Energy: Oil & Gas 2021

Last Updated August 10, 2021

India

Law and Practice

Authors



Khaitan & Co is one of India’s oldest and best-recognised full-service law firms. Built on foundations of integrity, simplicity, dedication and professionalism, the firm has expanded its presence in India from Kolkata (1911) to New Delhi (1970) to Bangalore (1994) to Mumbai (2001) and to Chennai (2021). It also opened a branch in Singapore in 2021. The firm takes pride in its steady growth and celebrated its centenary year in 2011. Khaitan & Co has advised several domestic and international clients on the entire value chain of the oil and gas sector. Its lawyers regularly advise clients on diverse transactions in the oil and gas sector, including upstream, midstream and downstream issues; pipelines; liquefied natural gas (LNG); distribution networks; trading; refineries; and petrochemicals. The firm assists clients on the entire gamut of project development contracts, mergers and acquisitions, joint ventures, privatisations, finance, tax, environmental, litigation and regulatory issues.

India has a federal structure of government where power to legislate is divided between the union/central legislature (parliament) and the state legislature in terms of the subject reserved for them under the Constitution of India. In accordance with the Constitution of India, parliament has been entrusted to legislate on matters pertaining to the regulation and development of oilfields and mineral oil resources, and petroleum and petroleum products. Additionally, ownership of minerals and things of value within territorial waters or the continental shelf, and resources of the exclusive economic zone are vested with the union. The Government of India (GoI) is the sole and exclusive owner of hydrocarbons and petroleum except when the title passes to the contractors in accordance with exploration and production contracts.

The Ministry of Petroleum and Natural Gas (MoPNG) is the administrative ministry of the GoI overseeing the petroleum and natural gas sector, including administering legislation. The Government of India (Allocation of Business) Rules 1961 entrust the transaction of hydrocarbon exploration and exploitation business to the MoPNG. 

The upstream sector is under the de facto regulatory control of the Directorate General of Hydrocarbon (DGH). The DGH was set up by MoPNG pursuant to the resolution in 1993 with the aim of promoting sound management of Indian petroleum and natural gas resources, with balanced regard for the environment, safety, technological and economic aspects of petroleum activity. The DGH in its advisory functions advises MoPNG on matters related to the upstream sector, and the Indian government on the formulation of safety norms and regulations in oilfield operations. 

The Petroleum and Natural Gas Regulatory Board (PNGRB) is the regulatory authority for the midstream and downstream sector and is entrusted with regulating the refining, storage, transportation, distribution, marketing and sale of petroleum, petroleum products and natural gas. PNGRB also exercises adjudicatory functions in the midstream and downstream sector. Other functions of PNGRB include promotion of the competitive market and addressing the grievances of consumers.

The following regulatory and administrative bodies have been established primarily to ensure safety in the oil and gas sector.

  • The Oil Industry Safety Directorate (OISD) is a technical directorate established in 1986 under MoPNG. By formulating and co-ordinating the implementation of a series of self-regulatory measures, OISD performs the role of safety regulator for upstream offshore blocks. 
  • The safety, health and welfare of mine workers is governed by the Mines Act 1952. The Directorate General of Mines Safety (DGMS) is a regulatory agency under the Ministry of Labour & Employment which aims to attain risk and hazard-free conditions of work for persons employed in onshore blocks.

While the above regulatory and administrative agencies are primary agencies established specifically to regulate the oil and gas sector, there are other government regulatory and administrative agencies pertaining to the environment and labour matters.

Companies in which the GoI has the majority shareholding include:

  • Oil and Natural Gas Corporation Limited – the largest oil and gas exploration and production company in India, which has various subsidiaries including the refining companies, Hindustan Petroleum Corporation Limited and Mangalore Refinery and Petrochemicals Limited;
  • Oil India Limited – the other government-owned exploration and production company;
  • Indian Oil Corporation Limited – a refining and downstream company;
  • Bharat Petroleum Corporation Limited – a refining and downstream company (the GoI is planning to disinvest its stake in this company); and
  • GAIL (India) Limited – a dominant player in the midstream and downstream sector, including natural gas pipelines.

The key legislation in the oil and gas sector is as follows.

  • The Oilfields (Regulation and Development) Act 194820 (“Oilfields Act”), which governs the upstream oil and gas sector. The Oilfields Act provides for the regulation of oilfields and for the development of mineral oil resources, and it includes provisions relating to licensing and leasing of oil and gas blocks. Pursuant to the Oilfields Act, the GoI is vested with the power to make rules with respect to mining leases and mineral oil development, and the royalty rates to be paid by the holder of a mining lease.
  • The Petroleum and Natural Gas Rules 1959 (“PNG Rules”) were enacted under the Oilfields Act and include detailed provisions for the granting of licences and leases for both offshore and onshore areas. A petroleum exploration licence (PEL) and petroleum mining lease (PML) are granted pursuant to the PNG Rules. 
  • The Mines Act 1952 (“Mines Act”) and Oil Mines Regulations 2017 deal with provisions relating to the health, safety and welfare of workers in the oil mines. The Mines Act also lists obligations in the form of the duties of owners, agents and managers, and strict penalties are prescribed in cases of contravention.
  • The Petroleum Act 1934 (“Petroleum Act”) was enacted to regulate matters relating to the import, transport, storage, production, refining and blending of petroleum. 
  • The Petroleum and Natural Gas Regulatory Board Act 2006 (“PNGRB Act”) provides for the establishment of the Petroleum and Natural Gas Regulatory Board (PNGRB) which has the authority to regulate the refining, processing, storage, transportation, distribution, marketing and sale of petroleum, petroleum products and natural gas. This excludes the production of crude oil and natural gas so as to protect the interests of consumers and entities engaged in specified activities relating thereto, and to ensure an uninterrupted and adequate supply of petroleum, petroleum products and natural gas in all parts of the country, as well as promote competitive markets.

Since the oil and gas sector is a highly regulated field, in addition to the above legislation, the government from time to time promulgates policies, standards, directives and guidelines for governing various aspects of the oil and gas sector.

Prior to the liberalisation of the oil and gas sector in 1999, the Indian government and the national oil companies dominated the oil and gas sector, and the government adopted various licensing regimes to promote the upstream sector. 

A block/field awarded under one licensing regime continues to be governed by such regime despite a new licensing regime coming into force. Therefore, the different blocks in India are governed by different licensing regimes, which can be broadly classified as follows.

  • Nomination Regime – under this licensing regime, exploration and production licences were awarded on a nomination basis to the two national oil exploration and production companies, OIL and ONGC, until the late 1970s.
  • Pre-NELP Regime – post the nomination regime and prior to NELP, the GoI signed 56 contracts for exploration blocks and development fields. Of these, 32 blocks and fields were operational as on 31 March 2020.
  • NELP Regime – the introduction of the New Exploration Licensing Policy (NELP) was a watershed moment in the upstream oil and gas sector. The NELP was implemented by the GoI in 1999. Under NELP, for the first time, the GoI adopted international competitive bidding to award blocks to the private sector and foreign companies. The government awarded the blocks under the production-sharing model, wherein the contractor is required to pay part of the profits earned to the government after deducting the costs incurred. Nine bidding rounds were conducted under the NELP regime from 1999 to 2012. As of 31 March 2020, 45 blocks awarded under NELP bidding rounds were operational.
  • HELP Regime – due to certain shortcomings in the NELP regime, in 2016 the GoI introduced the Hydrocarbon Exploration and Licensing Policy (HELP) to garner more private participation and foreign investment. Presently, oil and gas blocks are awarded under the HELP regime. Unlike its predecessor, HELP includes a revenue-sharing mechanism which allows marketing and pricing freedom for the hydrocarbons produced. Furthermore, a uniform licence is granted encompassing exploration and production of all hydrocarbons (such as oil, gas, coal-bed methane, shale gas/oil and gas hydrates). The GoI has also introduced the Open Acreage Licensing Policy (OALP) within the ambit of HELP. Unlike in NELP, where the blocks on offer for bidding were determined by the government, the OALP allows oil companies to choose hydrocarbon blocks from the designated area, which are then put up for bidding. To date, 105 blocks have been awarded under the five OALP bidding rounds and the sixth bidding round for 21 blocks was launched in August 2021. 

To monetise various small and marginal hydrocarbon blocks under the national oil companies, the GoI rolled out the Discovered Small Field Policy 2015 (DSF), previously known as the "Marginal Field Policy", to bring these fields into production. Similar to the HELP regime, a revenue-sharing mechanism and a uniform licensing policy are adopted for all hydrocarbons. The contractors must sell the crude oil exclusively in the domestic market through a transparent bidding process. A total of 53 blocks have been awarded under the two bidding rounds held so far. The third bidding round was launched in June 2021.

As per the model revenue sharing contract (RSC), the GoI is the owner of petroleum except for that part of the crude oil, condensate or gas title which passes to a contractor or any other person under the RSC. Once the block is awarded by the government to the contractor, the rights available to the contractor can be broadly classified into the following categories based on the stage of the block. 

  • Exploration phase – for this phase the contractor is required to obtain a PEL from the GoI (offshore blocks) or state government (onshore blocks) under theOilfields Act and PNG Rules. As per the PEL, the contractor is granted exclusive rights to drilling operations (information drilling or test drilling) and leasehold rights over any part of the licence area.
  • Development and production phase – to carry out the development activities, the contractor is required to obtain a PML for the areas covering the discoveries. The PML grants the contractor exclusive rights over the leased land to carry out mining operations for petroleum and natural gas.

Since the advent of NELP, the government has followed international competitive bidding procedures for awarding exploration blocks. Furthermore, since the introduction of OALP, the DGH has allowed private investors to apply directly to the GoI for any exploration in a new block, pursuant to suo motu expression of interest (EoI). 

The DGH helps investors propose their suo motu expression of interest, based on the data available at the National Data Repository (NDR). In the NDR, sedimentary basins are placed in three categories, namely Category I, Category II and Category III. Category I sedimentary basins are those which have established production and Category II and Category III basins are those which have prospective and contingent resources. The NDR helps investors to shortlist or select a block for the submission of an EoI to the GoI. The entity proposing the EoI has to fulfil certain technical and financial criteria and also submit a participation bond. The technical criteria primarily consist of minimum operatorship experience, minimum acreage holding and minimum average annual production. The financial qualification criteria are primarily based on the net worth of the entity (which is based on the estimated expenditure for the committed work programme for the block concerned). Once the DGH receives an EoI, it may offer the whole block for bidding by publishing a notice inviting offers (NIO). A period of 60 days is allowed for the bidders to submit bids after the date of publishing of the NIO.

After receiving the bids, the DGH evaluates them based on evaluation parameters. The key evaluation criteria are a biddable work programme and the share of revenue offered to the GoI. The originator of an EoI is given an incentive at the time of the bid evaluation. The bidders scoring the highest marks against the evaluation criteria are awarded the RSC. 

Contractors pay royalties, profit share for blocks under the NELP regime, and revenue share for blocks under HELP and DSF. Under the revenue-share model, bidders pay a share of revenue for the commencement of production, as per their quoted bid. The revenue share varies from USD50,000 to USD7 million per day. 

The royalty rates are determined as per the Oilfields Act, PNG Rules and the terms of the RSC. Under HELP, royalty rates for onshore blocks are 12.5% for oil and 10% for gas and coalbed methane. The royalty rates for hydrocarbons in shallow water, deep water and ultra-deep water blocks are 7.5%, 5% and 2.5% respectively. Furthermore, no royalty is payable for the first seven years for deep water and ultra-deep water blocks.

Pursuant to the granting of a licence, the licence holder must pay a nominal yearly fee for the license based on each square kilometre or part thereof covered by the licence. 

Furthermore, according to the PNG Rules, before being granted a lease, a security deposit must be paid for due observance of the terms of the lease. Additionally, on the granting of a lease, the lessee must pay the GoI or the state government, as the case may be, a fixed nominal yearly dead rent.

An entity engaged in upstream operations is subject to the following tax legislation.

Income Tax Act 1961 (“IT Act”)

Under the IT Act, the income of the operator is taxed. The profits and gains of the entities in upstream operations are computed on the basis of the determined value and revenue realised on the sale of oil and gas as per the contract, after allowing deductions. Deductions at a rate of 100% are allowed for capital and revenue expenditures incurred in respect of exploration operations and drilling operations. Companies can also claim depreciation for newly installed machinery and plants, and can carry forward losses to set off against subsequent revenues. Entities in the upstream sector can also claim special allowances, in case of any infructuous or abortive exploration expenses, drilling or exploration activities, and depletion of mineral oil in the mining area.

Indirect taxes

Crude oil, high speed diesel, petrol, natural gas and aviation turbine fuel are subject to value added tax/sales tax/excise duty. The procurement side of the upstream sector is subject to the Central Goods and Services Tax Act 2017 (GST Act), a unified indirect tax levied on the supply of goods and services. 

Prior to the advent of the NELP regime, the national oil exploration and production companies were nominated by the government to explore and develop oil and gas blocks. However, since the turn of the century, these privileges have been curtailed and the national oil exploration and production companies have been treated as equal to private companies in so far as awarding of blocks is concerned. Furthermore, the terms of the revenue-sharing contracts under the HELP and DSF regime do not offer any special concessions to national oil exploration and production companies. 

MoPNG has come out with the Policy to Provide Purchase Preference (linked with Local Content) (PPLC) in tune with the government’s "Make in India" campaign. The policy was amended in November 2020 and is currently effective until 30 September 2021. PPLC aims to incentivise growth in local content in goods and services while implementing oil and gas projects in India. PPLC is applicable to Public Sector Undertakings (PSUs) and their wholly owned subsidiaries under MoPNG, joint ventures having 51% or more equity with one or more PSUs under MoPNG, and attached and subordinate offices of MoPNG. The PPLC specifies targets of local content for procurement of goods, services and EPC contracts for oil and gas business activities.

While the PPLC is applicable to PSUs, the terms of RSCs which are equally applicable to private entities and PSUs, stipulate that contractors must purchase and use goods manufactured, produced or supplied in India in petroleum operations, provided that such goods are available on terms equal to or better than imported goods, with respect to timing of delivery, quality and quantity required, price and other terms. Additionally, contractors must employ Indian subcontractors with the required skills or expertise, to the maximum extent possible, in so far as their services are available at comparable standards with those obtained elsewhere and on competitive terms. Preference may be given to non-Indian subcontractors when no such Indian subcontractors are available.

Under the RSC, the contractor must take the following steps to proceed towards development and production, once a commercial discovery is made.

  • Notification to the management committee (MC) – the contractor must notify the MC of the commercial discovery. The MC comprises two representatives from the GoI, one member from the DGH and two representatives of the contractor. 
  • Good international petroleum industry practices (GIPIP) tests – after notifying the MC, the contractor must run tests under GIPIP in respect of such discovery, to determine whether the discovery is of potential commercial interest and merits appraisal, and the contractor must further submit the information in relation to the particulars of such discovery to the MC. 
  • Appraisal programme – if the contractor subsequently feels that the discovery merits appraisal, it may submit the appraisal programme to the MC.
  • Field development plan – 24 months (for onland blocks) and 36 months (for offshore blocks) from submission of the appraisal programme, the contractor must notify the MC as to whether it intends to submit a field development plan (FDP) in relation to the discoveries. The FDP comprises three parts:
    1. a detailed technical assessment report for the commercial development of the field;
    2. a detailed work plan for commercial development of the field, with timelines; and
    3. estimated costs and budgets for the commercial production from the field, to demonstrate the economic viability of the project.
  • Development phase – this begins after approval of the technical assessment report and continues until commencement of commercial production. 

The terms of the licence of newly awarded blocks are governed by the RSC, the key terms of which are as follows.

Exploration Period

A contractor is granted an exploration period of six years from the date of execution of the RSC. The exploration period is divided into two phases, namely:

  • an Initial Exploration Phase consisting of three contract years with an extension of one year where the contract areas fall in onland and shallow water areas or with a provision for up to two extensions of one year each where the contract areas fall in deep water, ultra-deep water and a specified basin; and
  • a Subsequent Exploration Phase consisting of three contract years with a similar extension policy. The committed work programme is linked to the exploration period.

Work Programme

During the initial exploration period, the contractor must complete the work programme quoted in its bid, which will be its committed work programme for the Initial Exploration Phase. The subsequent work programme is submitted by the contractor prior to the commencement of the Subsequent Exploration Phase. In the event that the contractor fails to fulfil the committed work programme during the Initial Exploration Phase or the subsequent work programme during the Subsequent Exploration Phase, as the case may be, then liquidated damages can be levied on the contractor.

Relinquishment

A contractor may relinquish the contract area:

  • on completion of the committed work programme for the Initial Exploration Phase; or
  • on completion of the subsequent work programme for the Subsequent Exploration Phase; or
  • on failure to submit the FDP in relation to the discovery of petroleum within the stipulated time, as provided in the RSC.

On relinquishment of the contract area, the contractor must demobilise all equipment and installations from the relinquished contract area pursuant to the abandonment plan, and perform all site restoration activities as per the applicable guidelines and rules.

Period of Lease

The lease granted to the contractor under the RSC is valid for an initial period of 20 years from the date of the grant.

Domestic Supply

The contract restricts the freedom of the contractor to sell hydrocarbons. The RSC specifies that until India becomes self-sufficient and able to meet its total national demand, the contractor is obliged to sell oil and gas produced in India to the Indian markets.

Extension

The term of any exploration phase of the exploration period, appraisal period, development phase or the RSC may be extended, on account of a force majeure event, as provided for in the RSC. The DGH, on recommendation of the MC, can also extend the above-mentioned term.

Liability

The liability of the members comprising the contractor is joint and several under the previous contracts. Some of the recent model contracts provide for liability of the members comprising the contractor to the extent of their individual participating interest.

Termination

The contractor may terminate the RSC with respect to any development or contract area by giving prior written notice of 90 days (contract area) or 180 days (development area). The GoI may terminate the RSC by providing 90 days’ prior written notice in the event that the contractor has submitted a false statement, or has engaged in unauthorised extraction of hydrocarbon without the permission of the government, or is adjudged bankrupt, or has assigned any interest in the RSC without the prior consent of the government.

Abandonment

Upon expiry or termination of the RSC or relinquishment of the contract area, the contractor is, inter alia, required to:

  • remove all equipment and installations from the contract area, pursuant to an abandonment plan; and
  • perform site restoration in accordance with GIPIP (the abandonment plan has to be prepared as per the Site Restoration Fund Scheme 1999).

The PNG Rules allow transfer of the PEL or PML subject to the prior approval of the government. Furthermore, the RSC stipulates prior written consent of the government for:

  • assignment of a participating interest;
  • change in control of the member, or its parent company; or
  • change in the relationship of the contractor with the companies providing the guarantee (typically the parent company).

However, a member of the contractor cannot assign or transfer its right under the RSC, in the event its participating interest is to be retained by the proposed assignor or the percentage interest of the assignee is less than 10% of the total participating interest of all the constituents of the contractor, except in special circumstances where the government, on the recommendation of the MC, may permit otherwise. 

The assignee/transferee to whom the participating interest is assigned/transferred has to satisfy the following requirements to obtain the consent of the government:

  • the capacity and ability to meet the obligations stipulated in the RSC and willingness to provide an unconditional undertaking to the government to assume its participating interest share of obligations and to provide guarantees as provided in the contract;
  • the assignee/transferee should not be a company incorporated in a country with which India has restricted trade or business;
  • willingness to comply with any reasonable conditions of the government as may be necessary in the circumstances, with a view to ensuring performance under the contract;
  • the assignee/transferee must provide an irrevocable, unconditional bank guarantee from a scheduled commercial bank in India, acceptable to the government, in favour of the government (where the transferee/assignee is an affiliate of the transfer); and 
  • the assignee/transferee must provide a financial and performance guarantee from its parent entity.

The RSC envisages a deemed approval, in the event the government does not accord its consent, or does not respond to a request for assignment or transfer by a member comprising the contractor, 120 days after such request and receipt of all information. 

The contractor is granted marketing and pricing freedom under the HELP regime and is permitted to sell petroleum and natural gas exclusively to the domestic market from the contract area on an arm’s length basis. The government has also permitted marketing and pricing freedom for new discoveries under existing contracts where the FDPs are approved after 28 February 2019. On 7 October 2020, the Cabinet Committee on Economic Affairs approved the "Natural Gas Marketing Reforms", whereby marketing freedom is to be granted to the blocks in which production-sharing contracts provide pricing freedom.

Just like the upstream sector, the midstream and downstream sector is liberalised, allowing free participation for private investors subject to obtaining the requisite approvals and licences from the government. Foreign investors are permitted to invest in the midstream and the downstream sector subject to the restrictions under the foreign direct investment conditions (see 4.1 Foreign Investment Rules Applicable to Investments in Petroleum for further details). 

While in the midstream and the downstream sector there is no government monopoly, the retail sphere and the pipeline sphere are dominated by PSUs. The development of pipeline infrastructure across the country is not uniform, with states close to gas sources having a robust pipeline infrastructure, while states further from gas sources have a significantly smaller pipeline network. 

As discussed in 1.3 National Oil or Gas Company, the PSU, GAIL, owns more than half of the pipeline infrastructure in India and is a dominant player in the sector. 

Third-party access to the natural gas pipeline is governed by the Petroleum and Natural Gas Regulatory Board (Guiding Principles for Declaring or Authorising Natural Gas Pipeline as Common Carrier or Contract Carrier) Regulations 2009 (“NG Pipeline Guiding Regulations”) while the Petroleum and Natural Gas Regulatory Board (Guiding Principles for Declaring or Authorising Petroleum and Petroleum Products Pipeline as Common Carrier or Contract Carrier) Regulations 2012 (“Petroleum Pipeline Guiding Principles”) deal with third-party access to petroleum and petroleum products pipelines and other infrastructure. See 3.10 Rules for Third-Party Access to Infrastructure for further discussion on third-party access. A customer or shipper enters into a contract with an authorised entity under the Petroleum and Natural Gas Regulatory Board (Authorising Entities to Lay, Build, Operate or Expand Natural Gas Pipelines) Regulations 2008 (“NG Pipeline Regulations”) for natural gas transportation or the PNGRB (Authorising Entities to Lay, Build, Operate or Expand Petroleum and Petroleum Products Pipelines) Regulations 2010 (“Petroleum Pipeline Regulations”) for petroleum or petroleum product transportation.

The tariff for pipelines authorised under the NG Pipeline Regulations or the Petroleum Pipeline Regulations is fixed by the PNGRB based on the tariff zone, and based on the bid submitted by the entity. For natural gas pipelines laid down before or authorised before the NG Pipeline Regulations, the tariff is determined by the PNGRB as per the Petroleum and Natural Gas Regulatory Board (Determination of Natural Gas Pipeline Tariff) Regulations 2008 (“NG Tariff Regulations”) and for petroleum and petroleum products pipeline entities authorised or laid down before the Petroleum Pipeline Regulations the tariff is determined by the PNGRB under the Petroleum and Natural Gas Regulatory Board (Determination of Petroleum and Petroleum Products Pipeline Transportation Tariff) Regulations 2010 (“Petroleum Pipeline Tariff Regulations”). 

Authorisation from PNGRB

Pursuant to Section 16 of the PNGRB Act, an entity is not permitted to develop pipelines or a natural gas distribution network without authorisation from PNGRB. Such authorisation may be granted by PNGRB either: (a) on receipt of an application for the development of a pipeline; or (b) if PNGRB is of the opinion that it is necessary or expedient to develop a pipeline in a specified geographical area. In each case, PNGRB must invite applications from interested parties to develop such pipeline. PNGRB is required to adopt an objective and transparent manner of selecting an entity as specified by the NG Pipeline Regulations or Petroleum Pipeline Regulations, guided by principles including the objective of promoting competition, avoiding infructuous investment, maintaining or increasing supplies, or for securing equitable distribution or ensuring adequate availability of natural gas throughout India. The NG Pipeline Regulations and the Petroleum Pipeline Regulations regulate the manner of submission of a bid, its evaluation, the awarding of authorisations and the development of pipeline infrastructure. An entity is authorised to develop a pipeline after a competitive bidding process, following evaluation of its technical and financial bid. The NG Pipeline Regulations and the Petroleum Pipeline Regulations specify exhaustive technical and financial criteria which an entity must fulfil in order to be awarded authorisation to develop a pipeline.

Other Licences Required for Downstream Operations

  • A licence under the Petroleum Act 1934 read with Petroleum Rules 2002 (“Petroleum Rules”) is required from the government authority for storage of petroleum, based on the quantity and class of petroleum. Similarly, a licence under the Gas Cylinder Rules framed under the Explosives Act 1884 is required for filling, possession, transport and import of petroleum. 
  • A licence under the Manufacture, Storage and Import of Hazardous Chemical Rules 1989.
  • A licence under Static and Mobile Pressure Vessels (Unfired) Rules 2016 framed under the Explosives Act 1884 for manufacturing, filling, delivery and repair of pressure vessels and transportation of compressed gas.

In addition to the above, construction of pipelines also requires environmental clearance from the Ministry of Environment, Forest and Climate Change (MoEFCC), authorisations from the relevant state pollution control boards under the provisions of the Air (Prevention and Control of Pollution) Act 1981 and the Water (Prevention and Control of Pollution Act) 1974, and other approvals prescribed under applicable local laws.

The prices of petrol and diesel are market-determined in line with changes in the international market prices and other market conditions. 

The NG Tariff Regulations and the Petroleum Pipeline Tariff Regulations provide a procedure for determination of the natural gas and petroleum pipeline tariff, respectively. As per the NG Tariff Regulations, the entity to which the regulations apply must submit all technical, operating, financial and cost data of the natural gas pipeline project to PNGRB for determination of the natural gas pipeline tariff. The tariff is determined based on a reasonable rate of return on the normative level of capital employed plus the normative level of operating expenses in the natural gas pipeline. The unit rate of the natural gas pipeline tariff to be charged for a period is calculated based on the "Discounted Cash flow" (DCF) methodology, which considers a reasonable rate of return to be the project's internal rate of return. The rate of return on capital employed will be the rate of return on capital employed equal to 12% post-tax. The rate of return on capital employed, once applied to a natural gas pipeline project, remains fixed for the entire economic life of the project. An authorised entity is allowed to charge shippers compression charges, in addition to the transportation tariff, under the regulations framed by PNGRB. For petroleum and petroleum products pipelines, the tariff, bench-marked against the goods tariff table of the Indian Railways, is determined in accordance with the Petroleum Pipeline Tariff Regulations.

The IT Act and the GST Act are applicable to midstream and downstream operations. See 2.4 Income or Profits Tax Regime Applicable to Upstream Operations for more details.

No special rights are given to national oil or gas companies in connection with downstream licences and PSUs, and private entities are treated equally. 

See 2.6 Local Content Requirements Applicable to Upstream Operationsfor further details.

Unlike in the upstream sector, no standard contract is entered into by the downstream licence holder, so the terms of the licence and the principal legislation under which such licence is awarded gain importance and the licensee must abide by the terms of such licence and the legislation under which such licence is granted. 

As per the NG Pipeline Authorisation Regulations, an authorised pipeline entity must meet its annual target of transporting natural gas equal to the volume of natural gas quoted in the bid and PNGRB will monitor the actual progress in this regard on a quarterly basis. Failure to adhere to the annual target will result in encashment of the performance bond submitted to PNGRB during the time authorisation, in proportion to the penalty specified under the NG Pipeline Authorisation Regulations. An authorised entity operating pipeline facilities must enforce safety, technical and services standards including the affiliated code of conduct.

The Petroleum and Minerals Pipelines (Acquisition of Right of User in Land) Act 1962 (“PMPA Act”), provides the framework governing the acquisition of right of user in land for laying pipelines for the transportation of natural gas and matters connected therewith. The PMPA Act provides the procedure for acquisition, restrictions on the use of land, and the compensation payable to the persons interested in the land. Pursuant to the PMPA Act, the GoI, for the purpose of acquisition of land for the laying of pipelines in the public interest, declares its intention by way of notification. Any person interested in the land after the declaration made by the GoI may object within 21 days of such notification. After the resolution of the objection (if any), the GoI may declare that the right to use of the land for the laying of pipelines may be acquired, after which, right over the land vests in the GoI and these rights can be passed on to the state government or any other corporation or entity. 

The PMPA Act envisages that fair compensation should be paid to any person who was interested in land acquired under the PMPA Act. Additionally, for the purpose of establishing refineries and terminals, the government may acquire land from the public following the procedure prescribed under Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act 2013, provided such land is acquired for public purpose.

Notwithstanding the above, land may be procured by way of sale or lease entered into directly with the owners of the land. 

The NG Pipeline Regulations and the NG Pipeline Guiding Principles deal with third-party access to natural gas pipelines and other infrastructure whereas the Petroleum Pipeline Guiding Principles and the Petroleum Pipeline Regulations deal with third-party access to petroleum and petroleum products pipelines. The NG Pipeline Regulations and the Petroleum Pipeline Regulations specify that the authorised pipeline entities are to make extra capacity available in them for use on a common carrier basis. The entities must also actively promote the capacity available in the pipelines to encourage maximum utilisation.

The NG Pipeline Guiding Principles and the Petroleum Pipeline Guiding Principles have been framed with an objective to serve consumer interests by promoting competition and avoiding infructuous investments, by optimum utilisation of the natural gas and petroleum pipeline infrastructure. Both the NG Pipeline Guiding Principles and the Petroleum Pipeline Guiding Principles classify pipelines into two categories, namely, a contract carrier (pipelines for transportation of natural gas/petroleum or petroleum products by more than one entity, over and above the entity’s own requirement, pursuant to firm contracts for at least one year), and a common carrier (pipelines for transportation of natural gas/petroleum or petroleum products by more than one entity as the PNGRB may declare or authorise from time to time). The company laying, building, operating or expanding a common carrier or contract carrier pipeline has the right of first use of the capacity for its own and its associates' requirements. Common carrier capacity is allocated on a non-discriminatory first come, first served basis.

The NG Pipeline Regulations and the Petroleum Pipeline Regulations recognise the concept of allowing capacity in pipelines to be used by any entity on a non-discriminatory basis, through contract carriers or common carrier arrangements, with entities laying, building, operating or expanding petroleum and petroleum product pipelines. 

In the Union Budget 2021–2022, it was announced that an independent gas transport system operator will be set up for facilitation and co-ordination of booking of common carrier capacity in all-natural gas pipelines on a non-discriminatory, open-access basis, and the same is in the deliberation stage.

As discussed in 3.8 Other Key Terms of Each Type of Downstream Licence, since the downstream sector is highly regulated, with no contracts, the terms of the licences and the legislation under which such licences are granted, are important to determine the various rights of the entities. 

With respect to transportation and marketing of natural gas, an authorisation from PNGRB under the Petroleum and Natural Gas Regulatory Board (Authorizing Entities to Lay, Build, Operate or Expand City or Local Natural Gas Distribution Networks) Regulations 2008 (“CGD Regulations”) is granted. An entity given authorisation under the CGD Regulations is granted two forms of exclusivity: (a) exclusivity for development of the city gas distribution (CGD) network; and (b) exemption from purview of a common carrier or contract carrier.

Exclusivity for Development of CGD Network

The PNGRB (Exclusivity for City or Local Natural Gas Distribution Network) Regulations, 2008 (“CGD Exclusivity Regulations”) specify that PNGRB may grant an authorised entity exclusivity in developing the CGD network for the economic life of the project which, pursuant to the CGD Regulations, is prescribed in the authorisation granted to the successful bidding entity. The period of exclusivity for development of a CGD network granted to an authorised CGD entity is 25 years.

Exemption from Purview of Common Carrier or Contract Carrier

Pursuant to Section 20 of the PNGRB Act, PNGRB has the right to declare a particular pipeline as a common carrier or a contract carrier, in which case, other entities may be permitted by PNGRB to use such pipeline. Pursuant to CGD Regulations, an exemption from purview of a common carrier or contract carrier is granted for a period of eight years. Furthermore, if: (a) the entity meets all works programme targets in a timely manner, an extension of two years is granted; and (b) if the entity does not meet all works programme targets in a timely manner but completes the cumulative works programme at the end of the eighth year, an extension of one year is granted, for exemption from purview of a common carrier or contract carrier.

While India does not export crude oil or LNG, petroleum products may be exported, subject to obtaining a no-objection certificate from MoPNG.

Any transfer of licences granted under the Petroleum Rules is subject to prior approval by the issuing authority. 

The authorisation granted by PNGRB for laying, developing and operating petroleum or natural gas pipelines, or a CGD network, are subject to lock-in periods and any transfer of such authorisation is subject to the approval of PNGRB. Typically, PNGRB allows the transfer of authorisation on the same terms and conditions applicable to the transferor. 

Foreign Investment in Petrol and Gas

Automatic route

100% foreign direct investment (FDI) under automatic route is permitted in the following: 

  • exploration activities of oil and natural gas fields;
  • infrastructure related to marketing of petroleum products and natural gas;
  • marketing of natural gas and petroleum products, petroleum product pipelines and natural gas pipelines; and
  • LNG re-gasification infrastructure, market study, formulation and petroleum refining in the private sector.

FDI in petroleum refining by the PSUs has been permitted to the extent of 49% under the automatic route, without any divestment or dilution of domestic equity in the existing PSUs.

In March 2021, the government put LNG imports under the Open General Licensing (OGL) category and the establishment of LNG infrastructure, including LNG terminals, is also under 100% FDI (automatic route) to promote the usage and distribution of LNG. Recently, on 29 July 2021, the GoI amended the FDI policy on the petroleum and natural gas sector, pursuant to which foreign investment of up to 100% under the automatic route has been allowed in petroleum refining PSUs where an "in-principle" approval for strategic disinvestment of a PSU has been granted by the GoI.

Government route

However, an entity of a country which shares a land border with India can only invest under the government route. Likewise, if the beneficial owner of an investment into India is a citizen of, or is situated in, a country which shares a land border with India, such person can also only invest under the government route.

Dispute Resolution in Relation to Foreign Investors

The RSC does not provide for international arbitration and arbitration under the RSC is pursuant to the (Indian) Arbitration and Conciliation Act 1996, with the venue of the arbitration being New Delhi. A contractor does not therefore have the freedom to choose the arbitration procedure and law.

For the downstream sector, in the absence of any contract governing the rights of private entities vis-à-vis the government, the legislation under which the licence or authorisation is granted determines the dispute resolution process. Other than its regulatory function, PNGRB also performs an adjudicatory function for the downstream sector and has the jurisdiction to hear and decide any dispute arising from the PNGRB Act and its regulations. 

Key Environmental Laws

The key environmental laws applicable to various industries, including to entities in the oil and gas sector, are listed below.

Water (Prevention and Control of Pollution) Act 1974 (“Water Act”)

The Water Act was enacted to govern the prevention and control of water pollution and the maintenance/restoration of the wholesomeness of India's water. Pursuant to Section 25 of the Water Act, prior consent of the relevant State Pollution Control Board (SPCB) is required to establish any industry which is likely to discharge sewage or trade effluent into any land or water source. 

Air (Prevention and Control of Pollution) Act 1981 (“Air Act”)

The Air Act was enacted to provide for the prevention, control and abatement of air pollution. Under Section 19 of the Air Act, the state governments are empowered to declare any areas within the state as air pollution control areas. Section 21 of the Air Act prohibits the undertaking of industrial activities in the air pollution control area without the previous consent of the SPCB. 

Environment Protection Act 1986 (“EP Act”)

This was enacted to govern the protection and improvement of the environment and, in furtherance of the same, the MoEFCC issued a notification in 2016 dealing with environmental impact assessments (“EIA Notification”) to minimise the adverse impact of development projects on the environment. Furthermore, as per Coastal Regulation Zone Notification 2011, the exploration and extraction of oil and natural gas in the coastal zone requires permission from the MoEFCC.

Hazardous Wastes (Management, Handling and Trans-boundary Movement) Rules 2016 (“HWM Rules”)

The HWM Rules have been framed under the EP Act to provide for the management and transportation of hazardous wastes. Under Rule 6 of the HWM Rules, the occupier of a facility that generates hazardous waste is required to obtain authorisation under the HWM Rules from the relevant SPCB. 

Forest (Conservation) Act 1980 (“Forest Act”)

Pursuant to Section 2 of the Forest Act, prior permission is required from the forest department of the relevant state, along with subsequent approval from MoEFCC, for usage of forest land for a non-forest purpose.

Wildlife (Protection) Act 1972

This also applies to gas/oil exploration. 

Oil Mines Regulations 2017

This includes detailed provisions relating to the health, safety and welfare of workers in oil mines. 

The Merchants Shipping Act 1958

This act stipulates safeguards and civil liability in the case of oil pollution damage.

Key Environmental Regulators

As per the EIA Notification, all projects in respect of offshore and onshore oil and gas development and production, except exploration, require prior environmental clearance. Seismic surveys which are part of exploration surveys are exempted, provided the concession areas have previous clearance for physical surveys.

The assessment is carried out by the Expert Appraisal Committee (EAC) set up under the aegis of the MoEFCC. After the assessment is completed, the EAC makes recommendations to the regulatory authority concerned either with granting prior environmental clearance on stipulated terms and conditions, or rejecting the application for prior environmental clearance, together with reasons.

Environmental Impact Assessments

An environmental impact assessment (EIA) involves three stages:

Scoping

At the scoping stage, the EAC determines comprehensive terms of reference addressing all relevant environmental concerns for preparation of the EIA report. In February 2020 sector-specific standard terms of reference were developed in order to streamline the process of scoping and bring uniformity across the proposals. All new projects or activities are to be referred to the EAC by the regulatory authority within 30 days from the date of application, for recommending the specific terms of reference. If the regulatory authority does not refer the matter to the EAC within 30 days of the date of application, standard terms of reference shall be issued by the regulatory authority on the 30th day.

Public consultation

This public hearing, at the site or in close proximity to it, is conducted to ascertain the concerns of the locals and obtain responses in writing from other stakeholders. After completion of the public consultation, the applicant must address material environmental concerns expressed during this process and make appropriate changes to the draft EIA and environmental management plan. 

Appraisal

This stage covers detailed scrutiny by the EAC of the application and the final EIA report. The appraisal is done transparently and the applicant is invited to furnish any necessary clarifications. On conclusion of this proceeding, the EAC makes recommendations either to grant environmental clearance on stipulated terms and conditions, or to reject the application for environmental clearance, together with reasons. 

The MoEFCC, pursuant to a notification in January 2020, changed onshore and offshore oil and gas exploration activities from category "B2" to category "A". As such, oil and gas exploration activities will now require environmental clearance only from the states and will not require preparation of an EIA report or public hearing. Development or production activities continue to fall under category "A", requiring an EIA report and public hearing. 

In addition to the general environmental, health and safety regulations, entities involved in offshore development must adhere to the Petroleum and Natural Gas (Safety in Offshore Operations) Rules 2008 (“PNG Offshore Rules”). These rules have been framed under the Oilfields Act and prescribe safety standards and measures to be taken for the safety of offshore oil and gas operations. The PNG Offshore Rules stipulate various consent requirements and prescribe penalties for contravention of these rules.

Under the PNG Rules, on termination of the PEL or PML, the contractor has to deliver the leased area and any wells contained therein in good condition. The licensee/lessee is given six months to remove or dispose of any petroleum recovered during the period of such licence or lease, as well as stores, equipment, tools and machinery, and other improvements on the land covered by the licence or lease. Failure to remove or dispose of the materials from the land within the aforementioned timeline, entitles the government to auction the material lying on the land. 

Under the RSC regime, upon expiry or termination of the RSC or relinquishment of the contract area, the contractors are, among other things, required to:

  • remove all equipment and installations from the contract area pursuant to an abandonment plan; and
  • perform site restoration in accordance with any specific guidelines, rules or regulations formulated by the government in relation to site restoration and, in the absence of any specific guidelines, rules or regulations by GIPIP, to take all other actions necessary to prevent hazards to human life, to the property of others and to the environment.

The government has published the Site Restoration and Abandonment Guidelines for Petroleum Operations which provides detailed guidelines for decommissioning of offshore and onshore production sites.

For blocks under Discovered Small Field Policy 2015, it is also envisaged that a site restoration fund should be maintained by the contractor, as per the Site Restoration Fund Scheme 1999.

Under the Paris Agreement, India has pledged to reduce the emission intensity of its gross domestic product (GHG emissions per unit GDP) by 33–35% over 2005 levels by 2030 and to create an additional carbon sink of 2.5–3 billion tonnes of CO2 equivalent through additional forest and tree cover. While no specific legislation has been enacted to fulfil the commitment to the Paris Agreement, the government has formulated various guidelines and policies aimed to promote renewable energy. In 2008, the government launched the National Action Plan on Climate Change, under which, eight national missions on advancing India’s climate change-related objectives are provided, including missions relating to solar power, water, sustainable agriculture and energy efficiency.

See 5.1 Principal Environmental Laws and Environmental Regulator(s) for specific legislation pertaining to the environment which is, in turn, related to climate change.

As discussed in 1.1 System of Petroleum Ownership, under the constitutional scheme of India, power to legislate is divided between the centre and the states. As a result, the government authorities from whom licences are obtained will vary according to the authority legislating on the subject. Furthermore, in India there is decentralisation of power to local authorities for better administration.

In 2018, the GoI issued a policy framework for the exploration and exploitation of unconventional hydrocarbons (“Policy on Unconventional Hydrocarbons”). Until the launch of the Policy on Unconventional Hydrocarbons, contractors were not permitted to exploit unconventional hydrocarbons under licence or in leased areas. In furtherance of the Policy on Unconventional Hydrocarbons, the HELP and DSF regime focuses on a uniform licensing policy under which a single licence is granted encompassing exploration and production of all hydrocarbons, including unconventional hydrocarbons such as shale gas or oil.

In line with the Policy on Unconventional Hydrocarbons, the definition of petroleum under the PNG Rules was also amended to include unconventional hydrocarbons.

The PNGRB Act mandates registration of any entity establishing or operating a liquefied natural gas terminal. The PNGRB (Eligibility Conditions for Registration of Liquefied Natural Gas Terminal) Rules 2012 stipulates the eligibility conditions for registration of an LNG terminal and states that any entity desirous of establishing an LNG terminal and fulfilling the eligibility condition has to apply to PNGRB. However, PNGRB has not yet issued regulations regarding registration relating to LNG terminals and only draft regulations, namely, the PNGRB (Registration for Establishing and Operating LNG Terminals) Regulations 2018 were circulated for comment from stakeholders. 

Recently, PNGRB clarified that it does not have jurisdiction under the PNGRB Act to issue authorisation for the operation and establishment of LNG dispensing stations and authorisation from PNGRB is not required to dispense LNG as automotive fuel, allowing wider market participation in the LNG distribution sector. On 17 February 2021, MoPNG published the Draft LNG Policy for comments from stakeholders. The Draft LNG Policy focuses, inter alia, on the creation of LNG terminals and re-gasification facilities to address the need for LNG and to promote the use of LNG in various sectors, including transportation and the mining sector.

In September 2020, PNGRB published the PNGRB (Gas Exchange) Regulations, 2020 (“Gas Exchange Regulations”). This was the first time PNGRB had come out with comprehensive gas exchange regulations, allowing trading in gas contracts through a gas exchange and allowing buyers and sellers (including but not limited to aggregators, CGD companies, consumers and trading licensees) to transact on gas contracts. Currently, the Gas Exchange Regulations are applicable to the following contracts:

  • delivery-based contracts for natural gas or LNG transacted on the gas exchange –
    1. day-ahead contracts (delivery of gas on the next day);
    2. intra-day contracts (delivery of gas occurs on the transaction day); and
    3. term-ahead contracts (physical delivery of gas occurs two days from the date of transaction); 
  • pipeline capacity contracts which are for secondary trade of natural gas pipeline capacity; and 
  • any contract for trading of natural gas or LNG, including those with a price linkage to other established markets or reported indices, either in India or elsewhere.

Under the Gas Exchange Regulations, a gas exchange or clearing corporation has to obtain authorisation from PNGRB before setting up its operations, subject to fulfilling eligibility criteria set out in the Gas Exchange Regulations. Every gas exchange or clearing corporation has to maintain a net worth of INR250 million at all times and shareholding patterns, as provided in the Gas Exchange Regulations. Authorisation to operate as a gas exchange is given for 25 years.

Pursuant to the Gas Exchange Regulations, India Gas Exchange Limited was granted authorisation by PNGRB on 2 December 2020, thereby becoming the first gas exchange in India. 

There have been no material changes in oil and gas laws or regulations over the past year. 

However, there have been some policy changes and some proposed changes to laws and regulations. 

Recently, the government further simplified and standardised the procedures under the Product Sharing Contract (PSC) for pre-NELP/NELP blocks. This is a continuation of the earlier simplification and standardisation exercise undertaken by the government in April 2020. At that time, after reviewing the processes for various approvals and submissions of documents to the DGH or MoPNG under the PSCs of NELP or pre-NELP phases, the DGH divided the processes into three categories, as follows:

  • processes where documents will be accepted on a self-certification basis and no further approval is required (“Category A”);
  • processes where approval will be deemed on expiry of 30 days from the submission of documents under self-certification (“Category B”); and
  • processes where approvals shall be required under the respective act, rules or contracts (“Category C”).

Pursuant to the review, a total of 22 processes were identified under the self-certification route, three processes were identified under the deemed approval route, and 12 processes were identified under the third category. The recent streamlining of guidelines further rationalised the above processes, so that now a total of nine processes fall under Category A, three processes under Category B and six under Category C. Thus, through merging and subsuming, the earlier 37 processes of contract compliance are now covered by 18 processes. 

In June 2021, MoPNG proposed amendments to the Oilfields Act with an aim to promote the ease of doing business and create opportunities for exploration, development and production of next-generation cleaner fuels and mitigate regulatory challenges. The proposed amendments seek to:

  • distinguish between mining activities and petroleum operations;
  • redefine mineral oil, to include modern and cleaner energy like hydrogen;
  • designate an authority to formulate standards, procedures and guidelines for the safety of mineral oil operations;
  • establish a stable lease period with fixed terms;
  • recover payment due to the government in the form of arrears of land revenue; and 
  • decriminalise provisions of the Oilfield Act and enhance penalties.

The proposed amendments are in pre-legislative consultation stage, inviting comments from the general public, stakeholders, industry associations and other concerned persons. 

In October 2020, the Cabinet Committee on Economic Affairs approved the Natural Gas Marketing Reforms which intend to provide a standard procedure for the sale of natural gas in a transparent and competitive manner to discover the market price by issuing guidelines for sale by contractor through e-bidding. The policy also permits affiliated companies to participate in the bidding process in view of the open, transparent and electronic bidding. Additionally, the policy also proposes to grant marketing freedom to the FDPs of those blocks in which PSC already provides pricing freedom.

In June 2020, the government published guidelines for the early monetisation of hydrocarbon under PSCs and RSCs. In order to encourage early monetisation of discoveries in contract areas, the guidelines clarified that the timelines given in RSCs and PSCs for discovery, development and production are the maximum timelines for development and monetisation of discoveries, and there are no restrictions on monetisation of discoveries at an early stage within these timelines. Consequently, the government allowed early monetisation of discoveries before completion of other activities, such as, appraisal, declaration of commerciality and submission of the FDP, etc, in blocks during the exploration period.

Khaitan & Co

Max Towers
7th & 8th Floors
Sector 16B, Noida
Uttar Pradesh 201 301
India

+91 120 479 1000

+91 120 474 2000

delhi@khaitanco.com https://www.khaitanco.com/
Author Business Card

Trends and Developments


Authors



Khaitan & Co is one of India’s oldest and best-recognised full-service law firms. Built on foundations of integrity, simplicity, dedication and professionalism, the firm has expanded its presence in India from Kolkata (1911) to New Delhi (1970) to Bangalore (1994) to Mumbai (2001) and to Chennai (2021). It also opened a branch in Singapore in 2021. The firm takes pride in its steady growth and celebrated its centenary year in 2011. Khaitan & Co has advised several domestic and international clients on the entire value chain of the oil and gas sector. Its lawyers regularly advise clients on diverse transactions in the oil and gas sector, including upstream, midstream and downstream issues; pipelines; liquefied natural gas (LNG); distribution networks; trading; refineries; and petrochemicals. The firm assists clients on the entire gamut of project development contracts, mergers and acquisitions, joint ventures, privatisations, finance, tax, environmental, litigation and regulatory issues.

As the fourth-largest energy consumer in the world, India will account for nearly one quarter of global energy demand growth until 2040. Over one third of India’s energy requirement is met by hydrocarbons, and India is dependent on imports for about 85% of its crude oil requirement and 53% of its natural gas requirement. The government of India (GoI) has been actively pursuing policies and reforms to reduce import dependency in the sector, however, by actively promoting the domestic production of oil and gas through conducive investment-friendly policies.

Some of the key reforms are as follows:

  • concession on royalty rates on early monetisation of fields;
  • offering marginal fields of national oil companies for exploration under the Discovered Small Field (DSF) Policy;
  • natural gas marketing reforms allowing discovery of the gas price in a transparent and competitive process;
  • providing incentives in the form of revenue share exemption for a certain category of sedimentary basin; 
  • promotion of ease of doing business by reducing the number of approvals under the exploration contract and through the introduction of single-window clearances;
  • the launch of gas exchange regulations, facilitating local price discovery in a transparent manner; and 
  • providing an exclusivity period for entities developing city gas distribution (CGD) networks. 

The GoI also has a robust foreign direct investment (FDI) policy, to attract more foreign investments across the oil and gas value chain. Understanding the importance of foreign companies in supplementing domestic companies and the national oil companies in the oil and gas sector, the GoI has allowed 100% FDI through the automatic route (without the approval of the government) in exploration activities. In the petroleum refining business, which is primarily dominated by national oil companies, the GoI allows 49% FDI in Public Sector Undertakings (PSUs), without any disinvestment or dilution of domestic equity in the existing PSUs under the automatic route. Recently, on 29 July 2021, the FDI policy was further liberalised allowing FDI up to 100% under the automatic route for petroleum-refining PSUs, subject to in-principle approval for strategic disinvestment of such PSU by the GoI.

Sailing through the Pandemic

The year 2020 was one of the most challenging years ever for the oil and gas sector, due to the COVID-19 pandemic. The Union Budget of 2021, announced in the middle of the pandemic, saw the following decisions in the oil and gas sector:

  • the extension of the GoI's flagship Ujjwala Scheme, which has benefited 80 million households to cover 10 million more beneficiaries (under this scheme, the GOI has committed to providing LPG connections to below-poverty line households); 
  • to add 100 more districts to the CGD network over the course of three years; and
  • to set up an independent gas transport system operator for the co-ordination of booking of common carrier capacity in all-natural gas pipelines, on a non-discriminatory open-access basis.

The key highlights from 2020 in the oil and gas sector were: 

  • 11 blocks covering an area of 19,789 sq km were awarded under the Open Acreage Licensing Policy (OALP) bidding round 5;
  • a total of five discoveries (four from the nomination regime and one from the New Exploration Licensing Policy – NELP) were monetised, as of November 2020; and
  • 1,544 km of pipelines were laid as part of the National Gas Grid.

Evincing Investor Interest in Exploration and Production

India’s upstream sector has seen a paradigm shift in policies aimed at attracting more investors to the exploration and production (“E&P”) sector. Before 1999, the GoI and national oil companies had a monopoly over the oil and gas sector. In 1999, the GoI adopted NELP, under which, acreages for the exploration of hydrocarbons were awarded through international competitive bidding, with domestic and foreign companies being given equal opportunity. Furthermore, there has been a significant change to government policies since 2016, with the shift to the Hydrocarbon Exploration and Licensing Policy (HELP). Under HELP, a revenue-sharing mechanism has been adopted, and marketing and pricing freedom are provided for any hydrocarbons produced. HELP follows a uniform licensing policy under which one licence covers exploration and production of hydrocarbons, such as, oil, gas, coal-bed methane, shale gas/oil and gas hydrates. The OALP, one of the main facets of HELP, aims to fast-track upstream activities and create a continuous window of exploration opportunities in which exploration and production companies have the flexibility to choose the hydrocarbon blocks to carry out relevant activities. After the shift to HELP and with the launch of OALP, five OALP bidding rounds were concluded in which 105 exploration blocks were awarded, covering an area of approximately 156,580 sq km. The GoI launched OALP bidding round 6 for international competitive bidding in August 2021 in which a total of 21 blocks, with an area of approximately 35,346 sq km, are on offer to investors. The bidders must submit their bids by 6 October 2021 and award of the blocks is expected by the end of November 2021.

The GoI also launched the DSF Policy, to monetise small and marginal hydrocarbon blocks under national oil companies. Contracts for 53 blocks were awarded under the first two DSF bidding rounds corresponding to a committed investment of USD1.63 billion. As of 31 March 2020, field development plans were submitted for 31 of these blocks. On 10 June 2021, the GoI launched DSF Bid Round III. Under the third round, 75 discoveries across 32 contract areas in 11 basins/locations are being offered.

To attract more investment to the downstream retail sphere, which is mainly dominated by the national oil marketing companies, the GoI had, to some extent, relaxed the terms of eligibility criteria for authorisation of bulk and retail marketing of Motor Spirit (Petrol) and High Speed Diesel. Until 2019, only an entity which had invested INR20 billion in either hydrocarbon E&P, or refining, pipelines or liquefied natural gas (LNG) terminals, could obtain a fuel retailing licence in India. However, the rule has since been relaxed and an entity with minimum net worth of INR2.5 billion or INR5 billion (in the case of authorisation for both retail and bulk) can seek authorisation. The Petroleum and Natural Gas Regulatory Board (PNGRB) has also clarified that any entity can dispense LNG to the transport sector in any geographical area or anywhere else, even if the entity is not authorised by the PNGRB. Recently, the GoI awarded multiple authorisations to private entities under the relaxed guidelines.

The GoI has also come out with a Draft LNG Policy, with an aim to promote the use of LNG in transport and other sectors where, at present, LNG has not been explored as a medium of alternative fuel. 

Gas-Based Economy

On a policy level, the GoI has a target to increase the share of natural gas in its primary energy mix to 15% by 2030, up from 6% in 2019. One of the GoI's key objectives is to transform India into a gas-based economy. The creation of a gas infrastructure is the backbone of the gas-based economy. India has around 17,900 km of operational natural gas pipelines and in order to move towards a gas-based economy, an additional 17,000 km gas pipeline is underway to complete the national gas grid.

To make natural gas available to the public, the GoI has been actively promoting the development of the CGD network. This is a network of interconnected pipelines to supply natural gas to domestic, transport and industrial consumers in specified geographical areas. The GoI has taken a series of decisions to promote the development of the CGD network to ensure an adequate supply of piped natural gas (PNG) and compressed natural gas (CNG) to consumers. PNGRB is the regulatory body under the GoI entrusted with granting authorisations to entities to develop CGD networks in geographical areas as per the PNGRB Act, 2006. Geographical areas are identified by PNGRB in synchronisation with the development of natural gas pipeline connectivity, natural gas availability and the techno commercial feasibility of the geographical areas. PNGRB grants authorisation to entities to develop a CGD network based on a transparent competitive bidding process. PNGRB has currently concluded 10 bidding rounds, and the 11th bidding round is underway. The PNGRB bidding process has seen active participation of private entities, including foreign entities. With active encouragement from the GoI, the CGD network has expanded from 34 geographical areas (GAs) spread over 66 districts in May 2014, to 232 GAs spread over 407 districts in February 2019, with a potential to cover about 53% of the country’s area and reach 70% of the population.

PNGRB Gas Exchange Regulations

On 28 September 2020, PNGRB published the Petroleum and Natural Gas Regulatory Board (Gas Exchange) Regulations, 2020 (“Gas Exchange Regulations”) allowing the establishment of gas exchanges to trade in gas contracts. The regulations allow buyers and sellers to meet on a common platform and trade in various gas contracts. Currently, the Gas Exchange Regulations recognise the following types of contracts:

  • day-ahead contracts; 
  • intra-day contracts;
  • term-ahead contracts; 
  • pipeline capacity contracts; and 
  • any contract for trading of natural gas or LNG, including those with price linkage to other established markets or reported indices either in India or elsewhere.

The Gas Exchange Regulations provide certain eligibility criteria for registering as a gas exchange. Authorisation granted to a gas exchange under the Gas Exchange Regulations is valid for a period of 25 years, unless such authorisation is revoked or cancelled. After the advent of the Gas Exchange Regulations, Indian Gas Exchange Limited became the first gas exchange in the country to receive authorisation from PNGRB allowing buyers and sellers to trade in gas in the spot, as well as the forward, market. 

The establishment of a gas exchange allows a neutral market-based mechanism for gas pricing and allocation. 

Disinvestment of Bharat Petroleum Corporation Limited

The GoI is in the process of divesting from its stake in Bharat Petroleum Corporation Limited (BPCL), which is a major downstream oil and gas company in India and the second biggest refiner. By divesting itself of its stake in BPCL, the GoI aims to increase private participation in the oil and gas sector and reduce government participation. BPCL disinvestment would be the largest disinvestment process undertaken by the GoI. 

Development of Alternative Fuel

The GoI has been actively promoting the use of alternative, affordable and clean transport fuel. Here are some of the initiatives of the GOI in promoting alternative fuels.

  • Sustainable Alternative Towards Affordable Transportation (SATAT) was launched by the GoI in 2018, to boost the production and availability of compressed bio gas (CBG) as an alternative clean fuel for the transportation sector. Pursuant to SATAT, oil marketing companies are inviting an expression of interest from entrepreneurs for the procurement of CBG. CBG is produced through a process of anaerobic decomposition from various waste biomass sources like agricultural residue, municipal solid waste (MSW), biodegradable fractions of industrial waste, etc. Under the SATAT, entrepreneurs can supply CBG to oil and gas marketing companies under long-term supply contracts at an assured price. The GoI has also extended financial assistance to entrepreneurs producing CBG, and the Reserve Bank of India has also included CBG projects under priority sector lending.
  • The National Policy on Biofuels 2018 was announced by the GoI on 8 June 2018 with a vision to bring biofuels to the mainstream and use them as a substitute for diesel and petrol in the transport sector. Under this policy, an indicative target of 20% of blending of ethanol in petrol by 2030 was laid out. This policy has given impetus to ethanol production in India. The policy allows the use of surplus food grains for the production of ethanol which is then blended with petrol with the approval of the National Biofuel Coordination Committee. The government has encouraged the setting up of ethanol plants across the country and at present no approvals are required for this, although statutory clearances, like environmental clearances, etc, are required. The GoI has also extended financial incentives and assistance to ethanol-based plants.

During the Union Budget of 2021–2022 the GoI proposed to launch a Hydrogen Energy Mission to generate hydrogen from green power sources. As per the information available in the public domain, the draft of the Hydrogen Energy Mission will soon be released. Although the Hydrogen Energy Mission is still at the draft stage, the Ministry of Road Transport and Highway (MoRTH) by way of notification, amended the Central Motor Vehicle Rules 1989 to include hydrogen-enriched CNG as an automotive fuel. Furthermore, the Bureau of Indian Standards has developed specifications for hydrogen-enriched CNG for automotive purposes. Recognition of hydrogen as an automotive fuel by MoRTH shows the government’s willingness to transition into a gas-based economy with reduced dependency on conventional fuels. Recently, Indian Oil Corporation Limited, a state-run oil major, announced its plan to build India’s first green hydrogen plant. 

As is evident from the aforementioned discussion, the GoI is committed to fulfilling the ambition of creating a “gas-based economy” and has taken several policy initiatives in the entire value chain of the oil and gas sector in favour of sustainable development. 

Khaitan & Co

Max Towers
7th & 8th Floors
Sector 16B, Noida
Uttar Pradesh 201 301
India

+91 120 479 1000

+91 120 474 2000

delhi@khaitanco.com https://www.khaitanco.com/
Author Business Card

Law and Practice

Authors



Khaitan & Co is one of India’s oldest and best-recognised full-service law firms. Built on foundations of integrity, simplicity, dedication and professionalism, the firm has expanded its presence in India from Kolkata (1911) to New Delhi (1970) to Bangalore (1994) to Mumbai (2001) and to Chennai (2021). It also opened a branch in Singapore in 2021. The firm takes pride in its steady growth and celebrated its centenary year in 2011. Khaitan & Co has advised several domestic and international clients on the entire value chain of the oil and gas sector. Its lawyers regularly advise clients on diverse transactions in the oil and gas sector, including upstream, midstream and downstream issues; pipelines; liquefied natural gas (LNG); distribution networks; trading; refineries; and petrochemicals. The firm assists clients on the entire gamut of project development contracts, mergers and acquisitions, joint ventures, privatisations, finance, tax, environmental, litigation and regulatory issues.

Trends and Development

Authors



Khaitan & Co is one of India’s oldest and best-recognised full-service law firms. Built on foundations of integrity, simplicity, dedication and professionalism, the firm has expanded its presence in India from Kolkata (1911) to New Delhi (1970) to Bangalore (1994) to Mumbai (2001) and to Chennai (2021). It also opened a branch in Singapore in 2021. The firm takes pride in its steady growth and celebrated its centenary year in 2011. Khaitan & Co has advised several domestic and international clients on the entire value chain of the oil and gas sector. Its lawyers regularly advise clients on diverse transactions in the oil and gas sector, including upstream, midstream and downstream issues; pipelines; liquefied natural gas (LNG); distribution networks; trading; refineries; and petrochemicals. The firm assists clients on the entire gamut of project development contracts, mergers and acquisitions, joint ventures, privatisations, finance, tax, environmental, litigation and regulatory issues.

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