Crude oil crash adds to financial stress of states

Crude oil price crash in the midst of the coronavirus pandemic has further hit the finances of the state governments as it has badly depleted yet another source of revenue in this difficult period.

States having oil and gas exploration and production blocks get hefty royalty on production of the hydrocarbons with rates varying from 7.5 per cent to 12.5 per cent depending on whether a block is on loans or in shallow water. Totality rates are lower for deep way and ultra deep water blocks.

The COVID-19 pandemic and destruction of demand for oil had resulted in an oil price crash that resulted in crude falling to $15-18 a barrel level in April, around $30 in May and close to $ 40 a barrel in June. This has substantially dented the earnings particularly of three states, Rajasthan , Gujarat and Assam that have the bulk on inland oil blocks and also affected royalty earnings of Andhra Pradesh, Tamil Nadu, Assam for gas blocks.

Sources said that Rajasthan, which has the richest source of oil in the country, has seen its totality earning falling declining to a fourth at about Rs 250 crore in April-June period from about Rs 1,000 crore it earned in the same period of last fiscal. Other states have also seen a similar decline as a fall in global crude oil prices directly impacts royalty earnings.

"This is a double whammy for states as their GST revenue has already fallen to record low levels in April and May due to lockdown. Most states are short of funds even to meet basic expenditure needs that has also increased during the pandemic. Some states have rushed to the Centre for loans and grants," said an oil sector expert asking not to be named.

The royalty earnings of oil producing states were already stressed in 2019-2 0 due to steady oil prices with fall to the tune of 25 per cent. For Rajasthan, last year it earned just about Rs 3,000 crore as royalty against a target of well over Rs 4,000 crore.

The coronavirus pandemic is not only keeping oil prices low but has also impacted exploration activities. With suspension of lot of works, less oil is coming out and consequently less royalty is being paid.

States get close to Rs 20,000 crore as royalty earnings from oil and gas. Any impact on prices going ahead, will keep states earnings depressed.