More Stories

Informist, Friday, Sept. 19, 2025

 

By Anand JC

 

NEW DELHI – The hike in goods and services tax to be paid on exploration and production activities and a sharp moderation in crude oil prices mean that upstream oil companies will be left reeling with stranded tax and a negative impact on their operating margins in the ongoing financial year, according to analysts.

 

The GST Council, earlier this month, approved raising taxes on services rendered for oil and gas exploration and production to 18% from 12%, with input tax credit, effectively increasing costs for upstream activities. Companies will have to shell out higher taxes for hiring rigs and other services.

 

Oil India Ltd., which is engaged in hydrocarbon exploration, drilling and production activities, is factoring in a negative impact for the ongoing financial year. "The GST hike will have a net negative impact on our earnings, as per initial assessment," a senior official of the state-owned enterprise told Informist.

 

The company expects a hit on its capital expenditure and operational expenditure due to this move. "We will feel the impact on opex now and will feel the hit on capex later," the official said.

 

Upstream companies will soon be making a representation to the government to seek a reversal of this move. The Centre is working out a plan to compensate oil firms for the higher input costs they will likely incur due to the hike in GST, as reported by the daily Business Standard, citing government officials.

 

Among all upstream companies, Oil & Natural Gas Corp. Ltd. is expected to see the most meaningful impact in the ongoing financial year, a senior analyst covering the sector at a large equity research firm said.

 

"ONGC earns around 50% of its revenue from offshore operations. Its EBITDA (earnings before interest, tax, depreciation, and amortisation) for FY26 will take a hit of 4-5%," he said. ONGC had reported a consolidated EBITDA of INR 867.19 billion in FY25, down from INR 1.150 trillion in FY24.

 

"This 6% hike in GST will have an impact of around 0.6% per barrel of oil," the analyst said. The operational cost ONGC incurs per barrel is around $20, from which it earns an EBITDA of around $15 per barrel.

 

Financials of Reliance Industries Ltd., too, will take a hit due to this hike in taxes. "Reliance will be affected only to a limited extent, as it earns only 10% of revenue from exploration and production activities," the analyst said.

 

Upstream companies are expanding their exploration drives to greater depths amid a natural decline in offshore production, but these are expensive propositions. "Exploration activities themselves pose high financial and technical risks, especially in deep-water and ultra-deepwater drilling, where conditions are challenging and costs are substantial," ONGC had said in its Annual Report for FY25.

 

Given that crude oil and natural gas are currently outside the purview of GST, a hike in tax without an offset available on the sale of these products will lead to stranded tax, Prashant Vasisht, senior vice president and co-group head of corporate ratings at ICRA, told Informist.

 

Global crude prices recently halved from the peak they hit after Russia invaded Ukraine in 2022. Further, the decision of the Organization of the Petroleum Exporting Countries and allies to increase production in their bid to shore up market share is putting further downward pressure on oil prices.

 

In what is being seen as a "double whammy" for upstream players, the moderation in oil prices could also affect their realisations from the sale of oil. "Margins and cash accruals of upstream companies would reduce year-on-year in FY26, given the significantly lower average crude oil prices, besides the higher GST rates," Vasisht said.

 

In the last five years, upstream oil companies' operating margins have largely moved in tandem with Brent crude oil prices. Oil prices averaged $70.86 per barrel in 2021, when ONGC reported an operating margin of 25.3%. When oil prices swelled to $82.49 in 2023, ONGC's operating margin increased to 40.1% and fell to 37.3% in FY25 when oil prices moderated to $71.79 in 2025.

 

"OPEC+ has announced further production hikes at a time when demand is weak owing to global economic headwinds. Accordingly, crude oil prices are expected to go below $65/barrel in the next few months," Vasisht said.  End

 

US$1 = INR 88.15

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Edited by Akul Nishant Akhoury

 

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

 

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd. by NSE Data & Analytics Ltd., a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt. Ltd.

 

Informist Media Tel +91 (11) 4220-1000

Send comments to feedback@informistmedia.com

 

© Informist Media Pvt. Ltd. 2025. All rights reserved.