Regulatory Regime for Oil and Gas Industry in India

Abhinav Gaur, Research Associate

India has always had a rich and long history in Oil & Gas sector. Primarily, oil was struck at Makum in Assam in the year 1867. Then, first oil discovery put to commercial benefit was made in Digboi in 1889. In the times of pre-independent India, the Assam Oil Company and Attock Oil Company were the only oil companies producing oil in the country, with minimal exploration input. It is interesting to note that while the Industrial Policy Statement of 1948 was being framed, the development and sustenance of petroleum industry in the country was pointed out to be of utmost necessity ((Profile Of The Indian Oil & Gas Sector, http://www.ibef.org/download/oilandgas_16May_08.pdf)).

Oil and Natural Gas Commission was constituted in 1956. Government of India in July 1991worked to liberalize economic policy, by means of deregulating and de-licensing the core sectors, inter alia, petroleum sector with partial disinvestments of government equity in Public Sector Undertakings and other measures. Various researches suggest that Indian oil and gas sector is one of the six core industries in India and has very significant forward linkages with the development entire economy ((S. Parashar, “Legal Aspect of Oil and Gas Sector” available at http://www.manupatrafast.com/articles/PopOpenArticle.aspx?ID=3b9928f3-1807-4916-b783-33b3c38992db&txtsearch=Subject:%20Oil%20And%20Gas (last viewed on 20 August 2013).)).

CURRENT SCENARIO

India’s domestic consumption of petroleum products had increased by 965 MMbbl in 2009-10, to 1.03 Bbbl in 2011-12. India has 4% of world’s sedimentary basins.

A brief of a report on E&P activity by three of the leading oil and gas operators (ONGC, CAIRN Energy, and Reliance Industries) in India conducted by World Oil online ((PramodKulkarni, http://www.worldoil.com/March-2013_regional_report_india.html))suggests that India’s role in the global oil and gas arena is that of a major importer. Geopolitics and economic uncertainties have made even that role increasingly complex and difficult. Sanctions against Iran have forced India to begin the process of diverting imports from Iran to other countries, such as Saudi Arabia. While Qatar is a major supplier of LNG for India, two other sources appear to be Australia and U.S.

Oil and Gas sector is divided into three parts: upstream, midstream and downstream.Theupstreamoil sector is a term commonly used to refer to the searching for and the recovery andproductionofcrude oilandnatural gas. The upstream oil sector is also known as the exploration and production (E&P) sector. The upstream sector includes the searching for potential underground or underwater oil and gas fields, drilling of exploratory wells, and subsequently operating the wells that recover and bring thecrude oiland/or rawnatural gasto the surface.The midstream industry processes, stores, markets and transports commodities such as crude oil, natural gas, natural gas liquids (LNGs, mainly ethane, propane and butane) and sulphur. Generally midstream is clubbed with downstream industry.The downstream sector includes oil refineries, petrochemical plants, petroleum product distribution, retail outlets and natural gas distribution companies. The downstream industry touches consumers through thousands of products such as petrol, diesel, jet fuel, heating oil, asphalt, lubricants, synthetic rubber, plastics, fertilizers, antifreeze, pesticides, natural gas and Propane.

POLICIES AND REGULATIONS

The policies framework of oil and gas sector has forever been as dynamic as its demand in market, and thus, over the years various policies have been implemented by the Government to regulate and develop it. The Petroleum Act to control issues relating to import, transport, storage, production, refining and blending of petroleum was already in place since 1934. Further, the Oil Fields (Regulation and Development) Act, 1948 and the Petroleum and Natural Gas Rules, 1959 provided regulatory framework for domestic exploration and production of Oil & Gas.

Under the aegis of administrative control of the Ministry of Oil and Natural Gas, The Directorate General of Hydrocarbons (DGH) was set up in April 1993, as an upstream advisory and technical regulatory body to help the promotion of effective management of domestic oil and gas resources by not compromising with the environmental safety, technological and economic aspects of upstream activities. In September 2006, the DGH was designated as an authority or agency to exercise statutory powers to carry out its functions under the Oil Fields (Regulation and Development) Act, 1948.

Hydrocarbon Vision 2025exuberates upon regulatory policy which aims to guide the policies relating to the hydrocarbons sector for the next 25 years. The policy addresses issues such as E&P, refining, marketing, external policy, oil security, tariff and pricing, and restructuring and disinvestment. Also, ensures that an optimal mix of energy resources is made available to the consumer at fair price. Eleventh Year Plan, this plan was developed on the premise that availability and access to energy are considered as catalysts for economic growth. The envisaged growth of the economy at 9% in the Eleventh Plan cannot be achieved without a commensurate increase in the availability of energy. The policy issues that need to be addressed in the petroleum and natural gas sector relate to oil and gas security, pricing of petroleum products, pricing of domestically produced natural gas and its allocation to the power and fertilizer industry, ensuring competition and open access in the pipeline transportation and distribution grid, and conservation of petroleum products and natural gas.New Exploration Licensing Policy (NELP),the most prominent features of the facilities offered by the Government inter alia include, such as, no signature, discovery or production bonus by the bidder; income tax holiday for seven years from the start of commercial production, no customs duty on imports required to be payable for petroleum operations, biddable cost recovery limit up to 100 per cent, royalty to be payable by the contractor on ad voleram basis, freedom to the contractor for marketing of oil and gas in the domestic market, fiscal stability provision in the contract and incentive for deepwater exploration with only half of the royalty payable in the initial seven years from the beginning of commercial production.

FOREIGN INVESTMENT POLICY IN OIL AND GAS SECTOR

NELP has kept the Indian oil and gas fields open for investment in domestic private and foreign entrepreneurs under its framework. Foreign Direct Investment has been made permitted upto 100% in discovered small and medium sized fields, of course through competitive bidding, petroleum products and pipeline sector, permitted for natural gas/LNG pipeline with prior government approval, through automatic route in infrastructure related to marketing and marketing of petroleum products, market study.

For actual trading and marketing, minimum of 26% Indian equity is required over 5 years.

REGULATORY BODIES

Petroleum and Natural Gas Regulatory Board

The Petroleum and Natural Gas Regulatory Board Act, 2006 was enacted in April, 2006. Consequently, Government has set up in October, 2007, the Petroleum and Natural Gas Regulatory Board (PNGRB) to regulate the refining, processing, storage, transportation, distribution, marketing and sale of petroleum, petroleum products and natural gas, excluding production of crude oil and natural gas. The aim is to protect the interest of consumers and entities engaged in specific activities relating to petroleum, petroleum products and natural gas and to ensure uninterrupted and adequate supply of these products in all parts of the country and to promote competitive markets and for matters connected therewith or incidental thereto.

Directorate General of Hydrocarbon

The Directorate General of Hydrocarbons (DGH) was established under the administrative control of Ministry of Petroleum & Natural Gas by a Government of India Resolution in 1993 to promote sound management of the Indian petroleum and natural gas resources having balanced regard to the environment, safety, technological and economic aspects of the petroleum activity and to review the exploration programmes of companies and advise the Government on the adequacy of these programmes.18

Following are the functions of DGH :

“(a) To provide technical advice to the Ministry of Petroleum and Natural Gas

(b) To review the exploration programmes of companies

(c) To reassess the hydrocarbon reserves discovered and estimated by the operating companies in discussion with them;

(d) To advise the Government on the offering of acreages for exploration to companies as well as matters relating to relinquishment of acreages by companies;

(e) to review the development plans for commercial discoveries of hydrocarbon reserves proposed by the operating companies.

(f) To regulate the preservation, upkeep and storage of data and samples pertaining to petroleum exploration, drilling, production of reservoirs etc.

LAWS PERTAINING OIL AND GAS INDUSTRY

• Upstream Sector

The upstream sector is also known as the Exploration and Production of Oil and Gas. Following are the laws which are directly related to the upstream sector.

Constitution of India: Entry 53 of List I

“Regulation and development of oilfields and mineral oil resources; petroleum and petroleum products”

Constitution of India: Entry 25 of List II

“Gas and Gas Works

Oilfields (Regulation and Development) Act, 1948

Basic enabling statute for licensing and leasing of petroleum and gas blocks by the appropriate government. Covers mineral oils which are defined as including natural gas and petroleum [S.3(c)]. Mining lease is defined exhaustively to cover all forms of exploring and exploiting mineral oils and all purposes connected thereto [S.3(d)]

Empowers central government to make rules with regard to mining leases [S.5]

Also empowers central government to make rules for the development of mineral oil [S.6]

Petroleum and Natural Gas Rules, 1959

Rules provide framework for grant of exploration licenses and mining leases

Salient features of the Rules :

Prohibition on prospecting and mining except under a license or lease granted under the rules [Rule 4]

Central Government has the power to grant licenses or leases in respect of any land vested with it or minerals underlying the ocean within the territorial waters or the continental shelf [Rule 5(i)]

State government has power to grant license or lease over lands vested with it [Rule 5(ii)]

Person obtaining exploration license obtains the exclusive right to a lease for producing (i.e. extracting) oil/gas over any part of area covered in license

Territorial Waters, Continental Shelf, Exclusive Economic Zone And Other Maritime Zones Act, 1976

Article 297 of the Constitution vests resources found in these areas with Central government. No exploration in the Continental shelf and exclusive economic zone permitted without Central Government’s permission

• Downstream

Land acquisition Act, 1894

The law deals with the acquisition of land for Public purpose. The Act is a general Act which deals with the procedure and the conditions under which a land can be acquired.

The only requirement is that the land can only be acquired for public purpose as per Section 3(f) of the Act.

The Petroleum Act, 1934

The act deals with import, transport, storage, production, refining, and blending of petroleum. The Act is one of the oldest acts in the oil and gas sector. Earlier to this act the rules regarding the above specified activities were separate for separate States. This Act brought about uniformity in this field.

The Petroleum Minerals Pipelines (Acquisition of Right of users in Land) Act, 1962

The Act provide for the acquisition of right of user in land for laying pipelines for the transport of petroleum and minerals.

Section 3- Publication of notification for acquisition, Section 5 Hearing of objections

Petroleum and Natural Gas Regulatory Board Act, 2006

The Act provide for the establishment of Petroleum and Natural Gas Regulatory Board to protect the interests of consumers and entities engaged in specified activities relating to petroleum, petroleum products and natural gas and to promote competitive markets and for matters connected therewith or incidental thereto.

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