What does the windfall tax on oil really mean?

In a move to force upstream oil companies to share part of the largesse amidst rising crude prices, the government imposed a windfall tax on all refiners, including SEZ refineries, on the export of diesel, petrol and ATF. In addition, the government also imposed a cess on domestic crude output. This move is likely to negatively impact the FY23 estimates steeply. The tax could potentially be used to offset OMC losses on auto fuel, but could make many of the upstream oil companies all the more unprofitable.

To begin with, the government raised export duty on diesel by Rs.13 per litre while the export duty on petrol was hiked by Rs.6 per litre. In addition, the government has also raised export duty on ATF by Re.1 per litre. It has also been mandated that the Indian exporters would have to sell 50% of petrol in the domestic market and 30% of diesel in domestic market. Apart from all these, the government has additionally imposed a cess of Rs.23,250 per tonne on crude produced domestically.
 

The additional cess imposed by the government is likely to hit the numbers of the upstream oil companies. For example, the earnings ONGC and Oil India for F23 is likely to be lower by 36% and 24% only. In fact, even companies like Reliance Industries would have to mandatorily sell about 30% of its diesel locally to not attract the tax. That may not pose a problem as Reliance already sells nearly 40-50% locally. The note by Morgan Stanley has also highlighted that the gross refining margins (GRMs) could get impact by $6 to $8/bbl. 

In FY22, India had exported about 42% of its diesel and 44% of gasoline products. This will also open up the doors for a more healthy growth of the sector. However, the high levels of GRMs are not likely to sustain in these conditions. The higher cess on domestic crude production will also lead to the net crude realizations per barrel from $110/bbl to $107/bbl. That would translate into sharply lower net crude realizations of just $65/bbl. So, some amount of pressure and disruption nis inevitable from this levy move.

But, the bigger story is that it has a larger than life impact on the government revenues and is likely to give the much needed boost. For instance, the government is likely to derive monthly revenue of Rs.114,000 crore from windfall tax on oil,  This is most likely to offset OMC's monthly net loss of Rs.11,700 crore on the sale of petrol and diesel. This would incentivize domestic oil companies to push more of their products to the OMCs rather than sell it to the retail outlets.