The Oil and Gas Law Review: India
India is the third-largest energy consumer in the world,2 and oil and gas, as an energy resource, contributes 40 per cent of its total energy consumption.3 As of April 2019, the country had balance recoverable reserves of about 618 million metric tonnes of crude oil and about 1,308 billion cubic meters of natural gas.4 In 2019–2020, crude oil production was about 32.17 million metric tonnes, and the natural gas production of the country was about 31.18 billion cubic metres.5 With this level of production, about 83.8 per cent of the crude oil and about 47.3 per cent of the natural gas consumed in India are imported.6
The Indian government, from time to time, has adopted various licensing regimes with a view to enhance domestic production. As a general principle, an acreage awarded under a licensing regime continues to be regulated under such a regime, and any subsequently amended regime is applicable to acreages awarded under such regime. Therefore, at present different blocks are governed by different licensing regimes (depending on when they were awarded). The four broad categories of licensing regime that are presently applicable are discussed below.
i Nomination regime (for blocks awarded till late 1970s)
Under this regime, the petroleum exploration licence (PEL) was granted to the two national oil companies – Oil India Limited (OIL) and Oil and Natural Gas Corporation Limited (ONGC) on a nomination basis.
ii Pre-NELP regime (for blocks awarded between 1980 and 1995)
Pre-NELP Exploration Rounds: 28 exploration blocks were awarded to private companies. OIL and ONGC were given the right to participate in the blocks after discovery. At present, 11 pre-NELP production sharing contracts (PSCs) are active.7
Regarding pre-NELP discovered field or development rounds, for the small, medium-sized and discovered fields (proven reserves as discovered by ONGC and OIL), petroleum mining lease (PML) was granted to private parties for these fields. The Indian government has signed 28 contracts for 29 discovered fields. Out of these, 21 contracts are active.8
iii NELP regime (for blocks awarded between 1997 and 2010)
The new exploration licensing policy (NELP) was implemented from 1999.9
Blocks were awarded to companies (including private and foreign companies) through an international competitive bidding process.
The NELP regime was based on the 'production sharing model' (i.e., the Indian government is paid a part of the profits, after deducting the costs incurred by the contractor). The percentage of profit proposed to be paid by the contract was a biddable criteria.
Some 254 production-sharing contracts were signed under nine licensing rounds. Out of these, 45 are active.10
One of the main issues with the regime is that there is an excessive oversight by the Indian government (through management committee), as the costs incurred by the contractors have to be approved by the Indian government.11
iv HELP Regime (for blocks to be awarded after 2016)
In order to further attract the private participation and foreign investments, in 2016, the Indian government introduced the hydrocarbon exploration and licensing policy (HELP).12
The key features of HELP include:
- uniform licence for exploration and production of all forms of hydrocarbon including non-conventional hydrocarbons such as shale gas, coal bed methane, tight gas, gas hydrates, etc.;
- an open acreage licensing policy (OALP) under which prospective bidders have the option to carve out exploration blocks;
- a revenue sharing model;
- marketing and pricing freedom for the crude oil and natural gas produced;
- reduced royalty rates; and
- exploration rights on all of the retained area for the full life of the contract.
In February 2019, the government approved a 'Policy framework on reforms in exploration and production of oil and gas' pursuant to which the parameters under the policy are applicable from the fourth bidding round under OALP. The policy focuses on exploration and highlights a shift from revenue maximisation to production maximisation.13 Some of the key reforms include the following:
- for Category I basins (that have established production): an increase in weightage of minimum work programme and decrease in weightage of revenue share for evaluation of bids, a ceiling of 50 per cent on revenue share at higher revenue point and a reduction in timelines for completion of minimum work programme;
- for Category II and III basins (that have contingent and prospective resources respectively): the award of exploration blocks solely on work programme and no production and revenue sharing (except in case of windfall gain);
- the grant of concessional royalty if production commences within four years in the case of onshore and shallow water blocks, and within five years for deep water and ultra-deep water blocks; and
- the constitution of a committee of external eminent persons or experts for dispute resolution. Parties under existing contracts may also choose to refer disputes and differences to the committee provided that the parties agree in writing and agree not to invoke arbitration under the applicable host government contract.
To date, four OALP bid rounds have been completed under the HELP regime wherein 94 blocks have been awarded.14
In addition to the above, the Indian government also formulated the marginal field policy in 2015 with the objective of bringing the marginal oil and gas fields of the national oil companies to production at the earliest.15
One significant change that has been introduced by the Indian government recently has been the unification of licensing regime as applicable to conventional and non-conventional resources. Prior to the HELP regime, under the NELP regime, the contractors could explore and produce only conventional resources (i.e., crude oil, condensate and natural gas) but not CBM or shale. For unconventional resources, separate policies were formulated by the Indian government such as the CBM policy (1997)16 and policy dated 14 October 2013 granting permission for shale gas and oil exploration and exploitation to national oil companies, for blocks awarded to these companies on nomination basis.17 Under HELP, the contractors would be able to explore and produce unconventional resources under a single licence for the block. Further, the Indian government in August 2018 approved the policy on exploration of unconventional hydrocarbons policy to permit exploration and exploitation of unconventional hydrocarbons such as shale oil and gas and coal bed methane (CBM) under the existing PSCs, CBM contracts and nomination fields.18
Despite these aforementioned efforts of the Indian government, low levels of domestic production and failure to attract investments from foreign players are some of the key issues currently plaguing the sector.
Legal and regulatory framework
India has a federal constitution, where legislative powers are distributed between the central and the state legislatures.19 Pursuant to Article 246 of the Constitution of India, the regulation and development of oil fields, mineral oil resources, petroleum and petroleum products falls within the jurisdiction of the Union Parliament, that is, the federal legislative body of India. The state governments, on the other hand, have the power to regulate matters such as right of use and access land, labour, water and local government. Accordingly, while the contract for exploration and production of hydrocarbons is executed by the Indian government, the licences and approvals for undertaking activities relating to exploration and production for onshore blocks are to be obtained from state governments. For the offshore blocks, the Indian government has the licensing powers.
i Domestic oil and gas legislation
The following are the key pieces of legislation pertaining to upstream oil and gas sector:
- the Oilfields (Regulation and Development) Act 194820 (the Oilfields Act): the Oilfields Act is the primary legislation governing the upstream oil and gas sector. The Oilfields Act incorporates provisions relating to licensing and leasing of oil and gas blocks. In this regard, the Oilfields Act provides for rule-making power of the Indian government with respect to mining leases and mineral oil development21 and royalty rates to be paid by the holder of a mining lease;22
- the Petroleum and Natural Gas Rules 1959 (the PNG Rules): the PNG Rules enacted under the Oilfields Act provides detailed provisions for the granting of licences and leases for both offshore and onshore areas. The PNG Rules prohibit prospecting or mining of petroleum except in pursuance of a PEL or a PML granted under the PNG Rules.23 By an amendment of July 2018, the definition of 'petroleum' under the PNG Rules has been amended to include shale and other hydrocarbons. The amendment is in line with the HELP regime under which the licensing for conventional and non-conventional hydrocarbons has been unified;
- the Mines Act 1952 (the Mines Act) and Oil Mines Regulations 2017: these detail provisions relating to the health, safety and welfare of workers in oil mines. The Mines Act also highlights the duties of owners, agents and managers and the penalties in cases of contravention of the provisions; and
- the Petroleum and Natural Gas (Safety in Offshore Operations) Rules 2008 (the PNG Safety Rules): the PNG Safety Rules have been framed under the Oilfields Act and prescribe safety standards and measures to be taken for the safety of offshore oil and gas operations. The PNG Safety Rules provide for the manner of preparation of information and records; various consents and intimations in relation to the offshore installations; safety, health and environment measures, etc., and prescribe the penalties for contravention of the PNG Safety Rules.
Apart from the above legislation, the Indian government from time to time promulgates policies, standards, directives and guidelines for governing various aspects of the upstream oil and gas sector (including policies for the award of concessions for exploration of blocks and contractual structure to be followed).
The following are the key regulatory and administrative agencies concerned with the upstream oil and sector in India:
- the Ministry of Petroleum and Natural Gas (MoPNG): this is the nodal ministry at the federal government level that supervises the exploration and production activities of petroleum and natural gas, and administers various pieces of legislation, including the Oilfields Act;
- the Directorate General of Hydrocarbons (DGH): pursuant to its resolution dated 8 April 1993, the MoPNG established the DGH with the objective of regulating and overseeing the upstream activities in the petroleum and natural gas sector and also to advise the MoPNG in these areas. The major responsibilities of the DGH include technical advisory to the MoPNG with respect to exploration and optimal exploitation of hydrocarbons and adequacy of development plans proposed by companies, review of exploration programmes, reassessment of reserves as discovered and estimated by companies and advising the Indian government on formulation of safety norms and regulations in oilfield operations.24 The DGH is not an independent regulator and works under the administrative control of the MoPNG;
- the Oil Industry Safety Directorate (OISD): the OISD is the safety regulator for upstream offshore blocks operating under the MoPNG. It has been designated as the 'competent authority' for implementation of the Petroleum Safety Rules and exercises powers and functions under the PNG Safety Rules;25
- the Directorate General of Mines Safety (DGMS): this is the regulatory agency under the Indian government's Ministry of Labour and Employment, and is responsible for safety of the onshore blocks; and
- the Petroleum and Natural Gas Regulatory Board (PNGRB): this is the regulator for the midstream and downstream sector and has been empowered to regulate the refining, storage, transportation, distribution, marketing and sale of petroleum, petroleum products and natural gas. Therefore, transportation and evacuation of petroleum by pipelines outside the delivery point is subject to the PNGRB's oversight and regulations with respect to, among others, tariffs and technical safety standards.
In addition to the above, there are other general regulatory and administrative bodies looking into matters such as the environment, labour and tax that may be relevant for a company operating in the oil and gas sector in India.
India is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New York Convention) as well as the Geneva Convention on the Execution of Foreign Arbitral Awards 1927. If a party receives a binding award from a country that is a signatory to either of the conventions, and is notified as a convention country by India, the award would then be enforceable in India subject to the satisfaction of the Indian courts of the enforceability of such awards. For enforcement of a foreign award, under either of the aforementioned conventions, the enforcing party has to fulfil certain requirements prescribed under the (Indian) Arbitration and Conciliation Act 1996, such as production of arbitration award, etc.
India's bilateral investment treaties
From 1994 to 2015, India entered into 83 bilateral investment treaties (BITs), which were largely negotiated on the basis the Model BIT of 1993.26 In December 2015, India adopted a revised model text for its BITs.27 The Indian government proposes to replace the existing BITs with the revised text. In light of the proposed renegotiation of the BITs, in 2016, the Indian government issued notices to 58 countries to terminate the then applicable BITs after completion of the initial term. Accordingly, BITs executed with the 58 countries expired in 2017.28 Further, India has circulated a proposed joint interpretative statement to the counterparties for the 25 BITs for which the initial term has not been completed. The joint interpretative statement was issued to align the ongoing treaties with the text of the revised BITs and to clarify the ambiguities in the text of the existing treaty. Subsequent to the revised model text of 2015, BITs or statements (JISs) have been entered into with Colombia,29 Bangladesh,30 Belarus31 and the Kyrgyz Republic32 and an Investment Cooperation and Facilitation treaty has been entered into with Brazil33.
According to the United Nations Conference on Trade and Development (UNCTAD), which keeps an account of the number of investment disputes, a total of 25 known investor–state dispute settlement cases are pending against India. Further, there are eight cases where India is the claimant.34
Recent developments regarding India's double taxation avoidance arrangements regimes
India has double taxation avoidance arrangements (DTAAs) with more than 80 countries, including Australia, Canada, Germany, Mauritius, Singapore, the UAE, the UK and the US.
As noted under Section I, the licensing regime can be broadly categorised under nomination, Pre-NELP, NELP and HELP regime. PSCs have been entered into with contractors under the NELP and Pre-NELP regimes, and revenue sharing contracts (RSCs) are entered into for blocks awarded under the HELP regime. There have been organised licensing rounds (competitive bidding) under the NELP and HELP regime. However, there is a difference between the two regimes regarding the manner in which acreages are determined. While under NELP, the blocks on offer were determined by the Indian government, under HELP, the Indian government has introduced the concept of open acreage policy wherein the companies can choose the blocks from the designated area which are subsequently put for bidding.
Post the award of blocks and execution of the contract, the contractor is required to obtain a PEL for the entire contract area as per the provisions of the Oilfields Act and the PNG Rules. Under the terms of the PEL, the licensee is granted an exclusive right to operations relating to the information drilling or test drilling and right to lease over any part of the licence area.35 Subsequently, for carrying out development and production activities, the contractor is required to obtain a PML for parts of the contract area encompassing discoveries. Under the PML, the lessee has an exclusive right in the leased land to conduct mining operations for petroleum and natural gas and has the right to carry out construction in the leased area for full enjoyment of the lease or to fulfil the obligations under the lease.36
The Indian government has been empowered to grant PEL or PML in respect of any land vested in the union or in offshore areas and the state governments have the power to grant PEL or PML over the lands vested with the state government.37 The Territorial Waters, Continental Shelf, Exclusive Economic Zone and Other Maritime Zones Act 1976 provides for the granting of licence by the Indian government to explore and exploit the resources of the continental shelf and exclusive economic zone.38
As per the provisions of the PNG Rules, the Indian government may, by way of a special or general order, restrict the amount of oil or gas to be produced, by a lessee in the respective allotted field, in the interest of conservation of oil resources.39 Further, the terms of contract provides that until India becomes self-sufficient, oil and natural gas produced in India is to be sold within the domestic market in India. Therefore, the freedom to sell hydrocarbons is limited to sale in India and the same cannot be exported.
The price at which the gas produced is to be sold has undergone various changes over the years, and pricing freedom, which is one of the key features of HELP, is a relatively new concept in the sector. A brief background of the gas pricing regime followed in India is as follows.
Prior to November 2014, the gas pricing regime was broadly divided under two heads: (1) administered pricing mechanism (APM); and (2) non-administered pricing mechanism (Non-APM). The APM regime covered the gas sold by state-owned oil and gas companies, from blocks which were given to them on nomination basis and under this mechanism, where the Indian government determined the price at which gas was to be sold. The Non-APM regime regulated the price of gas produced from the Pre-NELP blocks and NELP blocks. Under the Non-APM regime, the price of gas was to be determined based on the provisions of the PSC executed by the parties. Accordingly, the price of gas produced from the Pre-NELP blocks was determined by the Indian government, and the price of gas produced from NELP blocks was to be based on a formula approved by the Indian government.
In October 2014, in order to bring about uniformity in the gas pricing regime, the MoPNG notified the New Domestic Natural Gas Pricing Guidelines, 2014 (the Gas Pricing Guidelines), which took effect from 1 November 2014. The Gas Pricing Guidelines prescribe a formula for determining the well head price of gas produced, and this price is notified on a half-yearly basis by the Petroleum Planning and Analysis Cell (PPAC). The price determined in accordance with the Gas Pricing Guidelines was applicable to all gas produced in India, (including gas from Nominated Blocks, Pre-NELP blocks, NELP blocks and CBM blocks), except in specified circumstances.
In March 2016, the Indian government notified the Marketing including Pricing Freedom for the Gas to be produced from Discoveries in Deepwater, Ultra Deepwater and High Pressure-High Temperature Areas Guidelines, allowing pricing freedom for all discoveries in deepwater, ultra-deep water and high temperature-high pressure areas, which were yet to commence production as on 1 January 2016. Pursuant to these guidelines, the parties could sell gas at a price up to the ceiling price notified by PPAC on a half-yearly basis.
In March 2016, by introduction of HELP, contractors have marketing and pricing freedom with respect to all hydrocarbons produced. It may be noted that the HELP regime is applicable prospectively to the blocks allocated under HELP, and not to the blocks that were awarded prior to enforcement of HELP. Accordingly, unless otherwise notified, the Gas Pricing Guidelines, the Deep Water, Ultra Deep Water, High Pressure-High Temperature Area Guidelines, and the CBM Pricing Guidelines, will continue to be applicable to blocks awarded or nominated prior to enforcement of HELP.
The government, by its resolution dated 28 February 2019, has also permitted marketing and pricing freedom for new discoveries under existing contracts where the field development plan would be approved after the date of issuance of the policy. On 7 October 2020, the Cabinet Committee on Economic Affairs approved 'Natural Gas Marketing Reforms', whereby marketing freedom would be granted to the Field Development Plans (FDPs) of blocks in which production sharing contracts already provide pricing freedom.40
Assignments of interests
According to the PNG Rules, the holder of a PEL or PML may assign its rights subject to the prior written approval of the government that has granted the licence or lease.41 Additionally, restrictions on the assignment of participating interests emanate from the applicable PSC or RSC as the case may be. The contractor is required to seek prior approval of the Indian government for: (1) assignment of participating interest; (2) mortgage of participating interest; (3) change in control of the member, or its parent company; or (4) change in relationship of the contractor with the companies providing guarantee (which is typically the parent company).42 Various foreign companies have raised concerns about this approval requirement, since any change of shareholding at the parent company of the contractor would require a prior approval of the Indian government, in the same manner as the assignment of the participating interest.43
i Income tax
The Indian government enters into agreements with contractor entities for the joint performance of conducting exploration, development or production operations for oil and gas. Levy of income tax is computed as per the Income Tax Act, 1961 (the IT Act). The profits and gains of the entities participating in such operations is computed on the basis of the determined value and revenue realised on the sale of oil and gas as per the contract, reduced by applicable deductions as per the IT Act. Certain specific deductions in the terms of contract are also allowed in lieu of or in addition to corresponding allowances under 'Profits and Gains of Business or Profession' in the IT Act. These include expenditure incurred for exploration and drilling operations including infructuous or abortive exploration expense subject to prescribed conditions.44
Non-residents engaged 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 per cent (plus surcharge and education cess) of the gross revenues.45
ii Goods and services tax
Goods and services tax (GST), a single tax on the supply of goods and services, formulates the indirect tax regime applicable in India. Under GST, credits of input taxes are available in the subsequent stage of value addition, making GST a tax only on value addition at each stage. Crude oil, petrol, natural gas, fuel jet and diesel are currently excluded from the ambit of GST levy, whereas, other oil products (such as liquefied petroleum gas, naphtha and kerosene) are included within the ambit of GST. As a result, upstream oil and gas companies can take advantage of input tax credit on GST paid only on the manufactured value added products covered under GST.46
Tax paid on inputs (purchase of machinery, crude oil, etc.) is deducted from the tax on output for the final output product. Tax credits cannot be used for products excluded from GST, as tax credit cannot be transferred between the erstwhile and new taxation system under GST. This is on account of procurement of goods and services for upstream and downstream sector being in the ambit of GST, and the majority output being outside the purview of GST.47 This implies that the majority of GST paid on goods and services by oil and gas companies is a cost to them in addition to the cost of compliance under both the old and new tax regimes. This results in the end consumer bearing the burden for the increase in cost of such products.48
Hence, oil and gas companies are to deal with the parallel system of taxation. While they incur GST charges on services and inputs used for operations, they cannot offset this against value added tax and excise duty on output such as crude oil, diesel etc. resulting in stranded taxes.
iii Tax incentives
Various special allowances and incentives are applicable to companies engaged in the Indian oil and gas sector.
Foreign companies are exempt from tax on income earned from sale of crude oil to any consumer in India or storage of crude oil in any facility in India and its sale to any consumer in India. The conditions for the aforementioned are that (1) the income is earned in Indian currency; (2) the agreement for such sale and the foreign company are approved and notified by the central government; and (3) the foreign company does not have any other activity in India. Any income accruing or arising to a foreign company on account of sale of leftover stock of crude oil, if any, from the facility in India after the expiry of the agreement or the arrangement is also exempt from tax subject to certain conditions.49
Allowance may be claimed in relation to expenditure made by way of infructuous or abortive exploration expenses for any area surrendered before commencement of commercial production, drilling or exploration activities or services in respect of physical assets, and depletion of mineral oil in the mining area (subject to the terms of the agreement with the Indian government).50
Deduction is allowed for any capital expenditure incurred for 'laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities being an integral part of such network'.51
In cases of new machinery or plant that have been acquired or installed after 31 March 2005, a sum of 20 per cent of actual cost of the machinery or plant is allowed as deduction. Further, where an undertaking is set up after 1 April 2015 in a notified backward area in states of Andhra Pradesh, Telangana or West Bengal, and any new machinery or plant is acquired or installed for such an undertaking, between 1 April 2015 and 1 April 2020, a 20 per cent deduction is increased to 35 per cent of actual cost of the machinery or plant.52
Additionally, on the Customs front, exemption from payment of Basic Customs duty and Integrated GST is allowed on specific goods imported for use in petroleum or CBM operations, subject to submission of an essentiality certificate granted by DGH and fulfilment of other prescribed conditions.53
Environmental impact and decommissioning
The environmental approvals and permissions that are required to undertake oil and gas operations in India include general environmental approvals as provided under the environmental legislations and specific approvals based on the location of the oilfield.
The general environment approvals include:
- environmental clearance: under the Environmental Impact Assessment Notification of 2006 as notified under the Environment (Protection) Act 1986 and the Environment (Protection) Rules 1986, it was mandatory to obtain environmental clearance to undertake exploration and production activity in the oilfield. However, recently the Indian government categorised onshore and offshore oil and gas exploration activities as 'B2 category' for seeking prior environmental clearance. By this change, the exploration activities will now require environmental clearance from the states concerned and also an environment impact assessment report or public hearing will not be required. However, the development or production activities for offshore or onshore fields will continue to be covered under category A and require an assessment;54
- consent to establish and consent to operate: under the Water (Prevention and Control of Pollution) Act 1974 and Air (Prevention and Control of Pollution) Act 1981, the consent to establish and consent to operate are required to be obtained by the respective state pollution control board. However, the projects requiring environment clearance may be exempted from consent to establish requirement subject to the prescribed conditions;55 and
- authorisation for handling hazardous waste: under the Hazardous Wastes (Management, Handling and Trans-boundary Movement) Rules 2016, authorisation from the state pollution control board is required for generating, processing, treating, packaging, storing and transporting waste (generated from drilling for oil and gas production).
The approvals based on the location of the oilfield include:
- coastal regulation zone: under the Coastal Regulation Zone Notification 2011, exploration and extraction of oil and natural gas in the coastal zone requires permission from the Ministry of Environment, Forest and Climate Change;
- forest clearance: if the exploration and production operations involve diversion of forest land, then forest clearance under the Forest (Conservation) Act 1980 read with Forest (Conservation) Rules 2003, is required to be obtained; and
- wildlife clearance: if the exploration and production activities are planned in and around protected areas such as national parks and wildlife sanctuaries, in addition to the environmental clearance and forest clearance, clearance under the Wildlife (Protection) Act 1972 is also required.
i Environmental requirements specific to PSCs and RSCs
Apart from the obligation contained under the environment laws, the PSCs and RSCs also provide for certain additional obligations in relation to protection of the environment. The terms of the contracts stipulate that the contractor shall conduct the petroleum operations with due regard to environmental protection concerns. In this regard, the contractors are required to adopt modern oilfield and petroleum industry practices and standards (under the terms of PSC) or good international petroleum industry practices and standards (under the terms of RSC) including advanced technologies, practices and methods of operations for the prevention of environmental damage. The relevant clause further provides that in the event of an emergency, such as accident, oil spill and fire, the contractor shall implement relevant contingency plan and perform such site restoration as may be necessary.
ii Decommissioning and site restoration
In relation to decommissioning and site restoration, the PNG Rules provide that on termination of the exploration licence or mining lease, the area and any wells contained in it must be delivered in good order and condition.56 For six months after the licence or lease ends, the former licensee or lessee can remove or dispose of any petroleum recovered during the licence or lease period, along with stores, equipment, tools and machinery and any improvements on the land covered by the licence or lease that the state government permits.57
As per the terms of the PSCs and RSCs, the contractors are required to remove all equipment and installations from the contract area in a manner as agreed with the Indian government pursuant to an abandonment plan. The contractor is required to prepare and submit a proposal to the Indian government for site restoration including abandonment plan and requirement of funds for site restoration and annual contribution.58 Further, the contractor is obligated to perform all necessary site restoration activities as under any specific guidelines, rules or regulations that has been formulated by the Indian government in relation to site restoration.59 In this regard, the site restoration and abandonment guidelines for petroleum operations have been issued by the Indian government, which prescribes provisions for obligations regarding decommissioning of offshore and onshore production sites.60
Foreign investment considerations
As per the Foreign Direct Investment Policy (FDI Policy), read with The Foreign Exchange Management Act 1999 (FEMA) and the Foreign Exchange Management (Transfer or Issue of a Security by a Person Resident Outside India) Regulations 2017, 100 per cent foreign direct investment (FDI) is permissible under the 'automatic route' (i.e., without the approval of the Indian government for exploration and production in oil and gas fields).61 Accordingly, a foreign company can undertake operations in the oil and gas sector either by itself or as a consortium with an Indian partner. A foreign company can undertake exploration and production activities in India without incorporating a company in India. Most foreign companies operating in this sector have setup a project office. The setting up of a project office is regulated under the Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations 2016, as may be amended from time to time.
ii Capital, labour and content restrictions
As discussed above, 100 per cent FDI is permitted under the FDI policy and as per the provisions of FEMA, certain restrictions can be placed on the transactions based on their classification as current account transactions and capital account transactions.62 Current account transactions are permissible unless specifically restricted by the Indian government and all capital account transactions are specifically prohibited unless specifically permitted by the Indian government.
With respect to local content and employment to Indian citizens, the PSCs and RSCs provide that: (1) the contractor shall, to the maximum extent possible, employ (and require the operator and its subcontractors to employ) Indian citizens having appropriate qualifications and experience; and (2) give preference to the purchase and use of goods (equipment, materials and supplies) that are manufactured, produced or supplied in India subject to their timing of delivery, quality and quantity required, price and other terms.
The Prevention of Corruption Act 1988 (PoCA) is the primary legislation for prevention of corruption in India. As per the amendment of July 2018 to PoCA, commercial organisations including companies that are either incorporated or undertaking business in India can be specifically charged as bribe givers and are punishable with fine.63 The Central Vigilance Commission (CVC) is the apex vigilance institution and is free from any executive control. The CVC, pursuant to the mandate granted to it under the Central Vigilance Commission Act 2003, can conduct inquiries into allegations of offences committed under the PoCA by certain categories of public servants, government companies, societies and local authorities etc. The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act 2015 regulates the undisclosed foreign income and assets and imposes penal taxes on undisclosed foreign income and assets. Additional criminal liabilities have also been included under the legislation for non-disclosure of foreign assets and wilful attempts to evade taxes.
The Prevention of Money-laundering Act 2002 (PML Act) and the Prevention of Money-Laundering (Maintenance of Records) Rules 2005 prohibit and criminalise money laundering activities in India. Under the PML Act, 'money laundering' is defined as any process or activity connected with the proceeds of a crime listed in the schedule to the PML Act, and projecting or claiming it as untainted property.64 In order to prevent money laundering activities, the PML Act requires all banks, financial institutions and persons engaged in certain designated activities, to maintain records of all transactions undertaken. An operator of an upstream oil and gas block does not qualify as a reporting entity under the PML Act and the PML Rules. The Companies Act 2013 also contains provisions with respect to statutory audits, corporate governance requirements, annual filing requirements among others that, inter alia, seek to prevent fraud and instances of money laundering. Further, pursuant to Section 216 of the Companies Act 2013, the Indian government has the power to initiate investigation to find out the real beneficiary of a financial transaction undertaken by a company.
Some of the current developments in the sector are as follows:
- On 7 October 2020, the Cabinet Committee on Economic Affairs, which is chaired by the Indian Prime Minister, approved the Natural Gas Marketing Reforms. The objective of the policy is to have a procedure for discovery of the market price of natural gas that is sold by the gas producers. For this, guidelines would be issued for sale through an e-bidding process. The policy would also provide for the granting of marketing freedom to the field development plans of blocks where the PSCs provided for pricing freedom.65
- In order to facilitate the ease of doing business and attract investments in the Indian upstream oil and gas sector, the federal government has introduced a simplified procedure for approval process under the PSCs.66 Post the review of the approval processes and submission of various documents under the PSCs, the Indian government has categorised 37 processes under three headings as:
- 22 processes have been brought under Category A wherein no approval is required, and the self-certified documents are accepted. Some of these include information of discovery, notification to DGH for well or production testing, and information about hiring of vendors through tenders;
- three processes have been brought under Category B wherein approval will be deemed on expiry of 30 days after submission of self-certified documents. These include work programme and budget, appraisal programme or its revisions and field development plans or its revisions; and
- 12 processes have been brought under Category C wherein approval shall be required under the statutes or contracts. These include extension of exploration phase, grant of PEL or extension application.
- Guidelines have also been issued on 25 June 2020 for early monetisation of hydrocarbon discoveries under the PSCs and RSCs whereby it had been clarified that the timelines under the provisions of the PSCs and RSCs are the maximum prescribed timelines for the development and monetisation of discoveries and there is no restriction on early monetisation with such timelines.67 In this regard, early monetisation is permissible before completion of appraisal, declaration of commerciality, and submission of development plan, etc., subject to certain conditions such as submission of early development plan pursuant to a discovery along with request for grant of PML, etc.
- Pursuant to the policy reforms in the exploration and licensing policy, the Indian government constituted the Committee of External Persons/Experts for Dispute Resolution and notified the terms and conditions governing the same, including constitution, tenure of members, powers and functions, etc.68
- In relation to the ongoing licensing rounds, under the HELP regime, four bidding rounds have been completed whereby 94 blocks have been awarded to successful bidders. Further, the bids for 11 blocks have been opened under bid round V.69
1 Venkatesh Raman Prasad is a partner at J Sagar Associates.
2 BP Statistical Review of World Energy 2020 (69th ed.), page 8, available at https://www.bp.com/content/dam/bp/business-sites/en/global/corporate/pdfs/energy-economics/statistical-review/bp-stats-review-2020-full-report.pdf.
3 Energy Statistics (2020), Ministry of Statistics and Programme Implementation, Government of India, page 52, available at www.mospi.gov.in/sites/default/files/publication_reports/
4 Annual Report 2019–20, Ministry of Petroleum and Natural Gas, Government of India, page 30, available at http://petroleum.nic.in/sites/default/files/AR_2019-20E.pdf (MoPNG Annual Report).
5 India's Hydrocarbon Outlook: 2019–20, Directorate General of Hydrocarbons, Ministry of Petroleum and Natural Gas, Government of India, Key Highlights of the Indian E&P Sector: 2019–20 available at http://dghindia.gov.in/assets/downloads/ar/2019-20.pdf (DGH Report).
6 MoPNG Annual Report, page 26.
7 DGH Report, Key Highlights of the Indian E&P Sector: 2019–20.
9 New Exploration Licensing Policy, Resolution No. N-O-19018/22/95-ONG-DO-VI, 10 February 1999, Ministry of Petroleum & Natural Gas, Government of India, http://petroleum.nic.in/sites/default/files/circulars-notifications60.pdf.
10 DGH Report, Key Highlights of the Indian E&P Sector: 2019–20.
11 Under the profit sharing model, the management committee (which includes the Indian government representatives) scrutinise cost details of private participants. This process has led to many delays and disputes in the past.
12 Hydrocarbon Exploration and Licensing Policy, Resolution No. O-32011/4/2013-ONG-I, 30 March 2016, Ministry of Petroleum & Natural Gas, Government of India, http://petroleum.nic.in/sites/default/files/HELP.pdf.
13 Government Drives Big Bang Reforms in Oil & Gas Sector, Press Information Bureau, Government of India, Niti Aayog (20 February 2019), https://pib.gov.in/PressReleseDetail.aspx?PRID=1565604#:~:text=The%20Union%20Cabinet%20chaired%20by,production%20of%20oil%20and%20gas.
14 (1) Contracts signed under Open Acreage Licensing Policy Bid Round-I, Press Information Bureau, Government of India, Ministry of Petroleum and Natural Gas (1 October 2018),
https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1548095; (2) Ministry of Petroleum and Natural Gas signs contracts for 32 blocks awarded under Open Acreage Licensing Programme (OALP) Bid Rounds – II & III, Press Information Bureau, Government of India, Ministry of Petroleum and Natural Gas (16 July 2019), https://pib.gov.in/Pressreleaseshare.aspx?PRID=1579035; (3) Ministry of Petroleum and Natural Gas signs Contracts for 7 Blocks Awarded under Open Acreage Licensing Programme (OALP) Bid Round – IV; 2020 Will Witness More Investment in Country's Energy Infrastructure, Says Shri Dharmendra Pradhan, Press Information Bureau, Government of India, Ministry of Petroleum and Natural Gas (2 January 2020), https://pib.gov.in/PressReleseDetailm.aspx?PRID=1598294.
15 'Marginal field policy', Resolution No. O- 19018/22-95-ONG.III, Press Information Bureau, Government of India, Ministry of Petroleum and Natural Gas (15 October 2015, 05:20 PM), http://pib.nic.in/newsite/printrelease.aspx?relid=128772.
16 'CBM Policy approved by the Government on the 19th July, 1997', http://petroleum.nic.in/sites/default/files/cbmpolicy_0.pdf.
18 'Cabinet approves Policy Framework for exploration and exploitation of Unconventional Hydrocarbons', Press Information Bureau, Government of India, Cabinet, (1 August 2018, 06:10 PM), http://pib.nic.in/newsite/PrintRelease.aspx?relid=181361.
19 INDIA CONST., Article 246 r/w Entry 53, List I of Schedule VII.
20 The Oilfields (Regulation and Development) Act, 1948, No. 53, Acts of Parliament, 1948 (India).
21 Oilfields Act, Sections 5 and 6.
22 Oilfields Act, Section 6A(1).
23 PNG Rules, Rule 4.
25 Notification No. SO 1502(E), Ministry of Petroleum and Natural Gas, Government of India (8 June 2008).
26 'Model Text for the Indian Bilateral Investment Treaty', Press Information Bureau, Government of India, Ministry of Finance, (16 December 2015, 08:10 PM), http://pib.nic.in/newsite/PrintRelease.aspx?relid=133411.
28 'India to trade partners: Sign new bilateral investment treaties by 31 March', https://www.thehindubusinessline.com/economy/indias-bilateral-investment-pacts-under-cloud/article9625580.ece.
29 The Joint Interpretative Declaration with Colombia came into force on 4 October 2018.
30 The Joint Interpretative Note with Bangladesh came into force on 7 October 2017.
31 The BIT with Belarus was signed on 24 September 2018. Bilateral Investment Treaties (BITs)/ Agreements, Department of Economic Affairs, Ministry of Finance, Government of India, https://dea.gov.in/bipa?page=7, Additionally, agreements with Brazil and Cambodia have been concluded and are yet to be signed, and agreements with 11 other countries including Iran, Switzerland, Hong Kong and Mauritius are under discussion.
32 The BIT with the Kyrgyz Republic was signed on 14 June 2019, Bilateral Investment Treaties (BITs)/ Agreements, Department of Economic Affairs, Ministry of Finance, Government of India,
34 Investment policy hub, http://investmentpolicyhub.unctad.org/ISDS/FilterByCountry.
35 PNG Rules, Rule 7(i).
36 PNG Rules, Rule 7(ii).
37 PNG Rules, Rule 5.
38 Territorial Waters, Continental Shelf, Exclusive Economic Zone and Other Maritime Zones Act, 1976, No. 80, Acts of Parliament, 1976, Section 6(4), Section 7(5).
39 PNG Rules, Rule 27.
40 Cabinet approves 'Natural Gas Marketing Reforms', Press Information Bureau, Cabinet Committee on Economic Affairs (7 October 2020), https://pib.gov.in/PressReleasePage.aspx?PRID=1662325.
41 PNG Rules, Rule 17.
42 Model RSC, Article 26.3.
43 Richa Mishra, 'What kept foreign players off OALP-I', Business Line, May 7, 2018, available at https://www.thehindubusinessline.com/economy/what-kept-foreign-players-off-oalp-1/article23805274.ece.
44 The Petroleum Tax Guide, Ministry of Petroleum & Natural Gas-Government of India,
45 Section 44BB of the IT Act.
46 K Ravichandran, 'How will the new tax rates impact the oil and gas sector?', Economic Times, Energy World (22 May 2017), http://energy.economictimes.indiatimes.com/news/oil-and-gas/-how-will-the-new-tax-
47 Richa Mishra & Twesh Mishra, 'GST: Fitment blues worry oil and gas industry', The Hindu Business Line (11 June 2017) www.thehindubusinessline.com/economy/policy/gst-oil-and-gas-industry/article9724778.ece.
48 'GST credit will be available only on value-added crude oil products', The Hindu Business Line (21 August 2017), www.thehindubusinessline.com/economy/gst-credit-will-be-available-only-on-valueadded-crude-oil-products/article9825371.ece.
49 Section 10(48A) of the IT Act.
50 Section 42 of the IT Act.
51 Section 35AD of the IT Act.
52 Section 32(iia) of the IT Act.
53 Notification No. 50 / 2017–Customs dated 30 June 2017.
54 'Govt of India categorizes onshore and offshore oil and gas exploration activities as Category B2 for green clearance', Notification No. S.O. 236(E), 16 January 2020, http://dghindia.gov.in/assets/downloads/5e26b9dacbb53Gazette_Notification.pdf.
55 Modalities for making CTE and EC a one-step process, F. No. 3-3/2019-1A.III, Government of India, Ministry of Environment, Forest and Climate Change, Impact Assessment Division, 5 February 2020, http://dghindia.gov.in/assets/downloads/5e3d16a2a665eonestepencte.pdf.
56 PNG Rules, Rule 22.
58 Model PSC, NELP-IX, Article 14.10; Model RSC, Article 14.10 for OALP Bid Round 5.
59 Model RSC, Article 4.
60 Site Restoration and Abandonment Guidelines for Petroleum Operations (April 2018).
61 'Consolidated FDI Policy (effective from 28 August 2017)', D/o IPP F. No. 5(1)/2017-FC-1, Department of Industrial Policy and Promotion Ministry of Commerce and Industry, Government of India.
62 As per the FEMA, 'Capital account transaction' means a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India, and includes transactions referred to under the provisions of FEMA; and 'current account transaction' means a transaction other than a capital account transaction and without prejudice to the generality of the foregoing such transaction includes: (1) payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business; (2) payments due as interest on loans and as net income from investments; (3) remittances for living expenses of parents, spouse and children residing abroad; and (4) expenses in connection with foreign travel, education and medical care of parents, spouse and children.
63 The Prevention of Corruption (Amendment) Act, 2018, No. 16 of 2018 (26 July 2018).
64 Section 3 of the PML Act.
65 Cabinet approves 'Natural Gas Marketing Reforms', Press Information Bureau, Cabinet Committee on Economic Affairs (7 October 2020), https://pib.gov.in/PressReleasePage.aspx?PRID=1662325.
66 Notification No. DGH/PSC/Self-Certification/20-21, Ministry of Petroleum and Natural Gas, Government of India (25 April 2020).
67 Guidelines for Early Monetization of Hydrocarbon discoveries under Production Sharing Contracts (PSCs) and Revenue Sharing Contracts (RSCs), File Ref: DGH/PSC-RSC/EM/20-21 (25 June 2020), http://dghindia.gov.in/assets/downloads/5ef4a5fe1a7a2EarlyMonetisationGuidelines.pdf.
68 Notification No. Expl-15022(13)/6/2017-ONGD-V, Ministry of Petroleum and Natural Gas, Government of India (16 December 2019).
69 OALP Bid Round – V Part-I Opening Summary of Bids received against offered blocks,