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Andhra Pradesh raised tax rate on gas from 14.5% to 24.5%

Higher VAT may hike gas cost by about 40-50 cents/MMBtu

Singapore — The increase in tax on natural gas in Andhra Pradesh, a key state in India where domestic gas produced from the Krishna Godavari basin is sold, would make domestic gas less competitive for end-buyers and pose a challenge in the central government's bold ambition to raise gas's share in the energy mix to 15% by 2030, market sources said.

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The government of Andhra Pradesh increased the rate of tax on natural gas from 14.5% to 24.5% with immediate effect from Sept. 12 to boost its revenue after the coronavirus inflicted lockdown had dried up its coffers, an order issued by the Government showed.

The land-fall point for the Reliance-BP domestic gas produced from the east coast off-shore KG-D6 basin is Kakinada, Andhra Pradesh. ONGC's production from the KG basin is sold on an ex-plant Oduru, Andhra Pradesh, basis and hence would require buyers to pay the additional 10% increase in tax rate.

The increase in tax rate comes at a time when domestic gas producers are already facing competition from relatively low spot LNG prices and other operational difficulties due to the coronavirus, or COVID-19, pandemic.

ONGC was facing indefinite delays to starting production from the KG basin and the Reliance-BP joint venture delayed the initial production of 5 million cu m/day from June 2020 to the first half of 2021, due to the logistical constraints stemming from the pandemic.

ONGC in November 2019 sold 100,000 cu m/day of gas from the KG Basin to HPCL at a premium of $1.01/MMBtu to the average of three months Platts West India Marker, or WIM, preceding to delivery, and another 550,000 cum/day to GAIL at a premium of around 57 cents/MMBtu to the average of three months Platts WIM preceding to delivery, according to S&P Global Platts data.

The landed price of gas to the West Coast for the HPCL and GAIL contracts would be around $6.45/MMBtu and $5.95/MMBtu, respectively, accounting for the 14.5% tariff and the pipeline tariff, Platts calculations showed.

With the increase in VAT rate to 24.5% it would cost about 40-50 cents/MMBtu more for end-buyers at the current price levels.

Reliance in November 2019 had sold its 5 million cu m/day supply from the KG-D6 Basin at a Dated Brent slope of 8.4%-8.6% to ArcelorMittal Nippon Steel, formerly known as Essar Steel, Adani Gas, GAIL, Mahanagar Gas, Hindustan Petroleum and Gujarat State Fertilizer Corp.

Accounting for the transportation tariff on the PIL pipeline and the 14.5% VAT in Andhra Pradesh, the gas delivered to the West Coast of the country, where most buyers are situated, would cost about $5.50-$5.55/MMBtu for January-September this year. With the increase in VAT rate to 24.5%, it would cost about 40 cents-45 cents/MMBtu more for end-buyers at the current price levels, according to Platts calculations.

Over the same period, WIM plus import duty, re-gasification costs and 15% VAT in Gujarat to purchase gas on an ex-terminal basis from Dahej and Hazira LNG terminals would be around $4.55-$4.75/MMBtu, Platts data and calculations showed.

With natural gas in India outside the purview of the central GST regime and under the state-wise VAT, buyers end up paying more for procuring gas and further rendering it economically unviable, industry sources said.

The inclusion of natural gas in the GST regime would lead to cost savings for buyers and lead to greater adoption of gas in the overall energy mix, sources added.