What’s dragging down shares of ONGC and other oil companies?

by 5paisa Research Team Last Updated: 2022-07-04T18:04:28+05:30

Oil India Ltd has lost over 15.8% over the last five trading sessions while ONGC is down by more than 12%. Even Mukesh Ambani-led Reliance Industries Ltd, a diversified conglomerate with interests in energy, telecom and retail, is in the red by more than 3.6%. Vedanta Ltd, whose subsidiary Cairn India is one of the country’s biggest oil producers, has fallen nearly 4% in the same period. 

Even among the three government-controlled oil marketing companies, Hindustan Petroleum and Bharat Petroleum, have been in the red over the last five trading sessions, with only Indian Oil registering an uptick. 

So, what’s spooking India’s domestic oil companies?

Last week, the government imposed a “windfall tax” on oil producing companies as well as refiners, which have increased product exports to gain from the higher overseas margins in the wake of the rise in global oil prices following the Russian invasion of Ukraine in February. 

The tax comes into effect from July 1. 

Which companies are these new taxes likely to hit?

As mentioned above, the taxes, and some accompanying export curbs, will hit the earnings of companies such as Reliance Industries, Nayara Energy, which is partly owned by Russia’s Rosneft, Oil and Natural Gas Corp, Oil India and Vedanta. 

Why has the government imposed this windfall tax?

The government says it has imposed the tax in an ostensible bid to boost domestic supply and revenue. But clearly, the government, which is cash-strapped, wants a pie of the bounty that oil producers and refiners alike hope to achieve from the windfall gains that they have been getting over the past few months. 

When could the government consider withdrawing this windfall tax?

Revenue secretary Tarun Bajaj has said that the government will look at withdrawing these taxes only when the international price of crude falls below the $40 per barrel mark.

"The taxation would be reviewed every 15 days," Bajaj said, adding that it would depend on international crude prices. "If crude prices fall, then windfall gains will cease and windfall taxes would also be removed," according to a Reuters report. 

The government believes such windfall gains will cease once prices fall $40 from existing levels, Bajaj said.

Where are oil prices at right now?

Brent crude futures slipped on Monday to about $111.27 a barrel, as fears of a global recession weighed on the market even as supply remains tight amid lower OPEC output, unrest in Libya and sanctions on Russia.

U.S. West Texas Intermediate crude futures were at $108.09 a barrel.

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