Budget 2017: No big-bang measures in energy sector, but directionally positive
Oil subsidy allocation may be slightly on the conservative side to meet industry needs for 2017-18, but there is a risk if the increase in oil prices is more than anticipated
Subsidy provided for the oil sector is about Rs25,000 crore for 2017-18. This includes Rs2,500 crore towards liquified petroleum gas (LPG) connection to poor households.
Basic custom duty on liquefied natural gas (LNG) has been cut to 2.5% from 5%.
The finance minister proposed to create an integrated public sector “oil major.” This will be able to match the performance of international and domestic private sector oil and gas companies.
Decision to set up Strategic Crude Oil Reserves.
Retains focus on 100% village electrification by May 2018.
Allocation for Deen Dayal Upadhyay Gram Jyoti Yojana stepped up by Rs4,814 crore.
Allocation for integrated power development scheme also increased.
An additional 20,000 megawatt to be added in the second phase of solar park development scheme.
Taxes on parts, machinery used to manufacture solar power project components reduced.
Oil subsidy allocation may be slightly on the conservative side to meet industry needs for 2017-18. There is a risk if the increase in oil prices is more than anticipated.
Decline in LNG custom duty is positive for the sector. Analysts expect Petronet LNG’s utilizations to get some fillip. Gas distributors such as Indraprastha Gas Ltd and Mahanagar Gas Ltd are expected to benefit on account of this move. Their profit margins could improve depending on the extent of the decline in prices the companies pass on to consumers. In general, decline in LNG custom duty is expected to encourage the use of natural gas, which is considered a relatively cleaner fuel.
As regards the creation of an integrated oil major, while the idea is certainly laudable, the key challenge will be integration issues especially on the human resources side, pointed out K. Ravichandran, group head, corporate sector ratings, ICRA Ltd. “Globally, the concept of state-owned oil majors is a well-established one, which confers several advantages to the stakeholders,” added Ravichandran.
Additional strategic reserves will help strengthen the country’s energy security.
Higher fund allocation for integrated power development scheme and Deen Dayal Upadhyaya Gram Jyoti Yojana to bring grid connected power to more villages.
Higher spending on electrification to result in more orders for companies in the transmission sector.
Reduction in taxes on parts, machinery used to manufacture in solar power project components to reduce costs for solar power projects.
STOCKS IN FOCUS:
The BSE Oil and Gas index gained 1.5% on Wednesday, on a day when the BSE Sensex rose 1.76%.
Gas stocks gained. Share prices of Petronet LNG, IGL and MGL were up 3.7%, 2.3% and 3%, respectively. LNG custom duty cut boosted sentiments for these stocks.
Shares of Bharat Petroleum Corp. Ltd, Hindustan Petroleum Oil Corp. Ltd and Indian Oil Corp. Ltd rose 1.7%, 3% and 2.5% , respectively. The optimism could be due to the proposal to create an integrated public sector oil major. Investors, of course, will have to wait for the details of how this will pan out.
The Oil and Natural Gas Corp. Ltd stock declined nearly 1%. One reason for that is the fact no announcement was made regarding decline in cess on crude oil production, which was one of the key expectations for this budget.
Suzlon Energy Ltd shares fell 5%. Continuation of accelerated depreciation and generation based incentives, key demands of wind energy sector, were not mentioned in the budget.
Tata Power Co. Ltd and Adani Power Ltd gained in the range of 0.6% to 1.6%. Development of 20,000 megawatt in the second phase of solar park development scheme offers growth visibility for their solar power divisions