Energy Conclave 2006
organised by IRADE
26th July, 2006
LEGAL AND REGULATORY FRAMEWORK
FOR THE PETROLEUM SECTOR
Hemant Sahai Associates
Advocates
New Delhi • Mumbai • Bangalore • Goa • London
CONSTITUTIONAL AND LEGAL
FRAMEWORK
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•
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By virtue of Article 297 of the Constitution of India,
petroleum in its natural state, including in the
Territorial Waters and the Continental Shelf of India is
vested in the Union of India;
Petroleum Act, 1934
Petroleum Rules, 2002
• deal with the law relating to the import, transport, storage,
production, refining and blending of petroleum.
•
•
Oilfields (Regulation and Development) Act, 1948
Petroleum and Natural Gas Rules, 1959
• Provide for regulation of Petroleum Operations and grant of
Licenses and Leases for exploration, development and
production of Petroleum in India
LEGAL FRAMEWORK
•
Petroleum and Minerals, Pipelines (Acquisition
of Right of User in Land) Act, 1962
• Provides for acquisition of rights of way for laying
pipelines
•
Territorial Waters, Continental Shelf, Exclusive
Economic Zone and other Maritime Zones Act,
1976
• provides for the grant of a license by the Government
to explore and exploit the resources of the continental
shelf and exclusive economic zone and provide for
the grant of License and Lease in respect of any land
or mineral underlying the ocean, within the territorial
waters, the continental shelf and exclusive economic
zone of India by the Central Government
LEGAL FRAMEWORK
• Essential Commodities Act, 1955
•
Price control
• Petroleum and Natural Gas Regulatory
Board Act, 2006 (yet to be brought into
force)
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Provides for the establishment of a
Regulator for the Sector
REGULATORY FRAMEWORK
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Currently, the Government of India through the Ministry of
Petroleum and Natural Gas (MOPNG) and Director
General of Hydrocarbons regulates the Hydrocarbon
sector;
•
The Petroleum and Natural Gas Regulatory Board Act,
2006 has been passed - yet to be brought into force;
•
The Act provides for the establishment of the Petroleum
and Natural Gas Regulatory Board to regulate the refining,
processing, storage, transportation, distribution, marketing
and sale of petroleum, petroleum products and natural gas;
•
The Act does not deal with E&P, i.e. the production of
crude oil and natural gas
REGULATORY FRAMEWORK
Key functions of the Regulator include :
•
ensuring uninterrupted and adequate supply of petroleum,
petroleum products and natural gas in all parts of the
country
•
to promote competitive markets
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Protect consumer interest and foster fair trade and
competition
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Register entities to market notified petroleum products and
natural gas; to establish and operate LNG terminals and to
establish storage facilities for petroleum, petroleum
products and natural gas
REGULATORY FRAMEWORK
Key functions of the Regulator…. Contd.
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Authorise entities to lay, build, operate or expand a
common carrier or contract carrier or local natural gas
distribution network
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Declare pipelines as common carrier or contract carrier
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Notify Regulations for access to common/contract carrier
and specify pipeline access code; for transportation rates;
for access to city/local natural gas distribution network to
ensure fair trade & competition and for technical and
safety specifications
REGULATORY FRAMEWORK
Status of the Regulator under the Act
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The Act prescribes an independent status for the
Regulator – quasi judicial body;
•
The Central Government will have powers to lay
down the broad policy framework, besides being
entitled to intervene in matters adversely affecting
public interest.
EXPLORATION AND PRODUCTION
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Private participation in gas exploration and production
is pursuant to the NELP and in terms of the Oilfields
(Regulation and Development) Act, 1948 and
Petroleum and Natural Gas Rules, 1959
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Production Sharing model.
•
Gas can be freely marketed and sold by the constituents
of PSC – crude has to be sold only to persons
designated by Government of India
• in NELP VIth round Freedom has been given to the
contractor for marketing of oil and gas in the domestic
market.
EXPLORATION AND PRODUCTION
NELP VI – PRINCIPAL FEATURES
Upto 100% participation by foreign companies.
 No signature, discovery or production bonus.
 No mandatory state participation.
 No carried interest by National Oil Companies
(NOCs).
 Income Tax Holiday for seven years from start of
commercial production.
 Sharing of profit petroleum based on pre-tax
investment multiple achieved by the contractor and
is biddable.

EXPLORATION AND PRODUCTION
NELP VI – PRINCIPAL FEATURES
Royalty for onland areas payable at the rate of
12.5% for crude oil and 10% for natural gas. For
offshore areas, royalty payable at the rate of 10%
for oil and natural gas. Royalty for discoveries
 in deep water areas beyond 400 m iso-bath payable
at half the applicable rate for offshore areas for the
first seven years of commercial production.
 Fiscal stability provision in the contract.
 Freedom to the contractor for marketing of oil and
gas in the domestic market.
 To facilitate investors, a Petroleum Tax Guide
(PTG) in place.

PIPELINE TRANSPORTATION & STORAGE
•
The major gas sector infrastructure has been developed by GAIL
including the major Hazira-Vijaipur-Jagdishpur (“HVJ”)
pipeline.
•
Other players are OIL, Assam Gas Company, Gujarat Gas
Company, Gujarat State Petroleum Corporation, Mahanagar Gas
Limited and Indraprastha Gas Limited.
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Right-of-way for laying pipelines is granted under the Pipelines
Act – Notification by Government of India, additional
clearances from highways, canals and other bodies.
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The Petroleum Regulatory Board Act provides a framework for
authorizations to lay, build, operate or expand pipeline and
establish and operate LNG terminals.
DISTRIBUTION
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Today, GAIL is the primary gas transmission, distribution and
marketing company in India accounting for almost 95 percent
of the market share.
•
No specific rules that govern operation of distribution
networks. Same Government authorizations and clearances
mentioned for exploration and production are required – The
Regulator will be required to establish such rules and
protocols.
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As regards tariff, no system in place to govern prices of
distribution services in India, For use of GAIL pipelines,
GAIL charges a flat rate to its customers, and revises such
tariff based on approval from the Central Government – Once
again The Regulator will be required to establish such rules
and protocols for tariff determination and open access rules.
DISTRIBUTION


Guidelines for Laying Petroleum Product Pipelines was notified
on 20th November 2002 and supplemented on 26th October 2004,
to deregulate the oil sector and to attract investment in the
petroleum product pipelines.
The main features of the Guidelines are :
– Categorization of pipelines into those of specified length (upto 300 km
or more) originating from refineries, captive pipelines and those
originating from ports;
– Right of user (RoU) in land for laying pipelines under the Petroleum
Pipelines (Acquisition of Right of User in Land) Act 1962 for the
pipelines less than 300 km in length, will be granted in favour of
applicant company treating such pipelines as captive pipelines;
– For pipes more than 300 km in length, specified procedure shall be
followed including a mandatory invitation of expression of interest
from any company interested in taking capacity on a ‘take or pay’
basis;
DISTRIBUTION

Features …..Contd.
– Common carrier principle shall be followed in case of excess capacity, on
the basis of a tariff as approved by the competent authority;
– The ROU acquisition under the Petroleum Pipelines (Acquisition of Right
of User in Land) Act, 1962 will be subject to such conditions as may be
deemed fit by the Government in public interest and subject to specified
conditions
– The guidelines are to remain in force till the Petroleum Regulatory Board
is constituted.
– After Petroleum Regulatory Board is constituted, the RoU in land for
laying petroleum product pipelines will be granted by the Ministry of
Petroleum & Natural Gas subject to fulfillment of requirements under the
petroleum regulatory law.
– Eligibility of parties seeking capacity will not be limited on the grounds
that the party seeking capacity is neither a refinery nor possesses any
marketing rights.
IMPLICATION OF SUPREME COURT
DECISION ON GUJARAT GAS ACT
•
The Government of Gujarat tried to introduce provisions pertaining
to distribution networks in the State of Gujarat through the Gujarat
Gas (Regulation of Transmission, Supply and Distribution) Act,
2001.
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The Central Government took the view that it alone had powers to
legislate on natural gas and LNG.
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President of India referred the matter to the Supreme Court of India
to provide its opinion on whether the State Governments or the
Central Government had such powers under the Constitution of
India.
•
On 25 March 2004, the Supreme Court of India has opined that
natural gas in any physical form including LNG is a central subject
and the State Governments have no power to legislate on it.
FOREIGN INVESTMENT REGIME
E&P and transportation
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FDI upto 100% is permitted on the automatic route in oil
(Other than refining) exploration in both small and
medium size fields subject to and under the policy of
Government on private participation in :
(a) exploration of oil and
(b) the discovered fields of National Oil companies
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FDI upto 100% is permitted on the automatic route on
petroleum product marketing, subject to the existing
sectoral policy and regulatory framework in the oil
marketing sector.
• Investment of Rs 2,000 crores in the petroleum sector, over a 10
year period.)
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FOREIGN INVESTMENT REGIME
FDI upto 100% is permitted on the automatic
route for petroleum product pipeline subject to
and under the Government policy and regulations
thereof.
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FDI upto 100% is permitted for natural gas/LNG
pipelines with prior Government approval.
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100% wholly owned subsidiary (WOS) is
permitted for the purpose of market study and
formulation under FIPB route.
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100% wholly owned subsidiary (WOS) is
permitted for investment/financing.
FOREIGN INVESTMENT REGIME
Refining
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FDI is permitted up to 26% in case of public
sector units (PSUs).
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PSUs will hold 26% and balance 48% by public.
Automatic route is not available
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In case of private Indian companies, FDI is
permitted upto 100% under automatic route
THANK YOU