India's windfall tax cut to aid upstream margins as crude oil falters

India has slashed the windfall tax on domestically-produced crude oil to zero amid easing global oil prices -- a move likely to provide some respite to upstream companies and potentially boost their margins.

The cut in windfall tax -- which has been brought down to zero from Indian Rupees 1,850/mt with immediate effect -- is expected to aid the overall financial strength of companies, such as ONGC, Oil India, Reliance Industries, along with Cairn Oil and Gas, Vedanta Ltd., according to government and company sources.

"Oil prices are falling fast and that's not good for upstream producers. The decision to bring down the windfall tax to zero will bring some relief to upstream producers, at least in the near term," said one India oil source.

India introduced windfall taxes on July 1, 2022, joining a host of nations that levied a tax on the huge profits that energy companies earned due to high crude prices as a fallout of the Russia-Ukraine conflict.

The windfall tax on crude is calculated based on any price that producers get above a threshold limit and is adjusted regularly, in line with global price movements.

The 2025 base-case price outlook for Platts Dated Brent has been lowered by $2/b to an average of $77/b, according to S&P Global Commodity Insights. The 2024 average has been also revised down $1/b to $83/b.

India's overall oil and gas output rose 1.3% on the year to 1.15 million boe/d in 2023. Upstream output has been declining nearly 1.1% on a compound annual growth rate over the past 10 years due to natural drop in mature fields of state-run upstream producers ONGC and Oil India, coupled with a lack of monetization of existing discoveries and reduced number of new discoveries, analysts at Commodity Insights said.

Windfall tax a stumbling block for investors

Global companies are generally averse to investing in countries with windfall taxes, according to analysts at Commodity Insights.

"Successive Indian governments continue to see domestic upstream assets as a source of funds and continue to keep returns 'controlled' through various mechanisms, including windfall taxes," said Mansi Anand, senior research analyst at Commodity Insights.

According to Anand, while major global companies are showing interest in India in other parts of the energy value chain, with a slew of partnerships in renewables, "the window for domestic upstream sectoral investments is narrowing in an energy transition world."

Crude oil futures finished a volatile session slightly lower Sept. 18, amid tighter US supply and the US Federal Reserve cutting interest rates for the first time since 2020. NYMEX October WTI settled 8 cents lower at $69.88/b, and ICE November Brent declined 5 cents to $73.65/b.

Government and refining officials said they were considering whether to alter their buying strategies amid falling crude prices.

"We look at crude deals as and when we get offers. The basic equation does not change. We will buy oil from wherever it is cheaper. We never violated the price cap even while buying Russian crude," said a senior government official.

Before the Russia-Ukraine conflict, over 60% of India's crude basket comprised Middle Eastern crudes, with North America, West Africa, and Latin America as other significant contributors.

However, in 2023, Russia accounted for approximately 40% of India's total crude imports, a significant increase from just 5% in 2019. This shift has resulted in Russia capturing market share from other leading supplying regions, according to Commodity Insights.