Oil & Gas

Role of the union and states: India’s Constitution declares the country to be a union of states and Part XI of the Constitution distributes legislative powers between the union and states. As per the Constitution, the union has exclusive powers to make laws regarding the regulation and development of oil fields, mineral oil resources, petroleum and petroleum products.

As far as the states are concerned, licences and leases in respect of the land vested in a state are granted by the governments of the respective states, with the previous approval of the union government. Further, since the amendment of the 2006 Environment Impact Assessment Notification by the Union Ministry of Environment, Forest and Climate Change, environment clearances in case of oil and gas exploration must be obtained from the state government concerned.

Ownership: As far as the ownership of oil and gas rights is concerned, Article 297 of the Constitution declares that petroleum in its natural state in the territorial waters
and the continental shelf of India is vested in the union.

As per the Model Production Sharing Contract (Model PSC) and the Model Revenue Sharing Contract (Model RSC), which form the templates of agreements executed with exploration and production contractors, the union government is the sole and exclusive owner of petroleum underlying the area specified in such contract.

• Petroleum Act, 1934: This was enacted to consolidate and amend the law relating to the import, transport, storage, production, refining and blending of petroleum.
• Oilfields (Regulation and Development) Act, 1948 (‘Oilfields Act’): This provides for the regulation of oilfields and the development of mineral oil resources in India. Mining leases in India must be granted consistent with the rules framed under this legislation.
• Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976 (‘Maritime Act’): This sets out provisions for the grant of licences by the central government to explore and exploit the resources of the continental shelf and exclusive economic zone.
• Petroleum and Natural Gas Regulatory Board Act, 2006: This was enacted to establish the Petroleum and Natural Gas Regulatory Board (PNGRB). The PNGRB is empowered to regulate the refining, processing, storage, transportation, distribution, marketing and sale of petroleum, petroleum products and natural gas.
• The Mines Act, 1952 and the Oil Mines Regulations, 2017: These:
• • set forth the duties of owners, managers and agents in relation to oil mines;
  • provide for penalties for specified offences; and
  • regulate the operating conditions in oil mines by providing for safety standards.
• The Petroleum and Natural Gas Rules 1959 (‘PNG Rules’): These rules, framed under the Oilfields Act, regulate the grant of petroleum exploration licences (PELs) and petroleum mining leases.

Legislation:

• Oil Industry (Development) Act, 1974 (‘OIDB Act’): The OIDB Act established the Oil Industry Development Board (OIBD) to provide financial assistance for the development of the oil industry and levy of excise on crude oil and natural gas. The OIBD functions under the administrative control of the Ministry of Petroleum and Natural Gas (MoPNG).

Policies:

• Hydrogen Exploration and Licensing Policy (HELP): The central government approved HELP in 2016 to enhance domestic oil and gas production by encouraging exploration in sedimentary basins. HELP introduced provisions for:
• • a uniform licence regime for conventional as well as non-conventional hydrocarbons;
  • an open acreage licensing policy (‘OALP’) (whereby companies can choose and submit expressions of interest for blocks from a designated area across the year without having to wait for auctions); and
  • a graded system for reduced royalty rates to incentivise offshore exploration.
• New Exploration and Licensing Policy (NELP): NELP was formulated by the government in 1997 to provide a level playing field to both public and private sector companies in the exploration and production of hydrocarbons.
• Discovered Small Field Policy 2015 (DSF): The DSF aims to bring India’s marginal fields that have not yet been monetised or exploited to production by way of specific reforms introduced in this regard.

Rules and regulations:

• Petroleum and Natural Gas (Safety in Offshore Operations) Rules, 2008 (‘Offshore Safety Rules’): The Offshore Safety Rules, framed under the Oilfields Act, contain provisions on health, safety and environmental protection measures, among other things.

India has signed treaties in three categories that are of relevance to the oil and gas sector:

• From a tax perspective, India has entered into double tax avoidance treaties with over 85 countries.
• As far as disputes are concerned, India is a signatory to:
• • the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards; and the
  • 1927 Geneva Convention on the Execution of Foreign Arbitral Awards.
• As regards investment protection, since 1994 India has entered into around 86 bilateral investment treaties (BITs), the latest being with Brazil in 2020. However, since framing a Model BIT in 2016, India also terminated around 66 of those BITs, while it signed three new treaties.

The primary regulators in the oil and natural gas sector are as follows:

• Directorate General of Hydrocarbons (DGH): The DGH was established in 1993 and operates under the administrative control of the MoPNG. It is the nodal agency for the implementation of the HELP, NELP, CBM and DSF policies, and advises the MoPNG on exploration strategies and production policies. It is further tasked with reviewing exploration programmes of companies operating with a PEL under the Oilfields Act and the PNG Rules.
• PNGRB: The PNGRB 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 among oil and gas companies.
• Oil Industry Safety Directorate (OISD): The OISD is the safety regulator designated under the Offshore Safety Rules. It is tasked with implementing the Offshore Safety Rules and exercises other powers and functions provided for under those rules.
• Petroleum and Explosives Safety Organisation (PESO): The PESO regulates the transportation of petroleum by land and water in accordance with the Petroleum Act and the Petroleum Rules, 2002.
• Directorate General of Mines Safety (DGMS): The DGMS operates under the Ministry of Labour and Employment and is responsible for regulating the occupational safety, health and welfare measures to be taken for the protection of persons employed in mines.

As far as upstream activities are concerned, the relevant regulator is the DGH. The DGH operates under the MoPNG. As such, it is not an independent regulator. As a regulator, the DGH has lately focused on policy reforms aimed at:

• increasing exploration activities and attracting domestic and foreign investment in unexplored or unallocated areas of sedimentary basins;
• facilitating easy transfers/exits from blocks; and
• simplifying the bidding process.

As far as midstream and downstream activities are concerned, the PNGRB was established to protect the interests of consumers and entities engaged in specified activities relating to petroleum, petroleum products and natural gas, and to promote competitive markets in the sector. The PNGRB has investigative powers in relation to complaints regarding retail services obligations, marketing service obligations and retail prices. It also has adjudicating powers to decide on disputes between entities or between entities and any other parties on issues relating to the refining, processing, storage, transportation, distribution, marketing or sale of petroleum, petroleum products and natural gas under the PNGRB Act, unless the parties have agreed to arbitration.

Under the Constitution, matters such as the right of use and access to land, labour, water and local government fall within the legislative powers of the state governments. As such, as far as onshore blocks are concerned, licences and approvals for undertaking activities relating to exploration and production must be obtained from local government regulatory bodies.

As per List II in the Seventh Schedule to the Constitution, the powers to make laws relating to ‘gas and gas-works’ also fall within the domain of state governments. This has been interpreted to mean that synthetic gases can be locally manufactured and used in industries and hospitals.

The oil and gas industry is one of the core sectors of India’s economy. As of May 2021, India had 10,419 kilometres of crude pipeline, with a capacity of 147.9 million metric tonnes per annum; while gas pipeline infrastructure in the country stood at roughly 18,465 kilometres. By 2024, India’s natural gas production is expected to increase to 122 million standard cubic metres per day.

India is one of the largest contributors to non-Organisation for Economic Co-operation and Development petroleum consumption growth globally, and continues to be the third-largest energy consumer. It is also set to expand its natural gas grid to 34,500 kilometres by adding another 17,000 kilometres of gas pipeline.

According to one industry report, India’s petroleum and natural gas sector attracted $7.91 billion in foreign direct investment between April 2000 and December 2020. India is a key refining hub and the largest exporter of petroleum products in Asia. It has 23 refineries and plans to grow its refining capacity to 400 million tonnes per annum by 2025.

India’s market in the upstream and downstream sectors is consolidated. The market in the midstream sector is moderately fragmented.

The total value of petroleum products exported by India in FY 2020 was $35.8 billion. The major products exported were:

• high-speed diesel;
• motor spirit;
• aviation turbine fuel; and
• naptha.

Important oil refineries are located across the country and are also concentrated around the Northeast. Some of the important oil refineries are located in Guwahati, Barauni, Panipat, Mumbai, Numaligarh, Kochi and Jamnagar.

The oil and gas industry in India is dominated by state-owned corporations such as:

• Indian Oil Corporation Limited;
• Oil & Natural Gas Corporation (ONGC);
• Bharat Petroleum Corporation Limited; and
• Hindustan Petroleum Corporation Limited.

The leading private players are Reliance Industries Limited and Nayara Energy Limited.

As far as the market landscape is concerned, the following companies dominate the upstream, midstream and downstream markets:

• Upstream: The upstream market in India’s oil and gas industry is consolidated and the major players are:
• • ONGC;
  • Reliance Industries Limited;
  • Oil India Limited;
  • Larsen & Toubro Limited; and
  • BP Plc.
• Midstream: The Indian oil and gas midstream market is moderately fragmented and major companies include:
• • Indian Oil Corporation;
  • Hindustan Petroleum Corporation Limited;
  • Petronet LNG Limited;
  • Adani Enterprises Limited; and
  • Gail Limited.
• Downstream: The downstream market in India is consolidated and the key players are:
• • Indian Oil Corporation Limited;
  • Bharat Petroleum Corporation Limited;
  • Hindustan Petroleum Corporation Limited;
  • Reliance Industries Limited; and
  • Nayara Energy Limited.

(a) Oil and gas

As per a National Statistical Office report entitled “Energy Statistics 2021”, crude petroleum accounts for 32.76% of India’s energy resources consumption; while natural gas accounts for about 7.6% of total energy consumption.

(b) Import and export

Domestic production of crude oil accounts for roughly 15% of India’s crude oil requirement, and India depends on imports for the remaining 85% of its crude oil demand. Crude oil production for 2020–2021 was 30.5 million metric tonnes; while natural gas production was 38.67 billion cubic metres. No natural gas is exported.

The current regime for the grant of rights required to undertake exploration and production for both conventional and non-conventional hydrocarbons is governed by the Hydrogen Exploration and Licensing Policy (HELP). This policy provides for the grant of a uniform licence to enable exploration and production operators to extract all hydrocarbon resources covered under the Oilfields Act read with the Petroleum and Natural Gas Rules (‘PNG Rules’).

To operationalise the Open Acreage Licensing Policy (OALP) under HELP, the government of India issued a notification dated 30 June 2017. The policy envisages applications for the following:

• Petroleum operations contracts: These contracts are entered into for exploration, development and production operations in any of the onshore, shallow water, frontier, deepwater and ultra deepwater blocks for all types of hydrocarbons generally for a period of six years, with provision for extension; and
• Reconnaissance contracts: These are entered into for exploration operations in any of the onshore, shallow water, frontier, deepwater and ultra-deepwater blocks for all types of hydrocarbons for a period of two years, with provision for an extension of one year.

For these contracts, based on the quantum of geological and geophysical data available, the Directorate General of Hydrocarbons (DGH) has classified the sector/area into three categories of sedimentary basins. The classifications of sectors/areas and the available data for the same can be viewed in the National Data Repository.

Petroleum operations contracts are permitted for all three categories of sedimentary basins– that is, Categories 1–3. However, reconnaissance contracts are permitted only for Categories 2 and 3.

Given that OALP has been implemented under HELP, applicants for either petroleum operations contracts or reconnaissance contracts need not wait for a formal bidding round and can submit suo moto expressions of interest for the same. The expression of interest/bid is assessed on the basis of the following criteria.

Petroleum operations contracts:

• Technical qualification criteria: Minimum operatorship experience of one year in oil and gas exploration and/or development/production is mandatory. Further, a ‘positive’ minimum acreage holding (in the last consecutive 10 years) or a minimum average annual production (MMBOE) in any five of the last consecutive 10 years is necessary. However, if either the acreage or the MMBOE threshold is met, the other criterion is optional.
• Financial qualification criteria: For petroleum operations contracts, a two-stage qualification is involved in the assessment of net worth to ensure that the minimum notified threshold is met.

Reconnaissance contracts:

• Technical qualification criteria: Both originators and/or bidders for reconnaissance contracts must have one of the following:
• • 1,000 line kilometres of 2D seismic acquisition, processing and interpretation experience;
  • 300 square kilometres of 3D seismic acquisition, processing and interpretation experience;
  • drilling experience of at least five wells, or
  • other surveys (eg, controlled-source electromagnetic, gravity, magnetic, magnetotelluric) for at least 1,000 square kilometres.
• Financial qualification criteria: The originator and the bidder should have a positive net worth at the time of bidding. Further, the same requirements and conditions as are applicable during the second stage of petroleum operations contracts apply.

The application process to obtain a contract or licence for exploration and production rights involves the following procedure:

• Bidding: A technically and financially qualified company or consortium submits an expression of interest along with the notified application fee and a participation bond of a specified value, depending on whether the expression of interest is for a petroleum operations contract or a reconnaissance contract.
• Acceptance window: Suo motoexpressions of interest are accepted throughout the year in three windows. Applications for expressions of interest are evaluated on a first come, first served basis. The DGH endeavours to finalise the expressions of interest received within 30 days of closure of each window, subject to internal/government approvals.
• Carving of blocks: Upon conclusion of the evaluation period, the DGH carves out blocks based on the suo moto expression of interest.
• Notice inviting offer: The DGH then offers the blocks by way of competitive bidding through a ‘notice inviting offer’. The DGH endeavours to complete the evaluation within 45 days of the bid closing date, which is generally 60 days from the date on which the notice is published.
• Evaluation: The evaluation criteria are specific to the category of sedimentary basins, depending on whether these belong to Category I, II or III formulated by the central government.
• Execution of revenue sharing contract (RSC): In the case of competitive bidding, blocks are awarded to the successful bidder, which is then given 45 days to sign the contract.

All entities, whether Indian or foreign, can own exploration and production rights. International competitive bidding processes under HELP are open to both private and foreign investors. The government has approved 100% foreign direct investment in exploration activities of oil and natural gas fields, infrastructure and marketing.

A suo moto expression of interest should be accompanied by a non-refundable application fee of $1,000 to be paid online to the DGH. Further:

• for petroleum operations contracts, a participating bond must be submitted of $150,000 per sector for all types of blocks (in the form of a bank guarantee from a scheduled commercial bank); and
• for reconnaissance contracts, the originator must submit a participation bond of $30,000 per sector for all types of blocks in the form of a bank guarantee from a scheduled commercial bank, valid for 18 months.

Participating bonds of similar amounts are involved where a bid is submitted in response to a notice inviting offer. Further, the central government has capped the amount where multiple sectors are involved.

In addition, the successful applicant must pay a mining lease fee rent under the PNG Rules (as amended from time to time), as well as a fixed yearly rent. Contractors must also pay royalties and revenue shares for petroleum operations.

Under HELP, the royalty rate for onshore blocks is 12.5% (oil) and 10% (gas and coalbed methane). The royalty rates for hydrocarbons in shallow water, deepwater and ultra-deepwater blocks are currently 7.5%, 5% and 2.5% respectively. However, no royalty is payable for the first seven years for operations in deepwater and ultra-deepwater blocks.

As per the PNG Rules, petroleum exploration licences are granted in the first instance for four years, which may be extended for two further periods of one year each. As far as petroleum mining leases are concerned, these are ordinarily granted for a term of 20 years.

Under the OALP which operationalises HELP, petroleum operations contracts are executed for six years with a provision for one one-year extension in each of the initial and subsequent exploration phases for onshore and shallow water blocks. For frontier, deepwater and ultra-deepwater blocks, petroleum operations contracts are executed for six years, with a provision for two extensions of one year each.

Reconnaissance contracts are entered into for a period of two years, with a provision for a single one-year extension, irrespective of the location of the block.

Under the Model RSC issued by the DGH, contractors/operators have the following general rights:

• the exclusive right to carry out petroleum operations (encompassing exploration, development and production or any combination thereof) within the contract area;
• the right to use, free of charge, such quantities of petroleum produced as are
  reasonably required to conduct the petroleum operations in the contract area, following good international petroleum industry practices (GIPIP); and
• the right to lay pipelines, to build roads, bridges, ferries, aerodromes, landing fields, radio telephones and related communication and infrastructure facilities, and to exercise other ancillary rights as may be reasonably necessary for the conduct of petroleum operations, subject to such approvals from relevant authorities as may be required under the applicable law and regulations.

RSCs generally impose the following conditions/obligations on the contractors/operators:

• to conduct all petroleum operations at their sole risk, cost and expense;
• to conduct all petroleum operations in relation to the contract area diligently, expeditiously, efficiently and in a safe and workmanlike manner;
• to ensure the provision of all information, data, samples and similar which may be required to be furnished under the applicable laws or the contract;
• to ensure that all equipment, materials, supplies, plant and installations used by the contractor comply with generally accepted standards, are of proper construction and are kept in safe and good working order;
• in the preparation and implementation of work programmes and in the conduct of petroleum operations, to follow GIPIP; and
• to follow any directions of the DGH for maintaining reservoir health.

As per the Model RSC, upon completion of the committed work programme, the contractor will have the option to:

• relinquish the entire contract area, in which case the contract will stand as terminated; or
• retain the discovery areas and development areas (as mentioned therein).

On either the termination of the contract or relinquishment by the contractor, the contractor will have the following obligations:

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

As per the Model RSC, any contractor or member of the contractor consortium may assign or transfer part or all of its participating interest in the RSC with the prior written consent of the central government. The Model RSC stipulates that such consent will not be unreasonably withheld, provided that the government is satisfied that:

• the prospective assignee or transferee has the capacity and ability to meet its obligations under the RSC, and is willing to provide an unconditional undertaking to the government to assume its participating interest share of the obligations and to provide guarantees in respect thereof as provided in the RSC;
• the prospective assignee or transferee is not a company incorporated in a country with which the government, for policy reasons, has restricted trade or business;
• the prospective assignor or transferor and the assignee or transferee are willing to comply with any reasonable conditions of the government as may be necessary in the circumstances to ensure performance under the contract; and
• the assignment or transfer will not adversely affect the performance or obligations under the contract or be contrary to the interests of India.

As per the Model RSC, a contractor or a member of the contractor consortium can mortgage, pledge, charge or otherwise encumber, at its own risk and cost, all or part of its participating interest for the purposes of security relating to finance to the extent required to perform its obligations under the contract, provided, among other things, that the contractor or such member remains solely liable for all its obligations relating to its participating interest to the exclusion of the other participants.

There are no specific regulations in place in this regard. However, the Model RSC largely requires compliance with GIPIP, which contain relevant guidelines in this regard. The Offshore Safety Rules set out the safety measures that must be taken at the time of decommissioning or abandonment. In our opinion, steps mandated in relation to relinquishment are also relevant in this regard.

The Supreme Court of India has observed that it is difficult to see how the owner or lessee of land which has the right to win minerals can affect such a severance between the mineral rights and surface rights by opening and operating mines on that land. It further noted that even while the owner or lessee is carrying on mining operations, it continues to enjoy the surface rights also (Burrakur Coal Co Limited v Union of India, 1961 AIR 954).

That said, in practice, while the operator/contractor must obtain exploration and production rights through the Hydrogen Exploration and Licensing Policy regime, if it succeeds in its expression of interest or bid, it must obtain the petroleum exploration licence (PEL) and petroleum mining lease (PML) separately.

To obtain surface rights, the operator/contractor must comply with the provisions of the Petroleum and Natural Gas Rules (‘PNG Rules’) which govern the grant of PELs and PMLs.

In the case of a PEL, the licensee has the exclusive right to carry out geological surveys, geophysical surveys, information drilling and test drilling operations for petroleum in the area covered by the licence. In the case of a PML, the lessee has the exclusive right to conduct mining operations for petroleum and natural gas in and on the land demised by such lease, together with the right to construct and maintain in and on such land works, buildings, plants, waterways, roads, pipelines, reservoirs, tanks and other structures and equipment as are necessary for the enjoyment of the lease or to fulfil lease obligations.

The holders of PMLs granted under the Oilfields Act are obliged to pay royalties as well as a mining lease fee rent on petroleum (including natural gas):

• in the case of any land or mineral underlying the ocean with territorial waters or continental shelf, to the union government; and
• in the case of land vested in a state, to the state government with the prior approval of the union government.

The holder of a PEL must ensure payment of security deposit and the annual licence fee as required under the PNG Rules.

The central government or the state government is entitled to cancel the PEL or PML if the holder:

• fails to fulfil or contravenes the terms contained therein;
• fails to use the land for the specified purposes in a bona fide manner; or
• uses the land for an unspecified or unsanctioned purpose.

The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 is the relevant law governing the acquisition of land for public purposes and the amount of compensation to be made on account of such acquisition. Its purpose encompasses industrial corridors and mining activities, among other things. However, the acquisition of land requires consent, which must be presented alongside the social impact assessment study.

The Petroleum and Mineral Pipelines (Acquisition of Right of User in Land) Act, 1962 includes similar provisions. The act allows the central government, a state government or any corporation to acquire the right of use in any land. The act enables the authorities to lay down pipelines on the land of the user. The owner of the land on which the pipeline has been laid is restricted from:

• constructing any building or any other structure on the land;
• constructing or excavating any tank, well, reservoir or dam on the land;
• planting any tree on the land; or
• doing anything which could cause damage to the pipeline in any manner whatsoever.

The central government, a state government or a corporation is thereafter bound to compensate the owner whose right to the enjoyment of such land is affected.

Schedule V of the Constitution provides safeguards against the displacement of tribal populations because of land acquisitions. Governors of states which have ‘scheduled areas’ are empowered to prohibit or restrict the transfer of land from tribes and to regulate the allotment of land to members of scheduled tribes in such cases.

Section 4(5) of the Scheduled Tribes and Other Traditional Forest Dwellers (Recognition of Forest Rights) Act, 2006 states that, save as otherwise provided, no member of a forest-dwelling scheduled tribe or other traditional forest dwellers shall be evicted or removed from the forest land under his or her occupation until the recognition and verification procedure is complete.

Further, various provisions on rehabilitation and resettlement as per the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act are implemented by the relevant state governments. The purpose of these enactments is:

• to ensure, in consultation with institutions of local self-government established under the Constitution, a humane, participative, informed and transparent process for land acquisition, with the least disturbance to the owners of the land and other affected families; and
• to provide just and fair compensation to the affected families whose land is acquired or proposed to be acquired.

Additionally, the Panchayats (Extension to Scheduled Areas) Act, 1996 provides that the Gram Sabha or the Panchayats at the appropriate level must be consulted before making an acquisition of land in scheduled areas for development projects and before resettling or rehabilitating persons affected by such projects.

The Ministry of Environment, Forest and Climate Change (MoEF), through a notification dated 16 January 2020, categorised onshore and offshore oil and gas exploration activities as ‘Category B2’ for seeking prior environmental clearance.

In the original Environmental Impact Assessment (EIA) Notification, 2006, “offshore and onshore oil & gas exploration, development and production” were covered under Schedule 1(b). As ‘Category A’ projects, these required:

• the preparation of an EIA report;
• a public hearing; and
• clearance from the MoEF.

As exploration activities in the hydrocarbon sector have been moved to Category B2, they now require environmental clearance only from the states concerned and do not require the preparation of an EIA report or a public hearing. However, development and production activities, on both offshore and onshore fields as hydrocarbon blocks, will continue to merit assessment as Category A projects.

The requirements and restrictions that apply to the processing and refining of oil and gas are contained in the Petroleum Rules, 2002, issued under the Petroleum Act. These rules require the prior approval of a refinery, including any alterations to the same, by the chief controller. The rules further mandate that permission to carry maintenance or repair work must be obtained in writing in compliance with the standards issued by the Oil Industry Safety Directorate.

In addition, the rules contain provisions for the inspection and testing of samples and the methodology of tests. The rules also specifically bar the blending of tetraethyllead with petroleum, consistent with the international phase-out of this practice.

The Directorate General of Foreign Trade – the governing body for the promotion and facilitation of exports and imports under the Ministry of Commerce and Industry – notifies the procedure to be followed by:

• an exporter or importer;
• the licensing/regional authority; or
• any other authority for the purpose of implementing the Foreign Trade (Development & Regulation) Act.

However, India does not export crude oil or natural gas; and under the Model Revenue Sharing Contract, the contractor must sell its entire entitlement to crude oil and condensate and/or natural gas from the contract area in India until India attains self-sufficiency. On the other hand, India is a net exporter of petroleum products, so the exportation of petroleum products is freely allowed, subject to a no objection certification from the Ministry of Petroleum and Natural Gas.

The Petroleum and Natural Gas Regulatory Board Act (‘PNGRB Act’), together with the Petroleum Rules, 2002 (under the Petroleum Act), contains the rules governing the import, transport and storage of petroleum. The PNGRB regulates the transportation by pipeline in accordance with the regulations issued under the PNGRB Act. On the other hand, the Petroleum and Explosives Safety Organisation regulates transportation by land and water under the Petroleum Act and the Petroleum Rules, 2002.

As far as cross-border transportation is concerned, India does not export petroleum. However, as far as imported petroleum is concerned, the Petroleum Rules, 2002 provide that no petroleum may be landed except with the permission of the commissioner of customs. Further, in the case of importation, petroleum may be landed only at places specially authorised by the union government.

The PNGRB (Authorising Entities to Lay, Build, Operate, or Expand Natural Gas Pipelines) Regulations, 2008 empower the PNGRB to establish technical standards and specifications, including safety standards, for:

• activities involving petroleum, petroleum products and natural gas; and
• the construction and operation of pipeline and infrastructure projects related to the downstream petroleum and natural gas sector.

The PNGRB permits the construction of oil and gas pipelines through a competitive bidding procedure that complies with the 2008 PNGRB Regulations and the PNGRB (Authorising Entities to Lay, Build, Operate, or Expand Petroleum and Petroleum Products Pipeline) Regulations, 2010.

Further, the PNGRB (Technical Standards and Specifications for Natural Gas Pipelines) Regulations, 2009 set out the standards that must be complied with to ensure the uniform application of design principles, in order to assist in the selection and application of materials and components, equipment and systems, and in the operation and maintenance of natural gas pipelines. These regulations further focus on the safety of employees, the general public and the infrastructure linked with natural gas pipelines.

The principal laws are as follows:

• Water (Prevention and Control of Pollution) Act, 1974 and Air (Prevention and Control of Pollution) Act, 1981: These statutes require new units to obtain a ‘consent to establish’ and a ‘consent to operate’ from the Central Pollution Control Board or applicable state pollution control boards before commencing production.
• Forest (Conservation) Act, 1980: Under this act, the permission of the relevant state government along with the express prior authorisation of the central government is necessary to use forest land or part thereof for non-forest purposes.
• Environment Protection Act, 1986 and Environment Protection Rules, 1986: These contain provisions on the protection and improvement of the environment. Additionally, they impose specific restrictions on the emission and discharge of contaminants into the environment.

Relevant rules and regulations include the following:

• Petroleum and Natural Gas Rules, 1959 (‘PNG Rules’): These govern the issuance of petroleum and natural gas exploration licences and mining leases, as well as their conservation.
• Petroleum and Natural Gas (Safety in Offshore Operations) Rules, 2008 (‘Offshore Safety Rules’): These require the contractor to obtain a valid certificate of fitness from the competent authority.
• Environmental Impact Assessment Notification, 2006 (‘EIA 2006’): Prior environmental clearance is required for all onshore and offshore oil and gas projects, except for exploration drilling, under the EIA 2006 as amended in January 2020. The onus of clearing projects falls on the state government, depending on the size or capacity of a project.

• Offshore Safety Rules: These require the operator to retain environmental monitoring documents for as long as is necessary. Any accidental release of hydrocarbons or other noxious compounds that jeopardises the safety of installations or the maritime environment must be immediately reported to the relevant authority.
• Petroleum and Natural Gas Regulatory Board (Technical Standards and Specifications including Safety Standards for Liquefied Natural Gas Facilities) Regulations, 2017: These require facilities that generate waste – such as waste water, sanitary sewage or storm water – to take precautions to avoid, mitigate and manage negative environmental impacts.
• Hazardous Wastes (Management, Handling and Transboundary Movement) Rules, 2016: Approval from the applicable state pollution control board is required under these rules for the generation, processing, treatment, storage and packaging of hazardous waste generated during exploration and production operations.
• Oil Mines Regulations, 2017: These regulations establish a safety management system for discovering, analysing and controlling hazards, as well as for their recovery.
• Contractual obligations: The Model Production Sharing Contract requires the operation to adopt ‘modern oilfield and petroleum industry practices’; and the Model Revenue Sharing Contract (RSC) requires a contractor to follow ‘good international petroleum industry practices and standards’ to give due regard to environmental issues when conducting operations.

• PNG Rules: These mandate the surrender of land and wells in good condition within six months of the expiry or termination of a licence. At the end of this six-month period, the government has the right to auction any petroleum, stores, equipment, tools and machinery, as well as any improvements to the land covered by the licence that the state government permits, if these are not removed by the prior licensee during the specified period.
• Site Restoration and Abandonment Guidelines for Petroleum Operations, 2018: The contractor must submit a decommissioning plan, which includes measures to secure the area against possible future pollution from abandoned wells or polluted deposits to the competent authority. These restoration procedures are carried out to avoid dangers to human life, property or the environment.
• Model RSC: ‘Site restoration duties’ in the Model RSC refer to operations necessary to restore a site to its condition on the date of contract execution as determined by the EIA report or to make a site compatible with its intended after-use. A contractor’s site restoration responsibilities may include:
• • the abandonment of wells and other installations;
  • the removal of equipment, structures and waste;
  • the establishment of contours and drainage;
  • the replenishment of topsoil;
  • revegetation;
  • slope stabilisation; and
  • excavation in-filling.
• Discovered Small Field Policy 2015: For blocks covered by this policy, the contractor must maintain a site restoration fund under the Site Restoration Fund Scheme 1999.

The operator must take reasonable precautions to avoid environmental harm while conducting operations. For any breach, the operator must take all necessary actions to remedy the breach and its consequences. The government may elect to force the contractor to cease operations until remedial measures and repairs are completed.

If the operator fails to complete site restoration within the stipulated timeframe, it can be made liable for the damages incurred. The director, manager, secretary or any other manager can be found guilty if the action breaches any specific laws, such as the Environment (Protection) Act, 1986.

The Ministry of Environment, Forest and Climate Change (MoEF) and the Central and State Pollution Control Boards together form the regulatory and administrative core for the enforceability of environmental obligations. Under the Environment (Protection) Act, 1986, the central government can empower any person to inspect the region to confirm that the obligations under the act are being upheld.

An EIA must be carried out for all oil and gas production and development in a region. The expert appraisal committee set up under the aegis of the MoEF assesses such impact and grants or rejects the environmental clearance based on the economic and environmental costs and benefits. Environmental clearances enforce the environmental obligations on the directors or managers of the operator. Each state government has the right to undertake action to enforce the environmental obligations of the operator.

In light of India’s aim of achieving self-sufficiency in oil and gas production, environmental clearance relaxations are frequently granted by the central government to increase the ease of doing business. In January 2020, the central government demoted oil exploratory projects from Category A (requiring the highest level of scrutiny) to Category B2, thereby removing the requirement to seek environmental clearance for exploratory projects. These relaxations are aimed at incentivising companies to commence exploration projects in less-explored oil blocks.

• Mines Act, 1952: Under this act, ‘mines’ include oil wells and pipelines carrying mineral oil, including natural gas and petroleum. The act provides comprehensive directions on:
• • the accessibility of safe drinking water;
  • separate restrooms for men and women;
  • the ready availability of first-aid kits; and
  • the ready availability of conveyance to medical facilities.
• Offshore Safety Rules, 2012 regulations and 2016 regulations: These aim to ensure the health and safety of workers during oil and gas operations. Among other things, they ensure that employees have access to safe drinking water, sanitary facilities and medical equipment.
• Petroleum and Natural Gas Regulatory Board (Technical Standards and Specifications including Safety Standards for Liquefied Natural Gas Facilities) Regulations, 2018: In addition to the environmental standards, the 2018 regulations require waste-generating facilities to take precautions to avoid, limit and manage adverse health and safety consequences.
• Petroleum and Natural Gas Regulatory Board (Technical Standards and Specifications including Safety Standards for LPG Storage, Handling and Bottling Facilities) Regulations, 2019: The objective of the management and control of day-to-day maintenance on all process units and utilities of a site is to provide for the safe, healthy and environmentally sound execution of maintenance work.

• Mines Act: The chief inspector, appointed under this act, is empowered to conduct an occupational health and safety inspection of a mine at any time after notifying the contractor. The Mines Act requires the operator to give notice upon the occurrence of an accident in or near a mine, including details of fatalities, serious bodily harm, explosions or incidents involving inflammable gases. Additionally, the legislation requires all owners, agents or managers of a mine to submit a quarterly report of all accidents that results in reportable injuries.
• Occupational Safety, Health and Working Conditions Code, 2020 (OSHWC): The OSHWC consolidates more than 10 labour statutes, including the Mines Act, into unified legislation, with the aim of increasing the ease of doing business. It focuses on the health, safety and welfare of workers in a variety of sectors, including mines. It establishes provisions for facilities such as mines on licensing, safety regulations and employer’s responsibilities. It was approved by the Indian Parliament and received the president’s assent in September 2020, but is yet to take effect.

The Mines Act provides that anyone who obstructs the chief inspector, an inspector or any other person designated for inspection, examination or inquiry shall face imprisonment for a term not exceeding three months, a fine not exceeding INR 500 or both. Similarly, anyone who attempts to use a forged certificate of fitness will face a jail term of up to one month, a fine or both. If a person under the age of 18 is employed in a mine, fines will be imposed on the owner, agent or manager of the mine. Additionally, if the operator fails to submit a notice of the accident’s occurrence, it will be penalised with imprisonment for up to three months, a fine or both.

The OSHWC provides that obstructing an inspector’s performance of his or her duties may result in a prison sentence of up to three months and a fine of up to INR 100,000. A violation that results in the death of an employee is penalised by up to two years in prison or a fine of up to INR 500,000, or both. Where no punishment is mentioned, the employer faces a fine of between INR 200,000 and INR 300,000. If an employee violates the code, he or she may be fined up to INR 10,000.

Contractors should review the new standards under the OSHWC to assess their compliance with the same. For instance, the OSHWC restricts the use of contract labour for core functions, with limited exceptions. The OSHWC provides that all employers must:

• ensure that no employee is charged for maintaining workplace safety and health, including medical examinations and investigations to detect occupational diseases;
• ensure that the workplace is safe from any hazards that could injure or sicken employees;
• provide free annual health examinations or testing for specific employees;
• provide and maintain a safe and healthy working environment for employees insofar as is practicable;
• ensure that workplace safety is associated with the use, storage and transport of items and substances; and
• safeguard the health and safety of all employees at work through information, teaching, training and supervision.

The Petroleum and Natural Gas Regulatory Board (PNGRB) investigates installations to verify that the activities being conducted follow the rules and legislation, and that the infrastructure complies with the regulations. The operator conducting oil and gas exploration must conduct a risk assessment before the commencement of operations. The inspector, PNGRB or any such recognised authority will check the qualitative risk analysis report and carry out inspections, verifications and investigations to ensure health and safety while carrying out such operations. The appropriate regulatory authority will analyse the fitness certificate to verify that oil and gas exploration is healthy and safe for personnel and third parties.

Corporate tax is levied at the rate determined by the Income Tax Act, 1961. Domestic companies with a turnover of up to INR 250 billion pay a standard corporate tax of 25%; those with a turnover of more than INR 250 billion pay corporate tax at a rate of 30%. A 4% health and educational cess is also levied on domestic companies.

Similarly, foreign corporations (or their branches) pay a standard corporate tax rate of 40% on income earned in India. In addition, a surcharge of 2% on tax for a foreign company must be paid if income is in excess of INR 10 million. Both domestic and foreign companies are also subject to surcharge.

Minimum alternate tax (MAT) is applied to a company if its tax liability is less than 15% of its book profits. If MAT is applicable, the tax will be calculated at 15% of the business’s book profits.

Crude oil, high-speed diesel, petrol, natural gas and aviation turbine fuel are exempt from the ambit of goods and services tax; but continue to be subject to central excise duty, state value-added tax and electricity duty.

Crude oil and natural gas produced from the field are normally subject to a 20% ad valorem cess. However, the applicable cess rate differs according to the revenue sharing contract or production sharing contract executed.

For royalties, see question 3.5.

The Income Tax Act provides for a tax holiday for an assessee whose profits and gains are derived from the commercial production and refining of mineral oil in India. Such assessee must have commenced:

• mineral oil production after 31 March 1997, but before 1 April 2017;
• mineral oil refining between 1 October 1998 and 31 March 2012; or
• natural gas production (in certain blocks) on or after 1 April 2009, but before 1 April 2017.

Capital and revenue expenditure on exploration and drilling are 100% tax deductible. These costs are aggregated until the year of commencement of commercial manufacturing.

Provisions for site restoration expenses are eligible for a special deduction, provided that the funds are placed in a designated bank account. The deduction is limited to the lesser of either the sum deposited in a separate bank account (the site restoration account) or 20% of the business’s income for the preceding fiscal year.

Additionally, the Income Tax Act provides for accelerated depreciation, which supplements deductions from taxable income. For mineral oil companies’ field activities, the depreciation rate for designated assets is 40%, as opposed to the generic rate of depreciation on a written-down basis at only 15%.

Business losses can be carried forward and offset against business revenue for eight consecutive years, provided that the income tax return for the year of loss is filed on time.

Scientific research expenses incurred for business purposes are tax deductible.

Due to substantial differences between the tax rates applicable to Indian and foreign companies, foreign corporations may consider incorporating an entity in India to avail of the reduced rates. The domestic arm of a foreign entity that is wholly controlled and managed in India may also be deemed to be an Indian corporation.

Under the Hydrogen Exploration and Licensing Policy, exemptions from the cess on crude oil and customs duty on equipment/services used in exploration and production activities are available.

Foreign corporations were also exempted from the payment of income tax on the sale of oil stored in India’s strategic oil reserves in 2017. The storage and sale of oil by a foreign entity must be under an agreement or arrangement approved by the central government.

There has been no significant change in the applicable tax rates in the last three years.

Petroleum and Natural Gas Regulatory Board (PNGRB: The PNGRB Act empowers the PNGRB to exercise such jurisdiction, powers and authority as are exercisable by a civil court on matters relating to:

• the refining, processing, storage, transportation and distribution of petroleum;
• the marketing and sale of petroleum, and the quality of service and security of supply to consumers; and
• registration or authorisation issued by the PNGRB under Section 15 or Section 19 of the act.

The Appellate Tribunal for Electricity, established under the Electricity Act, 2003, has been designated as the appellate authority to hear appeals against the PNGRB’s orders. The second appeal lies before the Supreme Court of India.

Arbitration: Arbitration is an exception to the jurisdiction of the PNGRB. Accordingly, if the agreement between the parties provides for the settlement of disputes by arbitration, as is typically the case with revenue sharing contracts (RSCs), then a party will be required to initiate arbitration proceedings.

Conciliation and mediation by expert committee: In 2019, the Ministry of Petroleum and Natural Gas also issued a notification appointing an Expert Committee for Dispute Resolution to undertake conciliation and mediation for the resolution of disputes concerning exploration and licensing between the parties, as per the Arbitration and Conciliation Act, 1996.

Judicial review: The remedy of judicial review is available if any action by either the union, the states or a competent governmental authority results in the violation of any rights guaranteed under the Constitution.

Disputes have typically involved actions against:

• the government’s policies regarding the New Exploration and Licensing Policy regime;
• the payment of royalties to the central government; and
• the application of retrospective tax legislation.

Given that production sharing contracts (PSCs) (as well as RSCs) typically provide for arbitration, such disputes are generally resolved through arbitration. Cases on retrospective tax legislation have also been the subject of investment arbitrations initiated against the Indian government; and the government’s actions regarding policies for the extension of PSCs have also been challenged on constitutional grounds before the high courts.

• Cairn Energy PLC and Cairn UK Holdings Limited commenced international arbitration proceedings against the Indian government under the UK-India Bilateral Investment Treaty (BIT) in March 2015. The arbitration sought to determine whether India had breached its obligations under the BIT to protect Cairn’s investments in India. The arbitral tribunal, seated at The Hague, ruled in Cairn’s favour and issued an award of approximately $1.2 billion in 2020. India has challenged the award in a Dutch court; while Cairn has filed cases in local courts in various jurisdictions to seek enforcement of the arbitration award.
• Reliance Limited and BG Exploration & Production India Limited had in 2010 initiated arbitration against the Indian government over cost recovery provisions, profits due to the state and the amount of statutory dues, including royalties, payable in relation to the western offshore Panna-Mukta and Tapti oil and gas fields. The final award on the issues was passed earlier this year. It has been challenged by the Indian government before the English High Court.
• In September 2020, the Supreme Court of India upheld an arbitration award passed in favour of Vedanta Resources and Videocon Industries Limited allowing the firms to recover $499 million from the central government instead of a $198 million cost recovery ceiling set by under the PSC executed between the parties. The matter relates to the Ravva oil and gas areas in the Krishna-Godavari basin off India’s east coast.

Current landscape: Increased demand for oil in India is expected to drive investment in refining capacity expansions and upstream production; and the government also plans to invest $2.86 billion in upstream oil and gas production. In February 2021, India’s prime minister also announced that the government plans to invest approximately INR 7.5 trillion in oil and gas infrastructure in the next five years.

There is also an increased focus on facilitating ‘ease of business’ insofar as the sector is concerned. For instance, by way of a notification dated 12 July 2021, the Directorate General of Hydrocarbons has made it easier for companies to continue with their exploration programme by reducing the various compliance and clearances required.

These developments are taking place against the backdrop of the COVID-19 pandemic, which has influenced India’s approach to the oil and gas sector. This is attributable in large part to the ‘Make in India’ and ‘Atmanirbhar’ campaigns of the current regime, which are pushing for increased self-reliance. Corporations and businesses are expected to align their operating strategies consistent with these policies.

Anticipated developments: It is expected that the coming 12 months will witness policy and legislative reforms aimed at:

• amending and overhauling the Oilfields Act;
• consolidating India’s Liquefied Natural Gas Policy; and
• furthering the National Policy on Biofuels, 2018.

There has been considerable change in India’s approach to the oil and gas sector, which can largely be attributed to the ‘Make in India’ and ‘Atmanirbhar’ campaigns of the current regime. Companies and businesses, both Indian and international, must now realign their strategies to accommodate this push towards self-reliance.

Major policy changes include the mandatory approval by India’s reserve bank of investments from countries with which India shares a border. Consistent with this, companies will also be required to register with the administering authorities if they are submitting expressions of interest or bids to participate in contracts floated by the government of India.

Companies should increase their efforts to engage in partnerships with local partners and suppliers, both for participation in revenue sharing contracts and for the deployment of Indian technology/employment of Indian citizens, to ensure compliance with local content norms. Further, against the background of the Cairn proceedings against the Indian government (see question 10.2), income tax considerations should be prioritised when planning investments in the oil and gas sector.

Co-Author: Mohit Kumar