nagar in the North 24 Parganas district. Both ONGC and OIL are increasing seismic surveys. In 2023-24, altogether 741 wells were spudded, and 12 discoveries made in the nomination and contractual sectors.

Under such circumstances, the sudden decision to make a steep increase in the GST rate on oil and gas exploration is quite surprising and gives wrong signals. The immediate primary impact will be an increase in operational expenses for oil and gas companies. The higher cost burden raises concerns about its potential to restrict investment in domestic oil and gas exploration and production activities. Industry analysts have warned that this tax hike, coupled with falling international prices, presents a difficult scenario for the domestic oil exploration sector. One wonders if the prime minister, who recently made a strong statement in Assam on the need for focussing on domestic oil exploration to cut oil imports, was properly briefed by the finance minister or the union cabinet about the latest hike in the GST rate on oil search operations and the reasons behind such an unexpected move. (IPA Service)