Transcript Document

INFRALINE CONFERENCE
DISCOVERY TO DELIVERY: INDIA’S
UPSTREAM OIL AND GAS SECTOR
Regulatory Framework
for E&P Activities
Mohit Saraf
Partner
Luthra and Luthra
Law Offices
December 11th, 2004
Regulatory Framework for
Upstream Exploration
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11th December 2004
Constitution of India (“CoI”)
Oilfields (Regulation and Development)
Act, 1948
New Exploration Licensing Policy
(“NELP”)
Petroleum and Natural Gas Rules, 1959
Territorial Waters, Continental Shelf,
Exclusive Economic Zone And Other
Maritime Zones Act, 1976
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Jurisdiction over Oil and
Natural Gas Resources
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Jurisdiction to regulate oilfields vested with Central
Government
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CoI: Entry 53 of List I
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CoI: Entry 25 of List II
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“Gas and Gas Works”
Presidential reference, Supreme Court judgment
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11th December 2004
“Regulation and development of oilfields and mineral
oil resources; petroleum and petroleum products”
Natural gas- a petroleum product and hence, a
central subject
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Jurisdiction over Oil and
Natural Gas Resources
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Presidential reference (contd.)
 Right
in natural gas and oil resources as
‘publici juris’
 Upstream regulation of exploration and
transmission of natural gas also in central
domain.
Jurisdiction to regulate gas clearly
identified with Centre by the judgment
 Paved the way for a unified central legal
framework for the energy sector
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The Oilfields (Regulation &
Development) Act, 1948
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Basic enabling statute for licensing and
leasing of petroleum and gas blocks by
the appropriate government
Covers mineral oils which is defined as
including natural gas and petroleum
[S.3(c)]
Mining lease is defined exhaustively to
cover all forms of exploring and exploiting
mineral oils and all purposes connected
thereto [S.3(d)]
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The Oilfields (Regulation &
Development) Act, 1948
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Empowers central government to make
rules with regard to mining leases [S.5]
Also empowers central government to
make rules for the development of mineral
oil [S.6]
NELP Enabling Provisions
Power to vary royalty or exempt it
altogether [S.6A]
 PSC additional terms and conditions to
PEL [S.12]
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New Exploration Licensing
Policy
Uses auctions to allocate petroleum blocks
thus bringing benefits of transparency and
efficiency
 Identifies biddable areas.
 Identifies commercial terms on which the
bid would be evaluated including profit
sharing
 Lays down the bidding procedure
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The Petroleum and Natural
Gas Rules, 1959
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Rules provide framework for grant of
exploration licenses and mining leases
Salient features of the Rules:
Prohibition on prospecting and mining
except under a license or lease granted
under the rules [Rule 4]
 Central Government has the power to
grant licenses or leases in respect of any
land vested with it or minerals underlying
the ocean within the territorial waters or
the continental shelf [Rule 5(i)]
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The Petroleum and Natural
Gas Rules, 1959
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Salient features of Rules (contd)
State government has power to grant
license or lease over lands vested with it
[Rule 5(ii)]
 Person obtaining exploration license
obtains the exclusive right to a lease for
producing (i.e. extracting) oil/gas over any
part of area covered in license
 As Licensee, prospector required to
furnish security deposit and annual license
fees for exploration license;
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The Petroleum and Natural
Gas Rules, 1959
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Salient features of Rules (contd)
License fees increase every year in a predetermined manner
 As Lessee, producer required to furnish
security deposit and dead rent or royalty
(payable to appropriate government)
whichever is higher as well as surface rent
(payable to SG)
 Increasing Licensing fee structure and
dead rent payments incentivise early
exploitation of license and leases
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The Petroleum and Natural
Gas Rules, 1959
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Salient features of Rules (contd)
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Provides for arbitration of disputes which
may arise between the Government and
the licensee or lessee
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Territorial Waters, Continental Shelf,
Exclusive Economic Zone And Other
Maritime Zones Act, 1976
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Article 297 of the Constitution vests
resources found in these areas with
Central government
No exploration in the Continental shelf
and exclusive economic zone permitted
without Central Government’s permission
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Regulating the upstream
sector
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Creation of an independent and impartial upstream
regulator is a key challenge for regulation in
upstream sector
Currently MoPNG is in charge of regulating
upstream sector. Director General of
Hydrocarbons performs technical advisory function
But government has a significant ownership stake
in certain upstream companies
Regulatory functions should not be discharged by
the government when it is also competing with
private players. Will avoid conflict of interest
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Regulating the upstream
sector
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This has been achieved in other infrastructure
sectors like Electricity and Telecom by constitution
of independent regulatory bodies through
comprehensive statutory framework
The downstream sector will soon see the
introduction of a omnibus regulator for oil and
natural gas (Petroleum Regulatory Board Bill
2002)
Independent regulator for upstream would assure
private players that they would be provided a
level playing field. This should attract greater
competition and the benefits of this greater
competition would increase value for all the
stakeholders
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Regulating the upstream
sector
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Other areas which would benefit from such
regulatory oversight include:
 Better appreciation of operators commercial
interest and minimizes opportunities for rent
seeking behavior
 Coordination with downstream regulation
 Acting against anti-competitive practices
 Role as arbitrator in case of dispute arising
between operator entities and other stake
holders; minimizes delay in exploitation of
resources due to dispute
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Regulating the upstream
sector
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Options for creation of independent regulatory
body
 Create a new regulatory authority and vest
it with power to implement licensing policy
as well as regulatory functions
 Increase the independence of DGH
possibly through separate statutory
framework and confer additional powers
on it to enable it to discharge role of
upstream regulator
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"Let me tell you something that we Israelis
have against Moses. He took us 40 years
through the desert in order to bring us to
the one spot in the Middle East that has
no oil!"
-Golda Meir (Israeli founder and prime
minister)
The gods have been kinder in our case!
Lets ensure that their bounty reaches the
people
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THANK YOU!
11th December 2004
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