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July 2014
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Contents
1.
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
16
I.
Overview 16
II.
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 19
V.
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
23
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.
1. Introduction
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
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.
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.
7.
8.
Source: Basic Statistics on Indian Petroleum & Natural Gas 2011-12, published on September, 2012
9.
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 Indias 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
Introduction
Provided upon request only
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
countrys 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)
A. ONGC
ONGC is the leader in E&P activities in India
contributing 72% of Indias 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 Indias 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 worlds 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)
A. Import
Item
Crude Oil
171,729
6722.20
9,703
203.73
14,997
541.66
Item
Crude Oil
N.A.
N.A.
LNG
N.A.
N.A.
Petroleum Products
60837
2846.44
LNG
35
Petroleum Products
B. Export
C. Other Details
Contribution to GDP
15% 36
Cairn Energy
Midstream (storage
and transportation)
Downstream
(Refining, Processing
& Marketing)
Indian Oil
Pipelines: 10,329 km
Turnover: US$ 68,488 mn.
89% state owned
Pipelines: 12,000 km
Turnover: US$ 6,762 mn.
57% state owned
Indian Oil
Bharat Petroleum
Hindustan Petroleum
[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 RILs 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 BPRIL partnership would attract further large-scale
investments in Indias oil and gas industry.
However, the optimism resulting from the RILBP deal has been tempered by doubts arising over
production concerns in Mangla field one of
Indias 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
Planning Commission
Policy
Ministry of Finance
Regulation
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
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
B. Petroleum Act
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
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 Corporation 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.
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
F. Environmental Law
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-licensepolicy-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
countrys 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/2013-0228/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).
10
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
11
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.
12
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. DGHFunctions and Responsibilities, Ministry of Petroleum & Natural Gas, Govt of India, available at http://dghindia.org/FunctionandResponsibility.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
13
14
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_Circular_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).
115. 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).
116. Public Sector Undertakings in India, http://www.india.gov.in/spotlight/public-sector-undertakings-india (accessed on July 15, 2014).
117. 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).
118. Ibid
15
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
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.
16
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
A. Step One
E. Step Five
Qualification of Bid
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 PreTax Investment Multiple (PTIM).
122. The term bathymetry originally referred to the oceans 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.
17
v. Work programme.
vi. Fiscal Package
F. Step Six
Evaluation of bid and Rejection criteria
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. -
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%20
CONTRACT(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.
18
D. NELP IX and X
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, nonresidents 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:
19
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
20
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.
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 arms 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.
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
21
22
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).
23
24
9. Dispute Resolution
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
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-indiaconsiders-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
25
Dispute Resolution
Provided upon request only
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
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.
26
10. Conclusion
From a commercial and business perspective, Indias
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 revenuesharing (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
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.
27
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