oil and gas industry in india legal, regulatory & tax

Oil and Gas Industry in India

July 2014

Legal, Regulatory & Tax

© Copyright 2014 Nishith Desai Associates www.nishithdesai.com

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Contents1. IntroductIon 01

2. o&G Industry at a Glance 04

Key Players and Market Shares 04

3. GovernInG BodIes, leGIslatIon and reGulatory Framework 06

I. Legislation 07

A. Oilfields Act 07

B. Petroleum Act 08

C. Petroleum Rules 08

D. Petroleum and Natural Gas Regulatory Board Act, 2006 09

E. NELP 09

F. Environmental Law 10

G. Competition Law 11

II. Regulation 12

A. Directorate General of Hydrocarbons 13

B. Regulatory Board 13

C. Oil Industry Development Board 14

4. ForeIGn Investment opportunItIes and market status 15

5. FIscal Framework For upstream sector In IndIa 16

I. Overview 16II. Salient Features of NELP 16

A. Level Playing Field 16

B. Royalty Rates 16

C. Cost Recovery 16

D. Customs Duty 16

E. Excise Duty and Cess 17

III. Process Under NELP 17

IV. NELP Bidding Rounds 18

A. Beginnings: NELP-I 18

B. Major Discoveries Under NELP 19

C. NELP VII and VIII 19

D. NELP IX and X 19V. Taxes 19

A. Corporate Income Tax 19

B. Dividends 20

C. Capital Gains 20

D. Withholding Taxes 20

E. Double Tax Avoidance Treaties 20

F. Anti-Avoidance 20

G. Indirect Taxes 21



6. report oF the commIttee on the productIon sharInG contract mechanIsm In petroleum Industry, 2012 (“ranGarajan commIttee”) 22

7. polIcy GuIdelInes For exploratIon and exploItatIon oF shale Gas 23

8. open acreaGe lIcensInG polIcy 24

9. dIspute resolutIon 25

I. Arbitration 25II. Litigation 26

10. conclusIon 27




“The Indian oil and gas sector is forecasted to grow from US$ 117.5 billion in 2012 (estimated) to US$ 139.8 billion by 2015.” 1

1. Datamonitor Report – Oil and Gas in India.

1© Nishith Desai Associates 2014



The Oil and Natural Gas (“O&NG”) sector has tremendous growth potential in India. It is a well regulated industry and in spite of the slowdown in the Indian and global economy, demand for O&NG has been consistent. Traditionally, O&NG has been the domain of the Government of India (“Union Govt.”) and select government enterprises. With liberalization and privatization, there has been participation from private entities, both domestic and foreign.

From a legal perspective, it is the Union Govt., under the Constitution of India, 1950 (“Constitution”) that has the power to legislate in respect of O&NG. Legislative powers are conferred on the Union Govt. by Entry 53, to List I of Schedule VII of the Constitution.2

This paper provides a comprehensive insight with respect to investment and regulatory aspects of the O&NG sector in India. We will discuss the governing bodies, regulatory framework, the New Exploration and Licensing Policy (“NELP”) regime, salient features of NELP and latest developments in the Shale Policy of India.

India has always been an import dependent nation as far as O&NG is concerned. Historically, Saudi Arabia and Iraq have been the largest crude oil exporters to India.3 India imports nearly three-fourths of its requirement of crude oil from the Middle East.4 According to Ministry of Petroleum and Natural Gas, India (“Ministry of PNG”), India has total reserves of 760 million metric tons of crude oil and 1330 billion cubic meters of natural gas as on April 1, 2012.5

From an industry perspective, O&NG industry is divided into three major sectors: upstream, midstream and downstream. The upstream sector is a term commonly used to refer to exploration, recovery and production of O&NG. In industry parlance it is simply called Exploration and Production (“E&P”). The downstream sector is a term commonly used to refer to the refining of crude oil and the selling and distribution of natural gas and products derived from crude oil. The midstream industry processes, stores, markets and transports commodities such as crude oil, natural gas, natural gas liquids (liquefied natural gas such as ethane, propane and butane) and sulphur.6

In spite of considerable domestic7 potential, India imports more than half the requirement of crude oil.8 India has 3.14 million square km. of sedimentary basins including onshore and offshore.9 Fifteen percent of these areas are still unexplored. The reason for overdependence on crude oil imports cannot be attributed solely to lack of crude O&NG reserves. India has a hydrocarbon10 resource base of 21 billion tons with an additional 9 billion tons from deep-water areas. However, only 6.8 billion tons of geological reserves have been established through exploration, leaving two-thirds of the area unexplored.11 For the year 2011-12, India was the fourth largest consumer of oil and consumed 4% of the total consumption in the world.12 Even the global slowdown has not impacted the oil consumption in India and in fact India’s demand for O&NG continues to be highly fuelled by a rapidly growing automobile industry.13 This burgeoning demand has not been matched by the required supply.14 Going forward, as

1. Introduction

2. Regulation and development of oil fields and mineral oil resources; petroleum and petroleum products; other liquids and substances declared by Parliament by law to be dangerously inflammable.

3. Source: http://in.reuters.com/article/2012/08/06/india-crude-import-idINL4E8IU4HI20120806, (accessed on July 15, 2014)

4. Ibid

5. See, Basic Statistics on Indian Petroleum and Natural Gas, 2011-12, available at http://petroleum.nic.in/petstat.pdf (page 8).

6. Source: http://www.trencome.com/petroleumindustry.htm (accessed on July 15, 2014).

7. Source: http://www.ibef.org/industry/oil-gas-india.aspx (accessed on July 15, 2014)

8. Source: ‘Basic Statistics on Indian Petroleum & Natural Gas 2011-12’, published on September, 2012

9. See, http://www.dghindia.org/SedimentaryBasins.aspx (accessed on July 15, 2014).

10. A substance (such as coal or natural gas) that contains only carbon and hydrogen, [Source: http://www.merriam-webster.com/dictionary/hydrocarbon (accessed on July 15, 2014)]

11. RK Pachauri and Pooja Mehrotra, Vision 2020: Sustainability of India’s Material Resources, Report available at http://planningcommission.gov.in/reports/genrep/bkpap2020/13_bg2020.pdf (accessed on July 15, 2014).

12. See, Energy Statistics, available at http://mospi.nic.in/mospi_new/upload/Energy_Statistics_2013.pdf (accessed on July 15, 2014)

13. Worldwide consumption of crude oil has not increased substantially since 2006 and continues to fluctuate around 4000 Mn Tonne. For details, See ‘Basic Statistics on Indian Petroleum & Natural Gas 2011-12’, published on September, 2012, available at http://petroleum.nic.in/petstat.pdf (accessed on July 15, 2014). For details on consumption of O&NG, See Energy Statistics, available at http://mospi.nic.in/mospi_new/upload/Energy_Statistics_2013.pdf (accessed on July 15, 2014).

14. Oil & Gas Production as of 2011-12: Crude Oil- 38.2 Mn (Mega Newton) Tons, available at http://petroleum.nic.in/pngstat.pdf

2 © Nishith Desai Associates 2014


India’s domestic consumption of goods and services coupled with industrial output continues to grow, the demand for crude oil and gas will automatically rise.15

Discovery of O&NG for the first time, in the offshore region, was made by Oil and Natural Gas Corporation (“ONGC”) in 1974, in Bombay High. This opened up new vistas for O&NG exploration and production in India. Subsequently, more discoveries were made in the Krishna-Godavari, Cauvery and Rajasthan sedimentary basins. The responsibility for carrying out E&P activities in the country was entrusted to the national oil companies (“NOCs”) till the beginning of 1990’s, when they used to be granted the “Petroleum Exploration License”16 (“PEL”) on nomination basis. The Union Govt. in 1997 introduced NELP and liberalized the sector by opening up acreages17 to private and joint venture companies through various exploration bidding rounds for development of discovered fields.

Realizing that NOC alone cannot solve E&P problems in India, Union Govt. decided that one way of overcoming India’s upstream woes would be by encouraging more participation from the private sector in E&P activity. It was expected that the private sector will bring two critical inputs to the fore - technology and finance. In essence, chances of new discoveries would be greatly enhanced by involving private and foreign players because further oil production from old and depleting fields may be sustained over long periods by applying suitable enhanced oil recovery techniques.18 Hence opening up acreages for active exploration by private or joint venture companies, in addition to efforts of NOCs, was considered necessary. The acreages offered by the Union Govt. under various exploration rounds

met with partial success.19 It was only in 1997, when NELP was introduced, that E&P received an impetus and produced effective results.20

In India, the O&NG industry contributes over 15% to the nation’s GDP.21 However, as mentioned earlier, in order to meet the increasing demand for petroleum products, India imports more than 75% of its crude oil requirement.22 In an effort to lessen dependence on foreign oil sources, the Union Govt. is committed to promoting increased E&P activity. Recently, the Cabinet Committee on Investment23 (“CCI”) cleared 25 E&P blocks24 worth Rs. 249 billion of investments.25 As natural gas comprises only 10% of the nation’s energy basket, compared to the global average of 24%, there is significant opportunity for growth in this sector as well.

India’s refining capacity has also increased by about 14% to 213.066 million metric tons per annum (“MMTPA”) as on April 1, 2012 from 187.386 MMTPA on April 1, 2011,26 with the entry of private companies like Essar Oil along with public sector undertakings (“PSUs”) like Indian Oil Corporation Ltd. (“IOCL”), Bharat Petroleum Corporation Ltd (“BPCL”) and Hindustan Petroleum Corporation Ltd (“HPCL”). Marketing and distribution is largely dominated by four PSUs namely IOCL, HPCL, Oil India Corporation (“OIL”) and BPCL. Decontrolling the market with new policy to invite foreign direct investment (“FDI”) and private companies has made it possible for new entrants like Essar Oil, Reliance Industries Limited (“RIL”), and Royal Dutch Shell to make their presence felt in the marketing sector. Apart from the untapped potential in upstream sector, there are huge investment opportunities in the distribution network of petroleum products as well.

15. Crude oil is a naturally occurring, unrefined petroleum product composed of hydrocarbon deposits. Crude oil can be refined to produce usable products such as gasoline, diesel and various forms of petrochemicals [Source: http://www.investopedia.com/terms/c/crude-oil.asp, accessed on July 15, 2014].

16. No person can prospect for petroleum except in pursuance of a petroleum exploration license (PEL), See, The Petroleum and Natural Gas Rules, 1959.

17. Acreage in O&NG parlance refers to an area that has the potential of possessing hydrocarbon reserves.

18. See Paragraph 3.1(a), 3.3(ii) and 3.4(i), India Hydrocarbon Vision 2025, available at http://petroleum.nic.in/vision.doc (accessed on July 15, 2014).

19. Source: PIB (Press India Bureau) Notification, available at http://pib.nic.in/feature/feyr2001/faug2001/f100820012.html (accessed on July 15, 2014).

20. Source: PIB (Press India Bureau) Notification, available at http://pib.nic.in/feature/feyr2001/faug2001/f100820012.html (accessed on July 15, 2014)

21. Source: http://www.investindia.gov.in/?q=oil-and-gas-sector (accessed on July 15, 2014)

22. Source: http://www.thehindubusinessline.com/industry-and-economy/indias-crude-oil-import-bill-rises-95-in-aprilaug/article5160388.ece (accessed on July 15, 2014); http://zeenews.india.com/business/news/economy/india-imports-nearly-80-of-its-crude-oil-needs_82701.html (accessed on July 15, 2014).

23. The Cabinet Committee on Investment has been set up to monitor investment proposals as well as projects under implementation, including stalled projects, and guided decision-making in order to remove bottlenecks and quicken the pace of implementation [Source: http://pib.nic.in/newsite/erelease.aspx?relid=92767], See http://www.thehindubusinessline.com/economy/cabinet-panel-clears-25-oil-gas-blocks/article4644283.ece

24. An oil exploration block is a large area of land, typically in 1000s of sq. kilometers, that is awarded to oil drilling and exploration companies by a country’s government. It is either awarded by the government and paid for by taxes on the company, or it is auctioned by the government that owns the land [Source: http://www.wikinvest.com/wiki/Oil_exploration_block]

25. India Brand Equity Foundation, The Indian Oil and Gas Sector: Recent Developments, Growth and Prospects, (January 2013), available at http://www.ibef.org/download/Oil-Gas-Sector-040213.pdf (“IBEF Oil & Gas”)

26. See, Basic Statistics on Indian Petroleum & Natural Gas, available at http://petroleum.nic.in/petstat.pdf (accessed on July 15, 2014)

Introduction




The current key players in India’s O&NG sector are:

A. ONGC

ONGC is the leader in E&P activities in India contributing 72% of India’s total production of crude oil and 48% of natural gas extraction/production. ONGC has established more than 7 billion tonnes of in-place hydrocarbon reserves in the country. In fact, six out of seven production basins in India have been discovered by ONGC. ONGC produces more than 1.27 million Barrels of Oil Equivalent (“BOE”) per day.27

B. GAIL

GAIL (India) Ltd was incorporated in August 1984 as a Central PSU under the Ministry of PNG. The company was initially given the responsibility of construction, operation and maintenance of the Hazira – Vijaypur – Jagdishpur (HVJ) pipeline project. It was one of the largest cross-country natural gas pipeline projects in the world. Originally this 1800 Km long pipeline was built at a cost of Rs. 17 billion and it laid the foundation for development of market for natural gas in India.28

C. ONGC Videsh

ONGC Videsh Ltd. (“OVL”) is a Central Public Sector Enterprise (“CPSE”) of the Union Govt. under the administrative control of the Ministry of PNG. It is a wholly owned subsidiary and overseas arm of ONGC, the flagship NOC of India. The primary business of OVL is to prospect for O&NG acreages outside India, including exploration, development and production of O&NG. OVL owns participating interests in 32 O&NG assets in 16 countries and contributes to 12% of oil and 7 % of natural gas production of India respectively.29

D. IOCL

IOCL is India’s largest company by sales with a turnover of Rs. 4149.09 billion and profit of Rs. 50.05 billion for the year 2012-13. IOCL is the highest ranked Indian company in the latest Fortune ‘Global 500’ listings, ranked at the 88th position.30

E. BPCL

BPCL is an Indian state-controlled O&G company headquartered in Mumbai, Maharashtra. BPCL has been ranked 225th in the Fortune Global 500 rankings of the world’s biggest corporations for the year 2012.31

F. HPCL

HPCL is a Union Govt. enterprise with a Navratna Status, and a Fortune 500 and Forbes 2000 company, with an annual turnover of Rs. 1900.48 billion and sales/income from operations of Rs. 2156.75 billion during the year 2012-13, having about 20% marketing share in India among PSUs and a strong market infrastructure.32

G. OIL

OIL in 1981 became a wholly-owned Union Govt. enterprise. OIL is engaged in the business of exploration, development and production of crude oil and natural gas, transportation of crude oil and production of LPG.33

27. http://www.ongcindia.com/wps/wcm/connect/ongcindia/Home/Company/History/

28. http://www.gail.nic.in/final_site/successstory.html

29. Source: http://www.ongcvidesh.com/company.aspx, (accessed on July 15, 2014)

30. Source: http://www.iocl.com/aboutus.aspx,(accessed on July 15, 2014)

31. Source: http://www.bharatpetroleum.in/Index.aspx (accessed on July 15, 2014)

32. Source: http://www.hindustanpetroleum.com/En/UI/AboutUs.aspx, (accessed on July 15, 2014)

33. Source: http://www.oil-india.com/Profile.aspx, (accessed on July 15, 2014)



[All the figures in the chart below are based on ‘Basic Statistics on Indian Petroleum & Natural Gas 2011-12’, published on September, 2012]34

2. O&G Industry at a Glance

A. Import

Item Quantity [‘000’ Tonne] value [Rs. (billion)]

Crude Oil 171,729 6722.20

LNG 35 9,703 203.73

Petroleum Products 14,997 541.66

B. Export

Item Quantity [‘000’ Tonne] value [Rs. (billion)]

Crude Oil N.A. N.A.

LNG N.A. N.A.

Petroleum Products 60837 2846.44

C. Other Details

Contribution to GDP 15% 36

Expected growth in the market The value of the Indian oil and gas sector is forecasted to grow from US$ 117.5 billion in 2012 (estimated) to US$ 139.8 billion by 2015 37

34. Source: http://petroleum.nic.in/petstat.pdf, (accessed on July 15, 2014)

35. Liquefied natural gas or LNG is natural gas (predominantly methane, CH4) that has been converted to liquid form for ease of storage or transport [Source: http://www.qe-energy.com/lng.php (accessed on July 15, 2014)]

36. Source: http://www.investindia.gov.in/?q=oil-and-gas-sector, (accessed on July 15, 2014)

37. India Brand Equity Foundation, The Indian Oil and Gas Sector: Recent Developments, Growth and Prospects, (January 2013), available at http://www.ibef.org/download/Oil-Gas-Sector-040213.pdf

Key Players and Market Shares

upstream (e&p) oil and natural Gas corporation

Oil Production: 531,000 b/d Gas Production: 25.6 bcm Turnover: US$ 13,782 mn. 74% state owned

oil India limited

Oil Production: 73,000 b/d Gas Production: 2.4 bcm Turnover: US$ 1,730 mn. 98.1% state owned

cairn energy

Oil Production: 25,000 b/d Gas Production: 0.4 bcm Turnover: US$ 340 mn. Private sector




midstream (storage and transportation)

Indian oil

Pipelines: 10,329 km Turnover: US$ 68,488 mn. 89% state owned

Gas authority of India

Pipelines: 12,000 km Turnover: US$ 6,762 mn. 57% state owned

downstream (refining, processing & marketing)

Indian oil

Refining: 880,000 b/d Retail Outlets: 18,643 Turnover: US$ 68,488 mn. 89% state owned

Bharat petroleum

Refining : 450,000 b/d Retail Outlets: 6,553 Turnover: US$ 34,591 mn. 66% state owned

hindustan petroleum

Refining : 260,000 b/d Retail Outlets: 8,539 Turnover: US$ 27,812 mn. 51% state owned

[Source: Business Monitor International: India Oil and Gas Report, 2012, IBEF]

While few large private sector companies are key players in the O&NG market (the largest being Cairn Energy), foreign involvement is slim. Private sector refineries belong to RIL and Essar Oil.38 In 2011, RIL signed a $7 billion deal with BP Plc., allotting 30% share in 23 of RIL’s oil and gas acreages.39 The deal included formation of a 50:50 joint venture between the two companies, which necessitated establishment of infrastructure for receiving, transporting, and marketing petroleum and natural gas products.40 This landmark agreement involved one of the largest foreign investments into India.41 Paired with the Union Govt.’s efforts to simplify investment procedure and revisit caps on FDI, it seemed likely that the success of the BP-RIL partnership would attract further large-scale investments in India’s oil and gas industry.

However, the optimism resulting from the RIL-BP deal has been tempered by doubts arising over production concerns in Mangla field — one of India’s biggest oil finds in the last 25 years.42 Cairn India (subsidiary of Cairn Energy) put the field into production, but encountered several difficulties in executing a sale of its shares. British Company Vedanta Resources agreed to purchase 51% of Cairn India, and ONGC had a 30% share in the

agreement. Cairn India maintained that ONGC was contractually liable for 100% of royalties on these assets, while the Union Govt. offered a royalty holiday scheme to Cairn as part of the exploration deal. ONGC demanded a change in contract for the sale, wherein Cairn India would be liable for payment of royalty and cess on oil produced As ministers were asked to decide whether “imposing conditions on the company [would] violate India’s bilateral investment promotion treaty (BIPA) with the UK,” the deal was stuck for over nine months.43 Eventually, the Ministry of PNG supported ONGC, and told the Union Cabinet that “asking Cairn to accept the state firm’s views on royalty and withdrawing litigation on cess were ‘reasonable conditions’ for approving the $9.6-billion Cairn-Vedanta deal.”44 Accordingly, the Cabinet Committee on Economic Affairs (“CCEA”) made cost recovery of royalty and payment of cess a precondition for approval of the deal.45 Unfortunately, the delays and uncertainty involved in the transaction cast doubts over investing in the O&NG industry. Such doubt could partially explain why despite relaxed procedural requirements governing FDI, few foreign companies have capitalized on opportunities to invest into refineries where PSUs are partners.46

38. IBEF Oil & Gas, p.8.

39. Reliance News, RIL-BP deal: Leading India’s FDI inflows, http://reliance-news.blogspot.in/2011/08/ril-bp-deal-leading-indias-fdi-inflows.html (ac-cessed on July 15, 2014).

40. Ibid

41. Hindustan Times, Reliance strikes gold with BP (Feb 21, 2011), available at http://www.hindustantimes.com/business-news/Markets/BP-partners-Reliance-in-7-2-bn-oil-tie-up/Article1-665124.aspx; See also The Economic Times, RIL-BP’s USD 7.2 bn deal – biggest FDI into India ahead of Posco, Arcelor Mittal investments (Jul 22, 2011), available at http://articles.economictimes.indiatimes.com/2011-07-22/news/29803563_1_transaction-foreign-direct-investment-fdi

42. Shilpa Kannan, Foreign investment in Indian oil exploration waning, BBC News (May 26, 2011), available at http://www.bbc.co.uk/news/busi-ness-13559082

43. Ibid

44. Rajeev Jayaswal, Oil ministry supports ONGC views on Cairn-Vedanta deal, The Economic Times, (April 5, 2011), available at http://articles.econom-ictimes.indiatimes.com/2011-04-05/news/29384628_1_cairn-vedanta-deal-cairn-energy-plc-cess-and-royalty

45. BT Online Bureau, ONGC gets upper hand, Cairn India may accept govt’s conditions on Vedanta deal, Business Today (July 20, 2011), available at http://businesstoday.intoday.in/story/ongc-set-to-gain-on-govt-conditions-on-cairn-vedanta-deal/1/17159.html

46. Richa Mishra, Oil industry not enthused by easing of FDI norms, The Hindu Business Line (July 17, 2013), available at http://www.thehindubusi-nessline.com/industry-and-economy/oil-industry-not-enthused-by-easing-of-fdi-norms/article4924769.ece



3. Governing Bodies, Legislation and Regulatory Framework

policy

legislation

regulation

planning commission

petroleum act, 1934 (import, transport, storage)

ministry of Finance

oil Fields act, 1948 (development of oil fields)

petroleum and natural Gas rules, 1959

nelp (competitive bidding)

directorate General of hydrocarbons

petroleum and natural Gas regulatory Board act, 2006

oil Industry development Board

other laws (e.g. environmental, tax, competition law)

petroleum and natural Gas regulatory Board




I. Legislation

As stated above the power to legislate in respect of matters relating to development of oilfields, mineral oil resources, petroleum and petroleum products and liquids and substances declared by Parliament to be dangerously inflammable is provided for in Entry 53 of List I of Schedule 7 to the Constitution. Parliament has sole and exclusive power to legislate in respect of subjects mentioned in List I of Schedule 7. In exercise of these powers Parliament has passed several laws which directly affect/ regulate O&NG sector.

The power of Parliament to legislate in these matters to the exclusion of States in the Union of India has been consistently upheld by courts in India.47 The effect of these provisions of the Constitution and judgments is that only Parliament can pass laws in respect of O&NG. The scope of this entry was discussed in considerable detail in Babubhai Jashbahi48where the High Court of Gujarat noted that due to the strategic nature of minerals, mineral oils and oilfields, these subjects were retained within the exclusive domain of the Union Govt. Explaining the scope of the powers relating to Entry 53, the High Court explained that these were national assets and that the entire nation had a stake in the same. The object of Entry 53 was for Parliament to legislate in respect of an important national asset and was not for Parliament to legislate in respect of land or property belonging to the State. However, the High Court noted that Entry 42 of List III of Schedule 7 (acquisitioning and requisitioning of property) was wide enough to empower Union Govt. to acquire a property belonging to a State Government. Therefore, in respect of oilfields, mineral oil resources and petroleum and petroleum products, the Union Govt. has the legislative powers to legislate and regulate. Where required, Union Govt. has the powers under the Constitution to make acquisition of property which is within the territory of a particular State by virtue of Entry 42 of List III.49

The Petroleum Act, 1934 (“Petroleum Act”) and the Petroleum and Natural Gas Rules, 1959 (“Petroleum Rules”) are key legislations for the regulation of the O&NG sector. Particularly for E&P activities, key regulations and policies include the Oilfields

(Regulation and Development) Act, 1948 (“Oilfields Act”), the Petroleum Rules, and the NELP. Together, these acts, rules and policies prescribe substantive as well as the procedural requirements to be complied with by companies engaged in exploration, production, import, transport, storage, refining, or practically any other activity associated with O&NG in India.

A. Oilfields Act

The Oilfields Act constitutes the basic statute for licensing and leasing of petroleum and gas blocks by the Union Govt.50 The Oilfields Act empowers the Union Govt. with broad authority to make rules providing for the basic regulation of oilfields and for the development of mineral oil resources.51 Together with the Petroleum Rules, the Oilfields Act governs grant of PEL and mining leases. In particular, Petroleum Rules may also provide for matters such as where and by whom applications for mining leases may be made, the terms upon which such licenses are granted, the maximum area and time frame for leases etc.52 While the Oilfields Act prescribes that royalties in respect of petroleum and natural gas are to be paid by the holder of a mining lease, it also provides that Union Govt. may exempt petroleum or natural gas produced from offshore areas from any royalty.53 This exemption allows for the Union Govt. to encourage exploration in these less accessible frontiers.

The effect of the Oilfields Act was discussed at length in Babhubhai Jasbhai where two members of the Gujarat Legislative Assembly challenged royalty to be paid to the State Government in terms of a notification issued under the Oilfields Act. The Gujarat High Court dismissed the challenge on the ground that only the Supreme Court could examine disputes between the Union Govt. and a State Government under Article 131 of the Constitution. However, the Gujarat High Court also examined the purpose of the Oilfields Act and explained the subject matter of the Oilfields Act as relating to regulation of matters set out in Entry 53. This would mean that even though oilfields are physically situated within a State in India, it is only the Union Govt. that can pass laws in respect of the same and

47. Satish Maganlal Vora v. Union of India & Ors. L.P.A. No. 692 of 2000, Babubhai Jashbhai Patel & Ors. v. Union of India & Ors. Special Civil application No. 2912 of 1982. See also Reliance Natural Resources Limited v. Reliance Industries Limited (2010) 7 SCC 1 for a discussion on ‘natural resources’.

48. Ibid.

49. State of West Bengal v. Union of India (1964) 1 SCR 371.

50. The Oilfields (Regulation and Development) Act, 1948 (53 of 1948), available at http://petroleum.nic.in/ordact.pdf (accessed on July 15, 2014)

51. Ibid

52. Ibid

53. Ibid



any dispute that a State chooses to raise in respect of an oilfield, it must do so with the Union Govt. only in the Supreme Court. In Satish Maganlal the Gujarat High Court had occasion to examine regulatory framework in relation to petroleum and petroleum products and in this background, the Gujarat High Court noted that the Oilfields Act empowers Union Govt. to pass laws for conservation and development of mineral oils. Further, Oilfields Act essentially regulates production aspect of petroleum.

B. Petroleum Act

The Petroleum Act regulates the import into India, transfers within, storage, production, refining and blending of petroleum. The Petroleum Act is one of the oldest legislation in the oil and gas sector. Prior to this law the rules regarding the above specified activities were separate for each of the individual States. The Petroleum Act brought in uniformity in this field.

The effect of Petroleum Act was explained in Satish Maganlal where the power of Union Govt. to regulate petroleum products was traced to Section 5 and Section 2(a) of the Petroleum Act. In this case, the Appellant claimed that a product ‘invented’ by him was in fact not petrol and consequently could not be regulated by Union Govt. However, it was established that the chemical component was essentially hydrocarbons as stated in Section 2(a) of the Petroleum Act54 and hence, by virtue of Section 5, Union Govt. could regulate any product that had characteristics of petroleum.

The effect of this ruling is the dominant role Petroleum Act plays in regulation of activities in relation to petroleum and petroleum products. Contrasting with Oilfields Act, it would be seen that while the latter deals with upstream activities, Petroleum Act deals substantially with midstream activities.

C. Petroleum Rules

The Petroleum Rules provide framework for grant of exploration licenses and mining leases. Some of the salient features of the Petroleum Rules are

(i) Prohibition on prospecting and mining except under a license or lease granted under the rules [Rule 4] (ii) Only Central Government has 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)]; (iii) State Government has power to grant license or lease over lands vested with it [Rule 5(ii)]; (iv) Person obtaining exploration license obtains exclusive right to a lease for producing (i.e. extracting) oil/gas over any part of area covered in license.

Petroleum Act and Petroleum Rules are often invoked together for the purpose of regulating the sale and distribution of petroleum and petroleum products.55 As explained in Municipal Corporation of Greater Bombay v. Bharat Petroleum Corporation Limited & Ors.,56 the scope of Petroleum Act was to consolidate and amend the law relating to import, transport, storage, production, refining and blending of petroleum. Although the transport and storage of petroleum and petroleum products relates to laws of the municipality where the petroleum is situated, in favor of uniform standards, the power to legislate in respect of petroleum and petroleum products was vested in the Union Govt. In exercise of the rule making powers under the Petroleum Act, Union Govt. framed the Petroleum Rules and along with the Petroleum Act, both were designed to regulate transport, distribution and storage of petroleum and petroleum products. Interestingly, the powers of the Union Govt. and State Govt. with respect to regulating petroleum and petroleum products was tested in Municipal Corporation57 and the Bombay High Court ruled that the power of Union Govt. to legislate on this subject would supersede the power of State Govt.

In the cases referenced above,58 the terms of grant of license and cancellation of license in the event of non-compliance of conditions of license was also examined. It is important to note that Union Govt. has the power to regulate petroleum products as the same are hazardous material and also since petroleum products are covered by Essential Commodities Act, 1955. Another important point to note is that rules and regulations are subordinate to the parent statute and hence, a rule or a regulation cannot enforce a standard more than

54. Any liquid hydrocarbon or mixture of hydrocarbons and any inflammable mixture (liquid, viscous or solid) containing any liquid hydrocarbon.

55. Satish Maganlal, supra note 48, Ravindra Singh Sando v. Bharat Petroleum Corporation Ltd. L.P.A. No. 392 of 1998 (High Court of Madhya Pradesh), Babu Filling Station v. The Divisional Retail Sales Manager Indian Oil Corporation, O.P. No. 585 of 2009 (High Court of Madras), Municipal Corpora-tion of Greater Bombay v. Bharat Petroleum Corporation Limited and Ors. Appeal No. 1114 of 1988 (High Court of Bombay).

56. Appeal No. 1114 of 1988 (High Court of Bombay).

57. Ibid

58. Supra Note 56.

Governing Bodies, Legislation and Regulatory Framework




what the statute mandates.59 This principle assumes significance in the context of interpretation and enforcement of provisions of statutes, rules and regulations.

D. Petroleum and Natural Gas Regulatory Board Act, 2006

The Petroleum and Natural Gas Regulatory Board Act, 2006 (“PNG Act”) was notified on April 3, 2006. The PNG Act provides for the setting up of the Regulatory Board 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 so as 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. The PNG Act provides for a legal framework for downstream gas sector regulation and development of natural gas pipelines and city or local gas distribution networks.

The Regulatory Board has certain functions under the PNG Act in terms of Section 11 in respect of the market and the various players in the O&NG market. The Regulatory Board is also conferred with powers under Section 12 to adjudicate disputes between entities engaged in activities set out in the PNG Act and to conduct inquiry into such entities as well. The powers of the Regulatory Board were challenged in a case where the Regulatory Board sought to authorize entities for laying, building and operating local gas distribution networks.60 The Delhi High Court ruled that Section 16 of the PNG Act had not been notified by the Union Govt. and hence, the Regulatory Board, could not exercise powers set out in Section 16. The court noted that the intent of the legislation was for the establishment of a multi-member regulatory board to regulate the refining, processing, storage, transportation, distribution, marketing and sale of petroleum and petroleum products. The objectives behind these functions were to protect the interests of the consumers and entities engaged in specified

activities relating to these products and to ensure proper supply throughout the country and to engender competition.

With regard to the functioning of the Chairman, the court noted that the PNG Act envisaged collective decision making process. While India’s vast body of law on administrative policy and executive decision making process recognize the principle of delegation of responsibilities, in the present case, the Chairman had sub-delegated his powers and this was held to be impermissible. The court noted that the Chairman, being a sub-delegate under the PNG Act would have to act in strict compliance with the PNG Act and its regulations.

Although this is a reiteration of the settled position of law in India61, it clarifies the scope of the powers of the Chairman and the Regulatory Board under the PNG Act. This ruling of the Delhi High Court was challenged by the Regulatory Board in the Supreme Court and while the appeal was pending, the Union Govt. notified Section 16, thus, empowering the Regulatory Board to take actions in terms of section 16.62

The power of the Regulatory Board to fix tariff in the gas market was challenged before the Delhi High Court.63 The Delhi High Court ruled that based on the provisions of the PNG Act, the Regulatory Board lacked the power to fix the price of gas to be sold in the market. This decision has been challenged in the Supreme Court64 and the same is pending in the Supreme Court. The next hearing is on August 12, 2014.

The PNG Act and the Regulatory Board are new creatures and it will be sometime before the extent of the law and the powers of the Regulatory Board are clarified. Another interesting facet of these laws is that in the tussle between specialized laws there is no clear test for resolving the tension as the Supreme Court is yet to adjudicate such a dispute.

E. NELP

NELP was formulated by the Union Govt. with Directorate General of Hydrocarbons (“DGH”) as the

59. Avinder Singh & Ors. v. State of Punjab (1979) 1 SCC 137.

60. Voice of India v. Union of India, W.P. (C) No. 8415 and Indraprastha Gas Ltd. v. Petrol and Natural Gas Regualtory Board & Anr. W.P. (C) No. 9022 of 2009.

61. Gwalior Rayon Silk Manufacturing (Weaving) Company Ltd. v. The Assistant Commission of Sales Tax & ORs. (1974) 4 SCC 98.

62. In 2013, by way of Order dated January 28, 2013, the appeal of the Regulatory Board was disposed of granting liberties to both parties to take recourse under law in case they were aggrieved by the actions of either party. Order of the Supreme Court available at http://courtnic.nic.in/supremecourt/temp/5408201012812013p.txt.

63. Indraprastha Gas Ltd. v. Petroleum and Natural Gas Regulatory Board and Anr. WP (C) No. 2034 of 2012.

64. Special Leave Petition (C) No. 22273 of 2012



nodal agency in 1997-98 to provide a level playing field to both public and private sector companies in E&P of hydrocarbons. DGH has been entrusted with the responsibility of implementation of NELP. It is important to note that NELP is not law by itself and is not passed in exercise of any rule-making powers. Further, in the recent past, transactions relating to gas-pricing65, acquisition of shares in O&NG companies66 among others have been challenged in public interest litigations (‘PIL’). These are petitions filed in the High Court of a State or Supreme Court challenging executive decisions of the Union Govt. Although NELPs are exposed to challenge, thus far, the policy of NELP itself has not been challenged and on the contrary, the Supreme Court has taken note of this change in policy and its salutary effects on harnessing the potential of the O&NG sector.67

NELP promotes investments in E&P Sector by facilitating allotment of exploration blocks through international competitive bidding. Since 1999 NELP has accelerated the pace of petroleum and natural gas exploration activities by providing a level playing field for all parties to compete for award of exploration acreage.68 National, private, and foreign companies compete on equal terms and conditions to secure PEL through bidding.69 To further promote E&P activities in particular, NELP allows for FDI up to 100 % in E&P activities. Over the past decade, more than 275 blocks70 allotted over nine bidding rounds, resulting in discovery of sixty-eight O&NG fields.71 Further, the Union Govt. is going to introduce NELP X, under which 86 blocks will be offered.72 73 One of the benefits of NELP was the seven year corporate tax holiday for the production of mineral oil, exemption from custom duty on imports required for petroleum operations, and biddable cost recovery up to 100%.74 However, the tax holiday is

not available in respect of O&NG blocks awarded post March 31, 2011. Although before Finance Act 2013, there were speculations that tax holidays will again be granted for E&P in O&NG blocks, in order to attract further investments75 but nothing was done to affect any changes. Even the Finance Bill 2014, has not made any announcements to this effect.

The successful bidder enters into a Production Sharing Contract (“PSC”) with the Union Govt. In terms of the PSC, the successful bidder is granted the requisite license under the Oilfield Act76 and Petroleum Rules77 for carrying out E&P activities, more particularly described in the Model Contract.78

F. Environmental Law

Under the PSC, Union Govt. and the contractor recognizing that petroleum operations cause some impact on the environment, have to conduct petroleum operations with due regard to concerns with respect to protection of the environment and conservation of natural resources and in particular:

i. employ modern oilfield and petroleum industry practices and standards including advanced techniques, practices and methods of operation for the prevention of environmental damage in conducting its petroleum operations;

ii. take necessary and adequate steps to:

a) prevent environmental damage and, where some adverse impact on the environment is unavoidable, to minimize such damage and the consequential effects thereof on property and people;

b) ensure adequate compensation for injury to

65. GAIL (India) Limited v. Gujarat State Petroleum Corporation Limited (2014) 1 SCC 329. See a similar case reported in http://articles.economictimes.indiatimes.com/2014-03-26/news/48595241_1_reliance-industries-ltd-cpi-mp-gurudas-dasgupta-kg-d-6.

66. Arun Kumar Agrawal v. Union of India and Ors. (2013) 7 SCC 1.

67. See for instance Reliance Natural Resources Limited v. Reliance Industries Limited (2010) 7 SCC 1 (paragraphs 81 and 111).

68. General Knowledge Today, New Exploration License Policy (NELP)-VIIII, (2009) http://www.gktoday.in/current-article-new-exploration-license-policy-nelp-viii (accessed on July 15, 2014)

69. Indian Energy Sector, NELP – New Exploration Licensing Policy, http://www.indianenergysector.com/oil-gas/nelp-new-exploration-licensing-policy (accessed on July 15, 2014)

70. An oil exploration block is a large area of land, typically in 1000s of sq. kilometers, that is awarded to oil drilling and exploration companies by a country’s government.

71. IBEF Oil & Gas, p.6

72. See, http://articles.economictimes.indiatimes.com/keyword/new-exploration-licensing-policy (accessed on July 15, 2014)

73. Source: http://www.thehindu.com/business/Economy/86-blocks-on-offer-in-round-ten-of-nelp/article5394325.ece (accessed on July 15, 2014)

74. Confederation of Indian Industry, Indian Hydrocarbon Industry – Policy Framework, http://www.cii.in/PolicyAdvocacyDetails.aspx?enc=fwDi/BDXuTpTb667OBcacl7dij+kpMfZ/NOhYDyHEVnPN6yCrBdE10uzYRkuydDF (accessed on July 15, 2014).

75. Budget 2013: Give tax holiday to oil & gas sector for exploration, demands FICCI, available at http://articles.economictimes.indiatimes.com/2013-02-28/news/37353005_1_definition-of-mineral-oil-holidays-for-other-sectors-tax-holiday

76. Section 6 of Oilfields Act (For details, see http://petroleum.nic.in/ordact.pdf )

77. Rule 5 of the Petroleum Rules (For details, see http://petroleum.nic.in/pngrules.pdf)

78. Source: http://petroleum.nic.in/nelp8a2.pdf (accessed on April 6, 2014).





persons or damage to property caused by the effect of petroleum operations; and

iii. comply with the requirements of applicable laws and the reasonable requirements of the Union Govt. from time to time.

iv. In case of failure to comply with the above steps; the contractor has to remedy the failure.79

Before commencing E&P, it is mandatory to conduct an Environmental Impact Assessment (“EIA”) for the project site, in accordance with the Environmental Impact Assessment Notification, 1994.80 Subsequently, a proposal has to be submitted to the Ministry of Environment and Forests (“MoEF”), Union Govt. outlining the details relating to the drilling activity, the co-ordinates of drilling, and EIA report along with public hearing report.

The first of the aforementioned studies has to be carried out in two parts, namely, a preliminary part which has to be concluded before commencement of any field work relating to a seismographic or other survey, and a final part relating to drilling in the exploration period. The part of the study relating to drilling operations in the exploration period has to be approved by Union Govt. before the commencement of drilling operations, and such approval is not generally unreasonably withheld.

The second of the aforementioned studies shall be completed before commencement of development operations and shall be submitted by the contractor as part of the development plan, with specific approval of Union Govt. being obtained before commencement of development operations, and such approval is not generally unreasonably withheld.

The MoEF subsequently approves the project if they are satisfied that all requirements are met.81

G. Competition Law

The PNG Act empowers the Regulatory Board under Section 11 to ‘protect the interest of consumers by fostering fair trade and competition…..’. However, the issue relating to unfair trade practices has also

come up before the Competition Commission of India (“Competition Commission constituted under the Competition Act, 2002 (“Competition Act”). Unlike the previous legislation, Monopolies and Restrictive Trade Practices Act, 1957, (“MRTP Act”), the Competition Act expressly makes the law applicable to State owned Enterprises (“SoE”). This issue came up for consideration early on in Reliance Industries Ltd. v. Indian Oil Corporation Limited & Ors.82 when the Competition Commission had to examine applicability of Competition Act to SoE. The Competition Commission emphatically and unequivocally upheld the applicability of the restrictions under the Competition Act to SoEs and PSUs in two subsequent decisions.83 As a result of the provisions of the Competition Act and the forward-looking approach of the Competition Commission, SoEs and PSUs can no longer thrive on legal monopoly and avoid healthy competition.

For instance, in O&NG sector, the NOCs hold about 86 % market share of India’s oil E&P, 77% of natural gas, 74% of oil refining capacity and 86% of marketing infrastructure.84 These NOCs do have an edge over new private sector entrants. Shell and RIL ventured into marketing of oil in a big way but had to close their oil distribution outlets due to absence of competitive neutrality between public sector and private sector in view of the subsidy (state aid) only to public sector oil companies. Appreciating these realities, law makers in India have placed an obligation on Competition Commission to examine such issues while determining dominance thereby bringing India’s competition law in line with international practice.

NOCs often incur huge losses on the sale of diesel, PDS kerosene and domestic LPG. The bailout package by the Union Govt. every year, going out of taxes paid by the public, have actually been subsidizing losses / inefficiency of these oil companies. On the contrary, private oil marketing companies do not have the luxury of being compensated for under-recoveries. Consequently, this has affected the entry/growth plans of private oil marketing companies as competing with NOCs is not viable under the present circumstances. Clearly, this has a direct impact on the incidence of investment by private oil marketing

79. See Model Production Sharing Agreement,

http://www.dghindia.org/pdf/MODEL%20PRODUCTION%20SHARING%20CONTRACT(MPSC).pdf. The details on specific compliance is listed in the Model PSC.

80. Environmental Impact Assessment is notified in exercise of the power conferred under Section 3 (c) of Environmental Protection Act, 1986.

81. See, http://www.iocl.com/download/Environmental_Clearance040512.pdf and http://www.ongcindia.com/wps/wcm/connect/2add4a8f-24bb-4587-a014-fbefc23ffc00/indara%231+EC.pdf?MOD=AJPERES&CACHEID=2add4a8f-24bb-4587-a014-fbefc23ffc00

82. Case No. 26 of 2010.

83. Suo moto case No. 03 of 2013 and Case No. 3 of 2012, Maharashtra State Power Generation Company Ltd. V. Mahanadi Coalfields Ltd.

84. Market Study Report “Competition in India’s Energy Sector” by TERI and available on the website of the CCI



companies, and throughout the entire oil value chain, and ultimately on greater market competition. In 2010 Reliance Industries brought an action against IOCL, BPCL, HPL and National Aviation Company Limited alleging that these companies (“Opposite Parties” in the complaint under Competition Act) were guilty of having violated the Competition Act.85 Reliance Industries contended that Opposite Parties were behaving like a cartel, enjoyed a dominant position in the market and was abusing their dominant status. The Opposite Parties however objected to the complaint on the ground that Reliance Industries had already filed a complaint with the Regulatory Board and the issues raised by Reliance Industries was to be adjudicated only by the Regulatory Board. The Competition Commission ruled on a preliminary point of jurisdiction holding that Competition Commission could entertain such a complaint even though Reliance Industries had already filed a complaint before the Regulatory Board. This order was challenged by the Opposite Parties in the Delhi High Court.86

As noted by the Opposite Parties, Reliance Industries had filed a case before the Regulatory Board in 2008 alleging restrictive and unfair trade practices adopted by the oil marketing companies.87 This case was dismissed in 2012 by the Regulatory Board on the ground that complainants before the Regulatory Board had failed to prove that the oil marketing companies had acted in an anti-competitive manner or obtained any pecuniary benefits.

In 2013, after the order of the Regulatory Board, Competition Commission issued notices to IOCL, HPCL and BPCL (“Opposite Parties” in the suo moto complaint case) to examine the issue of pricing.88 Here too, the Opposite Parties challenged Competition Commission’s jurisdiction on the ground that only the Regulatory Board had jurisdiction to examine the issue of pricing. Competition Commission by its order dated October 21, 2013 dismissed the objections of the Opposite Parties. This order too was challenged by the Opposite Parties in the Delhi High Court89 and the Delhi High Court by its order dated November 22, 2013 directed that both writ petitions be heard together. The next hearing is on August 26, 2014 and it is expected that the Delhi High Court would rule on issues relating to jurisdiction of Competition

Commission and the Regulatory Board.

The two cases from Competition Commission demonstrate that issues relating to anti-competitive practice, regulatory compliance under other laws are matters that O&NG companies will have to comply with under the respective legislations even though there are specific legislative measures relating to O&NG companies. In the cases before the Delhi High Court, the substantive issue relates to pricing and cartelization. While it is arguable that pricing is an issue within the exclusive jurisdiction of the Regulatory Board, an argument which is more likely to find favor with the Delhi High Court is that matters relating to anti-competitive practice, supply and distribution of goods and services and restrictions on entry into the market are matters that the Competition Commission will have to examine. Issues relating to regulatory conflict will ultimately have to be resolved by the Supreme Court and we can expect that in a few years the issue of regulatory conflict will ultimately be resolved by the Supreme Court. Until then, O&NG companies would have to ensure compliance with each of the individual regulatory requirements.

II. Regulation

In the hierarchy of laws, the Constitution is supreme. All laws are subordinate to the Constitution. A law may be struck down as being unconstitutional due to lack of legislative competence or because it violates fundamental rights.90 Decisions of the Union or State Executive, including decisions of statutory authorities, constitutional functionaries and quasi-judicial authorities may be challenged in a State High Court under the Constitution. Rules, regulations, notifications and circulars passed by authorities under the relevant statute may also be challenged on the ground that the same violate the Constitution.

The Constitution empowers, and the Supreme Court has recognized, authorities created under a statute to delegate certain functions to subordinate authorities.91 To facilitate in the effective implementation of government policies certain executive authorities have the power to pass rules

85. Reliance Industries v. Indian Oil Corporation Limited and Ors. Case No. 26 of 2010 decided on September 30, 2010.

86. W.P. No. 8211 of 2010.

87. Reliance Industries & Ors. v. IOCL & Ors. Complaint No. 4 of 2008.

88. Re: Fixing of petrol price by public sector Oil Marketing Companies, Suo Moto Case No. 03 of 2013.

89. W.P. No. 7303 of 2013.

90. I.R. Coelho v. State of Tamil Nadu (2007) 2 SCC 1.

91. See Gwalior Rayon Silk Manufacturing (Weaving) Company Ltd., supra note 61.





and regulations which have the force of law. These rules and regulations are subordinate to the parent law and cannot transgress the limits set out by the parent law. Rules and regulations cannot confer excessive discretion on subordinate authorities.

It is also settled law that authorities acting in furtherance of a statute must carry out their functions in a manner that best achieves the objectives of the statute. These principles are designed to reduce the scope of discretion and eliminate arbitrariness in executive action. Ordinarily, decisions of these authorities may be challenged in appeal before an appellate authority. However, in exceptional circumstances, where there is an egregious violation of fundamental rights, principles of natural justice or when an authority acts in violation of its jurisdiction, an aggrieved party may file a petition in the State High Court.

It is important to note that while challenging the decision of a statutory authority, generally the scope of appeal is limited and there is a high degree of deference by courts. The Supreme Court has recognized that in matters relating to economic policy, courts must not interfere unless arbitrariness is writ large in the decision making process. Even in cases where intervention of the court is justified, the court would only examine the decision making process and not the decision itself. These principles have been applied even in the context of gas price fixing and performance of contracts in the O&NG sector.92

Gas pricing is an issue that has cropped up several times before the courts as will be gathered from the litigious history of gas pricing. Although the Supreme Court unequivocally and emphatically set the boundary for itself with respect to judicial review, it has not prevented litigants from approaching the courts. In Oil & Natural Gas Commission & Anr. v. The Association of Natural Gas Consuming Industries of Gujarat and Ors,93 the Supreme Court upheld the right of ONGC to fix the price as per its discretion provided it was on ‘principle’ and not ‘caprice’. Supreme Court noted

that ‘exploration of oil is capital-intensive and money-consuming and the ONGC would be well justified in supplying gas to voluntary contractors at a price which several parties are willing to accept and which will enable the ONGC to build up a surplus to meet its manifold requirements.’ The principle laid down in this case was that considerable latitude was granted to ONGC to fix prices. However, this liberty has been called into question and the concerned entities will have to justify the faith reposed in them by the courts.94

A. Directorate General of Hydrocarbons

DGH was established under Regulation No.O-20013/2/92-ONG, D-III, Union Govt. Ministry of P&NG, dated 8th April, 1993.95 The DGH, under the administrative control of the Ministry of PNG, is responsible for the environmental, safety, technological, and economic activities related to the oil and gas industry. The DGH facilitates E&P activities through regulation as well as research. In unexplored or poorly explored areas, the DGH conducts studies, surveys, information drilling, and other related activities.96 The DGH reviews the exploration programs and reservoir production of companies for adequacy and advises the Union Govt. on such activities.97 Further, the DGH oversees matters concerning production sharing contracts for discovered field and exploration blocks. To ensure compliance with Ministry of Defence guidelines, DGH scientists remain onboard all of the seismic vessels and deep water drilling rigs during operation.98

B. Regulatory Board

As stated above, the Regulatory Board was established in 2006 in terms of Section 3 (2) of the PNG Act.99 The Regulatory Board is empowered to regulate the refining, processing, storage, transportation, distribution, marketing and sale of petroleum and petroleum products and natural gas, and to foster fair trade and competition amongst oil and gas companies.100 The Regulatory Board

92. Supra note 65 and 66 – see GAIL (India) Limited, Arun Kumar Agrawal and Gurudas Dasgupta & Anr. v. Union of India & Ors. WP (C) No. 513 of 2013.

93. (1990) Supp. 1 SCC 397.

94. Gurudas Gupta supra Note 93.

95. For details See http://www.dghindia.org/pdf/Resolution.pdf (accessed on March 20, 2014)

96. DGH—Functions and Responsibilities, Ministry of Petroleum & Natural Gas, Gov’t of India, available at http://dghindia.org/FunctionandResponsi-bility.aspx (accessed on July 15, 2014)

97. Ibid

98. Ibid

99. For details on power of the Board regarding complaints and resolution of disputes see Section 12 of the PNG Act

100. Ibid



registers entities to market petroleum and natural gas products, establish and operate liquefied natural gas terminals, and establish storage facilities for petroleum, petroleum products, or natural gas that exceed capacity specified by regulations. Further, the Board is responsible for authorizing pipeline development.

Unless otherwise provided for arbitration in the relevant agreement, the Regulatory Board has the power to adjudicate a dispute arising out of (a) refining, processing, storage, transportation and distribution of petroleum, petroleum products and natural gas by the entities; (b) marketing and sale of petroleum, petroleum products and natural gas including the quality of service and security of supply to the consumers by the entities; and (c) registration or authorization issued by the Regulatory Board under Section 15 or Section 19 of PNG Act.101

The Appellate Tribunal established under Section 110 of the Electricity Act, 2003 is the Appellate Tribunal for the purposes of PNG Act and the Appellate Tribunal exercises jurisdiction, powers and authority conferred on it by under the PNG Act.102 Further, under Section 37 of the PNG Act, an appeal shall lie against any order, not being an interlocutory order, of the Appellate Tribunal to the Supreme Court on one or more of the grounds specified in Section 100 of Civil Procedure Code (“CPC”). However, no appeal shall lie against any decision or order made by the Appellate Tribunal with the consent of the parties. The limitation for filing an appeal before Supreme Court is 90 days.

C. Oil Industry Development Board

Oil Industry Development Board (“OIDB”) was established through the Oil Industry (Development) Act of 1974 (“Oil Development Act”). This legislation was enacted in response to increasing international prices of crude oil since the 1970s.103 Accordingly, the Oil Development Act’s purpose was to facilitate increased self-reliance in petroleum and natural gas through various measures such as providing financial assistance to the organizations engaged in development programs of the oil industry.104 The OIDB renders assistance through “grant of loans for Projects, disbursement of grants for Research & Development programmes, refinancing of loans, and funding expenditure for scientific advisory committees, study groups, task forces, etc.”105

As per Section 26 of the Oil Development Act no court inferior to that of a metropolitan magistrate or a magistrate of the first class has the jurisdiction to try any offence punishable under Oil Development Act. Also, no prosecution for any offence punishable under the Oil Development Act shall be instituted except with the previous sanction of the Union Govt.106 Finally, no suit, prosecution or other legal proceeding shall lie against the Union Govt. or the Regulatory Board or any committee constituted by the Regulatory Board or any member of the Regulatory Board or of such committee or any officer or other employee of the Union Govt. or of the Regulatory Board or any agent of or any other person authorized by the Central Government or the Board, for anything which is in good faith done or intended to be done under Oil Development Act or the rules made thereunder.107

101. Section 24 of PNG Act

102. Section 30 of PNG Act

103. Oil Industry Development Board, About Us, http://oidb.gov.in/index1.asp?linkid=128 (accessed on July 15, 2014)

104. Ibid

105. Ibid

106. Section 27 of the Oil Industry (Development) Act, 1974

107. Section 28 of the Oil Industry (Development) Act, 1974





The current competitive environment and foreign investment opportunities within the O&NG market are key Indian economic and energy security concerns. In 1991, the Union Govt. instituted various policies to facilitate the influx of foreign capital and encourage entrepreneurs to invest in India.108 These policies included the deregulation and de-licensing of various petroleum products, simplification of the procedure to obtain industrial licenses, freedom to form joint venture companies, and allowance of 100% FDI in multiple segments of the oil and gas sector.109

According to the Ministry of Commerce and Industry’s 2013 consolidated FDI policy, 100% FDI is allowed under the automatic route for E&P, infrastructure related to marketing of O&NG, marketing of natural gas and petroleum products, petroleum product pipelines, natural gas pipelines, liquefied natural gas regasification infrastructure, market study and formulation and petroleum refining in the private sector (all subject to the existing sector policy and regulatory framework).110To allow 100 % FDI under an “automatic route” means that foreign companies are not required to obtain prior approval for investment

from either the Union Govt. or the Reserve Bank of India (“RBI”) (however, certain documents must still be filed with the RBI). For proposals on FDI that do not qualify under the automatic route, the Foreign Investment Promotion Board (“FIPB”), a government body offers a single window clearance.111 Under this policy, “government approval”112 route, up to 49% FDI is permitted in petroleum refining by PSUs without any disinvestment or dilution of domestic equity in the existing PSUs.113 From 2000-11, India’s O&NG sector attracted FDI worth US$ 3,152 million.”114

The O&NG industry is currently dominated by the Union Govt. PSUs.115 In PSUs, 51% or more of the paid up share capital is owned by Union Govt. or the various state governments.116 Leading PSUs in the Indian O&NG industry include ONGC (74% State owned), OIL (98.1% State owned), IOCL (89% State owned), Gas Authority of India (57% State owned),BPCL (66% State owned), and HPCL (51% State owned).117 ONGC accounts for approximately 67% of oil and gas production, while IOC and its subsidiaries control the largest market share in petroleum products.118

4. Foreign Investment Opportunities and Market Status

108. Ministry of Petroleum and Natural Gas, Introduction, http://petroleum.nic.in/appintr.htm (accessed on July 15, 2014)

109. India Brand Equity Foundation, Oil and Gas Industry in India (June 2013), http://www.ibef.org/industry/oil-gas-india.aspx (accessed on July 15, 2014).

110. Ministry of Commerce and Industry, Consolidated FDI Policy (Effective 05 Apr 2013), available at http://www.dipp.nic.in/English/Policies/FDI_Cir-cular_01_2013.pdf (accessed on July 15, 2014)

111. Register in India, Automatic route of RBI, http://www.registerinindia.com/automatic-route-of-RBI.html (accessed on July 15, 2014).

112. Register in India, Approval Route of Government, http://www.registerinindia.com/approval-route-of-government.html (accessed on July 15, 2014).

113. Ministry of Oil and Natural Gas, Information revised FDI Policy, available at http://petroleum.nic.in/fdi.pdf.

114. IBEF Oil & Gas, p.6 (citing Invest in India – Oil and Gas Sector).


116. Public Sector Undertakings in India, http://www.india.gov.in/spotlight/public-sector-undertakings-india (accessed on July 15, 2014).


118. Ibid



I. Overview

As stated earlier the fiscal framework of a country determines to a great extent the volume of investment from private and foreign players in the upstream sector. Since 1997 NELP has been at the cornerstone of India’s upstream fiscal system. The pre NELP fiscal regime was not perceived as very investor friendly. This prompted the Union Govt. to take a liberal approach and significantly revise the rates on royalty, tax and duties. The Union Govt. has started the practice of preparing a “Petroleum Tax Guide” for every new bidding round. This guide consolidates all the relevant laws dealing with income tax, customs duty, central excise, cess, royalties and license/lease fees thereby giving some clarity to bidders vis-a-vis the fiscal framework. The key parameter that determines whether the fiscal system is flexible or rigid is the “Contractor’s take”. The process of calculating the contractor’s take and Union Govt.’s take gives an understanding of a country’s fiscal system. As NELP-VII, VIII and NELP IX (bidding rounds) did not generate enthusiasm as expected; there may be a need to relook the fiscal framework of the upstream business in India.

II. Salient Features of NELP

A. Level Playing Field

There is no mandatory state participation through ONGC/OIL nor is there any carried interest of the State. ONGC and OIL compete for obtaining PEL on a competitive basis instead of the earlier system of granting them on nomination basis. At the same time, ONGC and OIL also get the same fiscal and contractual terms available to private companies. Open availability of exploration acreages provides continuous window of opportunities to oil companies. The acreages are demarcated on a grid system and pending preparation of grid, blocks are carved out for offer. Accordingly, companies are free to choose and propose acreages.

B. Royalty Rates

Under NELP, a royalty payment for crude oil is at the rate of 12.5% for the onshore areas and 10% for offshore areas and 10% royalty on natural gas both for onshore and offshore. Half the royalty from the offshore area is credited to a hydrocarbon development fund to promote and fund exploration related activities such as acquisition of global data on poorly explored basins, promotion of investment opportunities in the upstream sector, institution building, etc. In order to encourage exploration in deep water and frontier areas, royalty is charged at half the prevailing rate for normal offshore area for deep water areas beyond 400 metres bathymetry119 for the first seven years after commencement of commercial production. It is important to note that royalty is cost recoverable.120

C. Cost Recovery

The contractor is allowed full cost recovery (i.e. 100%) out of the percentage of the total value of petroleum produced from the contract area.121 Costs that the contractor is allowed to set off include exploration, development and production costs and royalty as well. It is important to note that 100% cost recovery does not mean that the contractor is allowed to recover all cost associated with petroleum operations. Cost recovery is a biddable component, i.e. while allotting acreages the contractor has to give an estimate of the exploration costs that they will incur.

D. Customs Duty

Several concessions or exemptions have been provided for import of goods for specified contracts for exploration, development and production of petroleum goods. Further, concessions or exemptions have been provided for the import of crude oil and other petroleum products. Also, import of certain petroleum products also attracts other customs duties, in addition to the duties listed above, such as additional duty on import of motor spirit and

5. Fiscal Framework for Upstream Sector in India

119. The term bathymetry is defined as the depth of water relative to sea level.

120. See Article 17 Model NELP PSC.

121. See Article 15 Model NELP PSC.




high-speed diesel, and national calamity contingent duty on import of crude oil.

E. Excise Duty and Cess

No excise duty or cess is levied on production of petroleum under PSCs including extracting of crude oil.

III. Process Under NELP

A. Step One

The Union Govt. identifies exploration blocks to be offered under the NELP

B. Step Two

The Union Govt. issues a notice inviting offers for exploration of O&NG under NELP. The blocks are described accordingly and include on land blocks which are of Type S blocks, shallow water blocks and deep-water blocks (beyond 400 metre bathymetry122). Companies are allowed to bid for one or more blocks, singly or in association with other companies, through an unincorporated or incorporated venture.

C. Step Three

There are certain items that the contractors are required to bid for:

i. Work programme commitment.

ii. Percentage of value of annual production sought to be allocated towards cost recovery.

iii. Profit petroleum share offered to Union Govt. at the lowest tranche (less than or equal to 1.500) and the highest tranche (3.500 and above) of Pre-Tax Investment Multiple (“PTIM”).

D. Step Four

Bidders are required to furnish bid bond at the time of submission of the bid, for each block, which is valid for one year period. The bid bond is released on signing of PSC for the block. If the PSC is not signed within 90 days after the award of the block, the bid bond is forfeited. The following amount is taken as bid bond:

i. Deepwater block Rs. 2.0 million

ii. Shallow water block Rs. 1.5 million

iii. Onland block Rs. 1 million

iv. Onland Type S block Rs. 5 million123

E. Step Five

Qualification of Bid

i. Payment of tender fees, by bidding company or any member of the consortium, by way of purchase of the requisite data package of the block to be bid as the case may be, on or before bid closing date.

ii. The bidder must be a company singly or in association with other companies, through an unincorporated or incorporated venture.

iii. Technical capability of the proposed operator.

iv. Financial capability of the bidding company/consortium - The annual report including the audited annual accounts for the latest completed year and a certificate of net worth from company’s statutory auditor(s) based on the latest audited annual accounts certifying the net worth of the bidding company should be submitted. In case the parent company provides financial and performance guarantee, the annual report, annual accounts and net worth certificate in respect of parent company should be submitted and the financial capability of the parent company shall be considered for evaluating the financial capability of a bidding company.

122. The term “bathymetry” originally referred to the ocean’s depth relative to sea level, although it has come to mean “submarine topography,” or the depths and shapes of underwater terrain. [Source: http://oceanservice.noaa.gov/facts/bathymetry.html]

123. The bid bond amounts are based on figures disclosed in NELP IX.



v. Work programme.

vi. Fiscal Package

F. Step Six

Evaluation of bid and Rejection criteria

The Ministry of PNG has the sole discretion either to accept or reject the bids. The bids are submitted to the DGH124 who prepares a report and gives its recommendation to Ministry of PNG for final decision.125 However, the Union Govt. is not bound by these recommendations and its decision is final. Bids are evaluated on technical capability of the proposed operator, work programme and fiscal package. With regard to the fiscal criteria, the bidder is evaluated on the basis of bid cost recovery percentage and offered profit share to Union Govt. The bidder offering highest Union Govt. share in profit petroleum will get maximum points and other bidders will get points proportionately. Similarly the bidder who submits the lowest cost recovery bid will get maximum points.

G. Step Seven

The Union Govt. enters into a PSC with the successful bidder in respect of each block offered, which is based on the Model Production Sharing Contract (“MPSC”).126

H. Step Eight

Other Procedures such a clearance from various departments.

i. Clearance from Ministry of Defence, Union Govt. -

As per the existing procedure, all foreign vessels, drilling rigs, barges, platforms, supply vessels, etc. engaged in E&P activities in India are required to obtain security clearance from Ministry of Defence (Integrated Headquarters of Ministry of Defence -

Navy) and the applications are submitted to DGH for obtaining approval from Ministry of Defence on behalf of operator.127

ii. Clearance from MoEF

Two EIA has to be carried out (a) to determine at the time of the studies the prevailing situation relating to the environment, human beings and local communities, the flora and fauna in the contract area and in the adjoining or neighbouring areas; and (b) to establish the likely effect on the environment, human beings and local communities, the flora and fauna in the contract area and in the adjoining or neighbouring areas in consequence of the relevant exploration period of petroleum operations to be conducted under the PSC, and to submit, for consideration by the parties, methods and measures for minimizing environmental damage and carrying out site restoration activities.

IV. NELP Bidding Rounds

A. Beginnings: NELP-I

Since its inception 277 PSC’s have been signed and 210 are under operation under the NELP regime.128 Under NELP-I a total of 48 blocks were offered of which 27 received bids. RIL emerged as the largest private sector bidder for oil exploration blocks followed by ONGC.129 RIL̀s bids were for blocks in the Mumbai offshore region, Kerala-Konkan basin, Kutch, North Eastern Coast, and the Krishna Godavari basin. Cairn Energy emerged as the second largest private player putting in bids for three blocks in the Krishna-Godavari basin. The first round was significant on two aspects - first, it marked the consolidated entry of the private sector both domestic and foreign into the area, second the reaction for the blocks showed that the policy had still some way to go before it could attract world oil majors to explore in India.

124. The DGH comes under the administrative control of the Ministry of Petroleum & Natural Gas (MOPNG). Objectives of DGH are to promote sound management of the oil and natural gas resources having a balanced regard for environment, safety, technological and economic aspects of the petroleum activity. DGH has been entrusted with several responsibilities like implementation of NELP, matters concerning the PSCs for discovered fields and exploration blocks, promotion of investment in E&P Sector and monitoring of E&P activities including review of reservoir performance of producing fields.

125. Source: http://www.dghindia.org/InternalGovernance.aspx?tab=0 (accessed on July 17, 2014).

126. See, Model Production Sharing Contract (MPSC), available at http://www.dghindia.org/pdf/MODEL%20PRODUCTION%20SHARING%20CONTRACT(MPSC).pdf (accessed on July 15, 2013).

127. Source: http://www.dghindia.org/Clearances.aspx?tab=1 (accessed on July 15, 2014)

128. Source http://www.dghindia.org/pdf/1DGH%20Annual%20Report%202011-12.pdf, (accessed on July 15, 2014)

129. Reliance acquired 12 blocks while ONGC captured 5 blocks.

Fiscal Framework for Upstream Sector in India




B. Major Discoveries Under NELP

The highlights of the NELP regime have been the discoveries made at the Krishna-Godavari deep water blocks of the Andhra Pradesh coast by RIL in 2002. This block (also called KG-DWN-98/3/ or KG-D6 block) was awarded to RIL in 2000 under NELP-I. The KG-D6 block was said to be the world’s largest gas discovery for 2002. It is among the world’s largest and most complex deep-water gas production facility and has the potential of transforming India’s energy landscape. Presently, RIL is producing approximately 60 Million Metric Standard Cubic Meters per day (MMSCMD) of gas which is being supplied to several priority sectors identified by the Union Govt. under its gas utilization policy. Since production commenced in April 2009, the field has produced over 14.5 billion cubic metres of gas, contributing significantly to the country’s critical industrial sectors.

Another major oil discovery was made in the Mangla region of the State of Rajasthan. Mangla is located in the Barmer basin and consists of 16 separate O&NG fields. This block (also called RJ-ON-90-1) was first awarded to the Shell Group in 1992. Later in 2002 Cairn India purchased this block from Shell. In January 2004, 3.7 BOE was found in Mangala thereby making it 2004’s biggest discovery of on-shore oil in the world. This discovery has been hailed as a historic event and promises to alleviate India’s O&NG woes.

C. NELP VII and VIII

Under NELP VII, 57 blocks were offered out of which 45 blocks received bids from the participants. A total of 181 bids were received for these blocks. NELP-VII attracted more domestic players than foreign players with the exception of British Petroleum. The round netted US $1.49 bn in investment committed to exploration expenses. Finally a total of 41 PSC were signed with the Union Govt.

Under NELP-VIII while 70 blocks were offered for bidding, only 36 blocks received bids. Almost 50% of the blocks went to ONGC thereby reaffirming their status as the premier company in O&NG exploration. RIL abstained from bidding under this round and the reception from the private and foreign players didn’t match expectations. BHP Billiton, BG India and Cairn India were among the few foreign players who were awarded acreages.

D. NELP IX and X

A total of 33 exploration blocks were offered during the bidding process. ONGC bagged 10 of the 33 oil and gas exploration blocks, OIL bid for as many as 29 blocks and managed to get 10. RIL bid for two deep-sea blocks in the Andaman Basin in the Bay of Bengal and four onshore blocks in Rajasthan and Gujarat.

A total 46 blocks (17 Onland, 15 Shallow water and 14 deep water blocks) are being offered under tenth round of NELP-X in 26 prospective sedimentary basins of India for exploration of oil and natural gas, covering a total area of 3.14 million Square Km.130

V. Taxes

A. Corporate Income Tax

Resident companies are taxed at the rate of 32.44% (rates mentioned herein are the maximum effective rates inclusive of applicable surcharge and education cess) and non-resident companies are taxed at the rate of 42.02% on net taxable income. While residents are taxed on their worldwide income, non-residents are only taxed on income arising from sources in India. A company is said to be resident in India if it is incorporated in India or is wholly controlled and managed in India. A minimum alternative tax is payable at the rate of around 20% (18.5% plus surcharge and education cess).

Non-residents in the business of supplying plant, machinery, facilities or services in connection with prospecting or extraction of mineral oils are subject to a presumptive tax regime, wherein taxable profits are deemed to be 10% (plus surcharge and education cess) of the gross revenues.

A number of special allowances and incentives have been provided which are relevant to the oil and gas industry in India:

￭ With respect to exploration and production activities, a special allowance may be claimed in relation to infructuous or abortive exploration expenses, drilling or exploration activities, and depletion of mineral oil in the mining area (subject to the terms of the agreement with the Government).

￭ An allowance may be claimed with respect to capital expenditure incurred in laying and operating a cross-country natural gas, crude or

130. For details, see http://www.dghindia.org/admin/Document/Topstory/13.pdf



petroleum oil pipeline network for distribution, including storage facilities.

￭ A special allowance of up to 30% (15% each for 2013 and 2014) may be claimed with respect to cost of a new plant or machinery (where the cost exceeds INR 1 billion) acquired and installed between March 31, 2013 and April 1, 2015.

￭ With effect from April 1, 2014 income earned by a foreign company from sale of crude oil to any person in India is exempt from income tax if the income is earned in Indian currency, the agreement is entered into or approved by the Central Government, the agreement and foreign company is specifically notified by the Central Government and the foreign company does not have any other activity in India.

￭ Accelerated depreciation at the rate of 60% is available for plant (with a few exceptions) used by mineral oil concerns. New machinery or plant acquired or installed after March 31, 2005 may be subject to additional depreciation of 20%.

￭ A 7 year tax holiday is available for undertakings engaged in commercial production of mineral oils or refining of mineral oils. This is not available for concessions awarded after March 31, 2011 (or March 31, 2012 with respect to refining of mineral oils).

￭ Business losses can be carried forward for a period of 8 years, subject to a 51% continuity of ownership test.

B. Dividends

Dividends distributed by Indian companies are subject to a dividend distribution tax (“DDT”) at the rate of 16.22%, payable by the company. However, no further Indian taxes are payable by the shareholders on such dividend income once dividend distribution tax is paid. An Indian company would also be taxed at the rate of 21.63% on gains arising to shareholders from distributions made in the course of buy-back or redemption of shares.

C. Capital Gains

Tax on capital gains depends on the period of holding of a capital asset. Short term gains may arise if the asset is held for a period lesser than 3 years (or 1 year for securities). Long term gains may arise if the asset is held for a period more than 3 years (or 1 year for securities). Long term capital gains earned by a non-resident on sale of unlisted securities may be taxed at the rate of 10.5% or 21% depending on

certain considerations. Long term gains on sale of listed securities on a stock exchange are exempt, and only subject to a securities transaction tax (“STT”). Short term gains earned by a non-resident on sale of listed securities (subject to STT) is taxable at the rate of 15.76%, or at ordinary corporate tax rate with respect to other securities. India has recently introduced a rule to tax non-residents on the transfer of foreign securities the value of which are substantially (directly or indirectly) derived from assets situated in India.

D. Withholding Taxes

Tax would have to be withheld at the applicable rate on all payments made to a non-resident, which are taxable in India. The obligation to withhold tax applies to both residents and non-residents. Withholding tax obligations also arise with respect to specific payments made to residents. Failure to withhold tax could result in tax, interest and penal consequences.

E. Double Tax Avoidance Treaties

India has entered into more than 80 treaties for avoidance of double taxation. A taxpayer may be taxed either under domestic law provisions or the tax treaty to the extent it is more beneficial. A non-resident claiming treaty relief would be required to file tax returns and furnish a tax residency certificate issued by the tax authority in its home country. Certain tax treaties such as the treaties with Mauritius, Singapore, and Netherlands provide significant relief against Indian withholding tax on capital gains and interest income in specific circumstances.

F. Anti-Avoidance

A number of specific anti-avoidance rules are enforced in India. Cross-border transactions between related parties would be viewed for tax purposes on an arm’s length basis. Transfer pricing rules apply to certain domestic transactions as well. India does not have any thin capitalization rules at the moment. However, effective from April 1, 2015 wide general anti avoidance rules (“GAAR”) shall be implemented to tax or disregard certain ‘impermissible avoidance arrangements’ that are abusive or lack commercial substance. GAAR is likely to impact some of the conventional tax optimization structures for India.

Fiscal Framework for Upstream Sector in India




G. Indirect Taxes

Indirect taxes are imposed at the federal and state level. This includes service tax, customs and excise duty, value added tax (“VAT”) and central sales tax. Service tax is payable by the service provider at the rate of 12.36% on all services except for services specified in a negative list. Services provided outside the taxable territory of India is not subject to service tax. The rate of customs, excise duty and VAT varies depending on the product. Certain petroleum products may be subject to additional duties. India is in the process of introducing a goods and services

tax (“GST”) to consolidate and harmonize all indirect taxes on a value added basis. The implementation of GST will require the cooperation of the central and state governments, which is still awaited.



The Union Govt. constituted the Rangarajan Committee under the chairpersonship of Dr. C. Rangarajan, Chairman, Economic Advisory Council to the then Prime Minister of India Mr. Manhoman Singh, to look into the PSC mechanism in petroleum industry. The Rangarajan Committee has recommended scrapping the cost recovery model, and shifting to post-royalty-payment revenue-sharing (without setting off any costs). Also, the Rangarajan Committee suggested that revenue share be determined by competitive bidding for future PSCs. The Rangarajan Committee further suggested taking trailing 12-month average of:

i. volume-weighted net-back pricing at well-head for gas producers and

ii. volume weighted price of US’s Henry Hub, UK’s NBP and Japan’s JCC linked price, while determining the basis/formula for domestically produced gas.131

The CCEA has agreed upon the gas price formula suggested by the Rangarajan Committee. It was proposed to come into effect from April 2014 and with an expectation to offer the explorers nearly double the price for natural gas than what it is at present.132 However, on June 23, 2014, CCEA deferred the gas price hike by three months, and has said that it would have further consultation with all stakeholders. Further, on July 1, 2014 the Ministry of P&NG has passed a note to the Union Cabinet demanding a fresh formula.133

6. Report of the Committee on the Production Sharing Contract Mechanism in Petroleum Industry, 2012 (“Rangarajan Committee”)

131. Source: http://eac.gov.in/reports/rep_psc0201.pdf (accessed on July 15, 2014)

132. Source: http://www.ibef.org/industry/oil-gas-india.aspx (accessed on July 15, 2014)

133. Source: http://www.dnaindia.com/money/report-oil-ministry-wants-fresh-formula-for-gas-price-1999453 (accessed on July 16, 2014)




Shale gas is natural gas produced from shale, a type of sedimentary rock. It is commonly said that the exploration and production of shale gas in the United States has been a game changer, making the country self-sufficient in natural gas over the last few years. This has created considerable excitement globally, particularly in Europe. Similarly, India has been looking at exploring shale gas domestically to fill in the supply–demand gap. In the United States, RIL has made big investments (US$ 3.5 billion) in the Marcellus and Eagle Ford shales through joint ventures with Chevron, Carrizo, and Pioneer.134

Recently, India has approved a policy that allows exploration and exploitation of unconventional

shale gas and oil on licenses that have already been awarded for conventional efforts. The proposal by the Ministry of PNG was approved by the CCEA. The policy will allow companies to apply for shale gas and oil rights in their PEL and petroleum mining lease. Companies will be permitted three assessment phases, each with a maximum period of 3 years. Royalties and taxes would be the same as for conventional production in a particular area. In the first phase, the Union Govt. has restricted shale exploration to state-run ONGC and OIL in the blocks awarded to them on a nomination basis before the advent of NELP in 1997.

7. Policy Guidelines for Exploration and Exploitation of Shale Gas

134. “Shale Gas in India: Look before you Leap”, The Energy and Resources Institute, available at http://www.teriin.org/policybrief/docs/Shale_gas.pdf (accessed on July 15, 2014).



Open Acreage Licensing Policy (“OALP”) has been long due. Since 2009, there have been speculations that open licensing for exploration and production rights will come into force replacing the existing NELP regime. As on date there have been nine NELP rounds since 1999. NELP is often criticized for its failure to attract widespread participation by large international oil and gas operators, in particular NELP VIII and IX. In response to the criticism, the

Union Govt. has begun work on OALP. Accordingly, DGH has started work on a national data repository as a prerequisite of formulating the OALP. Here, companies would get the freedom to select any block on offer any time, compared to the existing NELP, where the government puts a particular area up for bidding. Canada and the UK are among the countries that offer acreage for E&P on an open basis.

8. Open Acreage Licensing Policy




Litigation in the O&NG sector is generally governed by rules of the relevant PSU which is awarding a contract or in the form of representations before an authority under the Ministry of PNG. Contracts with PSUs generally have an arbitration clause. However, before initiation of arbitration, there are generally provisions for mediation and conciliation before the dispute resolution mechanism is invoked.

I. Arbitration

PSCs have an arbitration clause and disputes arising out of PSCs are settled by arbitration. In Union of India v. Reliance Industries,135 the partial award passed by the Arbitral Tribunal was challenged under Section 34 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) by Union Govt. on the ground that subject-matter of the arbitration comprising of payment of royalty, cess, service tax and audit issues involved questions of public policy and therefore are non-arbitrable. The matter highlights that significant issues including arbitrability of claims pertaining to tax and audit would clearly be in violation of public trust doctrine and the constitutional mandate.

The Delhi High Court held that questions of arbitrability of claims cannot be tested only as per the applicable law of arbitration or lex arbitri136 but needs to be analysed in accordance with the public policy and intention of parties governed as per laws of the country to which it has the closest connection. The ruling clarified that clauses of the agreement need to be read in a holistic manner to discern intention of parties and whether exclusion of Indian laws done for the purpose of governing arbitration could be extended if subject matter of the arbitration is non arbitrable. It is in this context that the Delhi High Court rejected the objections on lack of jurisdiction due to express choice of law provisions. The matter was appealed in the Supreme Court by way of Special Leave Petition and on May 28, 2014, the Supreme Court held that Section 34 Petition filed in Delhi High Court was not maintainable. Supreme

Court held that when a final award is made against the respondent, the enforceability of the same in India can be resisted on the ground of Public Policy. Supreme Court opined that the conclusion of the Delhi High Court that in the event, the award is sought to be enforced outside India, it would leave the Indian party remediless is without any basis as the parties have consensually provided that the arbitration agreement will be governed by the English law.

Recently, the Supreme Court after hearing the arguments of RIL for the appointment of a foreign tribunal chair to preside over a dispute concerning cost recovery at the two gas fields off the coast of Andhra Pradesh, against Union Govt., has appointed an arbitrator to adjudicate the dispute. In this arbitration, RIL claimed that its PSC with Union Govt. entitled it to recover fully the cost of developing the two fields before sharing profits, and the PSC contained no provisions for the Union Govt. to restrict cost recovery. The Indian oil company has a 60% interest in the two fields, Niko has a 10% stake and BP has a 30% stake. The parties had approached the Supreme Court because the two party nominated arbitrator had failed to appoint the chair.137

Contractual claims form a substantial part of arbitration claims in the context of O&NG sector. These may be claims by or against O&NG companies including NOCs. It is important to note that in respect of a domestic arbitration SOEs typically provide for a technical person as the authority to who claims are to be referred. In such cases, in the event of a dispute relating to claims, if mediation / negotiation fails, parties will have to refer their claims to an officer / employee of the NOC. Such a clause which provides for an employee of one of the parties to be the arbitrator has been upheld on the ground that it is reasonable and does not violate any principle of natural justice (rule of bias).138 Further, even if there is a delay in appointment of an arbitrator pursuant to invocation of such a clause, the courts may be reluctant to appoint an arbitrator in view of the agreed upon dispute resolution mechanism.139 It is only when there is a refusal or

9. Dispute Resolution

135. 199(2013)DLT469

136. Law governing the seat of arbitration.

137. Alipak Banerjee, M S Ananth & Vyapak Desai, Supreme Court of India considers independence and impartiality in appointment of an arbitrator”, available at http://www.nishithdesai.com/information/research-and-articles/nda-hotline/nda-hotline-single-view/article/supreme-court-of-india-considers-independence-and-impartiality-in-appointment-of-an-arbitrator.html?no_cache=1&cHash=1488b1e940c05fab32dc6351cf81c01d

138. Indian Oil Corporation Limited v. Raja Transport (P) Ltd. (2009) 8 SCC 520.

139. Ace Pipeline Contracts Private Limited v. Bharat Petroleum Corporation Limited (2007) 5 SCC 304



unjustified delay in appointment of an arbitrator that the court will exercise jurisdiction under Section 11 of the Arbitration Act.

II. Litigation

Apart from initiating arbitration against a PSU, another right exercised by companies in the O&NG sector is the right to approach the state High Court under the Constitution seeking extraordinary remedies in the nature of writs. Historically, a writ is a relief by which a court can restrain the government from taking any action, or it can set aside any action taken by the government or provide directions. In the O&NG sector, at the stage of tender, an aggrieved party can approach the High Court and challenge the process of tender if the process adopted was arbitrary or if the grant of the tender in favor of another party was arbitrary.

In recent times, the Supreme Court and High Courts have also examined policies relating to FDI, liberalization and privatization. Although the courts have shown an inclination to examine issues relating to policy, they have generally adopted a “hands-off” approach, unless there is a serious allegation of fraud or arbitrariness in the decision making process. In this context, recently, with respect to spectrum wavelength, mines and minerals and other natural resources, the Supreme Court has held these to be resources that belong to India.140 Consequently, a challenge to an executive decision relating to such

resources would always be open to examination on the ground that the decision affects ‘public policy’ of India.

As stated above, even in the context of gas pricing, in the past, the Supreme Court and the Delhi High Court have refused to intervene in policy matters. However, as the Gurudas case cited above141 demonstrates, where petitioners have been able to demonstrate a degree of arbitrariness in the policy matters, courts have shown a willingness to exercise jurisdiction. The rationale for such intervention is the Supreme Court’s recognition of the fact that142:

“…..the people of the entire country have a stake in natural gas and its benefit has to be shared by the whole country.”

This observation was in the context of water and other natural resources. However, this principle has since been applied to mines, minerals and pertinently, O&NG.143

140. Reliance Natural Resources, supra note 48; Centre for Public Interest Litigation and Ors. v. Union of India (UOI) and Ors, AIR 2013 SC 3725

141. Supra note 93.

142. In Re: Special Reference No.1 of 2011 (2004) 4 SCC 489.

143. Reliance Natural Resources, supra note 48.

Dispute Resolution




From a commercial and business perspective, India’s O&NG sector is a promising one as there is huge untapped potential basin while many large blocks offshore are unexplored. NELP has changed the E&P scenario in India for the better. A comparison with the pre-NELP rounds in itself would sustain this statement. Moreover NELP regime heralded the entry of the big players of O&NG industry such as British Petroleum and RIL. Also with relaxation in FDI norms, allowing 100% FDI under the automatic route for E&P, infrastructure related to marketing of O&NG, marketing of natural gas and petroleum products, petroleum product pipelines, natural gas pipelines, liquefied natural gas regasification infrastructure, market study and formulation and petroleum refining in the private sector, is certainly a welcome step as it would encourage future investments in near future. Further, the new Shale gas policy initiative is commendable and hopefully private players will be allowed to participate in this segment as well, in future. Recently, in Budget 2014-2015, Union Govt. has proposed an additional 15,000 km of gas pipelines using appropriate PPP models in order to complete the gas grid and to help in reducing dependence on any one energy sources. Finally, the Report of the Rangarajan Committee which proposed scrapping the cost recovery model, and shifting to post-royalty-payment revenue-sharing (without setting off any costs) is a good move. However, recently CECA deferred the gas price hike by three months, and has said that it would have further consultation with all stakeholders. Hopefully, the Union Govt. will take notice of the recommendations and bring suitable changes in the existing policy framework.

It is important to note that even from pricing perspective, the Supreme Court has recognized that companies engaged in activities such as exploration, mining and harnessing resources, can

reasonably expect fair compensation.144 Additionally, the Supreme Court and even the Competition Commission have recognized importance of freedom of contract subject to certain reasonable caveats.145 Such caveats are that pricing mechanisms would have to be within the limits of the statutory provisions and statutory contracts and any variation cannot be arbitrary.146 The regulatory framework in respect of O&NG is relatively nascent and the length and breadth of the law has not been fully tested. However, the Supreme Court has recognized that in policy matters which affect foreign investment, it is imperative that there be uniformity, consistency and predictability in application of laws.147 Therefore, ventures in O&NG certainly promise to be lucrative and exciting.

In the final analysis, it must be noted that from an economical and financial perspective, investment in O&NG is lucrative with substantial prospects in India. The elaborate regulatory framework and the participative nature of framing policies also ensure that all stakeholders are duly represented when O&NG policy is framed. Given the growing demand for crude oil in India and its wide application in household and industrial activities, it would be seen that demand for this investment is not likely to decline in India. While the Union Govt. resolves teething issues in the O&NG sector, the landscape in the O&NG sector promises to be dynamic with scope for growth for business entities and development of the sector.

Alipak Banerjee, M S Ananth, Vivek Kathpalia

For any queries feel free to write to [email protected]

10. Conclusion

144. Oil & Natural Gas Commission & Anr. v. The Association of Natural Gas Consuming Industries of Gujarat and Ors. (1990) Supp. 1 SCC 397

145. Reliance Natural Resources, supra note 48

146. Reliance Natural Resources, supra note 48

147. Vodafone International Holdings B.V. v. Union of India (2012) 6 SCC 613.




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