India: Energy – Oil & Gas

India has a well-established upstream oil and gas industry with both state owned and private companies engaged in the sector as operators of oil and gas blocks.

As per the provisional data published in the Indian Petroleum & Natural Gas Statistics 2021- 22 issued by the Government of India: crude oil production was about 29.69 million metric tonnes and the natural gas production of the country was about 34.02 billion cubic meters; and the country had balance recoverable reserves of about 651.77 million metric tonnes of crude oil and about 1,138.67 billion cubic meters of natural gas.

India has a federal constitution whereby legislative powers are distributed between the Parliament of India (the federal legislative body of India), and the state legislatures. Under Article 246 of the Constitution of India, the regulation and development of oilfields, petroleum and petroleum products fall within the legislative powers of the Parliament of India. The respective state governments have the power to regulate matters such as right of use and access to land, water and local government.

Also, by virtue of Article 297 of the Constitution of India, petroleum in its natural state in the territorial waters, exclusive economic zone, and the continental shelf of India is vested in the Union of India. The key governing legislations (also noted in the sections below) thereby have provisions for grant of licenses and leases for exploration, development and production of oil and gas in India. The license and lease for exploration and production is granted by the appropriate government. The contract for exploration and production of oil and gas resources is executed between the companies and the Government of India.

In terms of legal and regulatory regime pertaining to the exploration and production of oil and gas resources in the upstream sector, the following are the key legislations:

• Oilfields (Regulation and Development) Act, 1948 (Oilfields Act) and the Petroleum and Natural Gas Rules, 1959 (PNG Rules): The Oilfields Act is the primary legislation governing the India upstream oil and gas sector. It incorporates provisions relating to licensing and leasing of oil and gas blocks. The Oilfields Act also provides for rule-making power of the Government of India with respect to mining leases, mineral oil development and royalty rates to be paid by the holder of a mining lease. Pursuant to these rule making powers, the PNG Rules have been enacted and provide for detailed provisions for the grant of petroleum exploration licences (PEL) and petroleum mining leases (PML) for both offshore and onshore areas.
• Mines Act 1952 (Mines Act) and Oil Mines Regulations, 2017 (OMR): These legislations contain provisions relating to the health, safety and welfare of workers.
• Specifically, for offshore fields, the Petroleum and Natural Gas (Safety in Offshore Operations) Rules, 2008 (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.

Apart from the above, there are other legislations including those governing environment, labour matters etc. which are key to the sector.

In terms of licensing of the oil and gas fields, the Government of India, from time to time, has adopted various regimes. An oil and gas block awarded under a particular regime continues to be regulated under such a regime, unless specifically amended. Accordingly, different blocks are governed by different regimes depending on the regime under which they were awarded. Broadly, the licensing regimes are described below:

1. Nomination regime (blocks awarded till late 1970s): Under this regime, the licences were granted to the two national oil companies on a nomination basis.
2. Pre-NELP regime (blocks awarded between 1980-1995): Under this regime, blocks were awarded to the national oil companies as well as certain private entities.
3. NELP regime (blocks awarded between 1997-2010): In the new exploration licensing policy (NELP) regime, blocks were awarded to companies through an international competitive bidding process and foreign entities were permitted to participate. Under the NELP regime, the entities were awarded through international competitive bidding and the selected entities would enter into production sharing contracts (PSC) with the Government of India. As part of the PSC, the selected entity would pay a share of the profits to the government, after deducting the costs incurred by the contractor.
4. HELP regime (blocks awarded after 2016): In 2016, the Government of India introduced the hydrocarbon exploration and licensing policy (HELP). The key features of the HELP regime are also noted below. Under this regime, the principle of international competitive bidding was retained with the selected entities entering into a revenue sharing contract (RSC) with the Government of India. The key features of the HELP regime are as follows:
   • 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;
   • Reduced royalty rates payable to the Government of India; and
   • Exploration rights on all of the retained area for the full life of the contract.

Under the HELP regime, which is applicable to blocks awarded 2016 onwards, the selected entities responsible for exploration of the blocks have been granted the right to undertake exploration and production activities of both conventional and unconventional hydrocarbons under a unified/ single license. Prior to HELP regime and under the NELP regime, contractors were permitted to explore and produce only conventional resources.

Therefore, prior to HELP, the Government of India, from time to time, has formulated policies for the exploration and production of unconventional hydrocarbons, such as the Coal Bed Methane (CBM) policy (1997) basis which, the first bidding round for CBM commenced in 2001. Subsequently, there were three other bidding rounds in the years 2003, 2005 and 2008, respectively. This was followed by a policy dated October 14, 2013 granting permission for shale gas and oil exploration and exploitation to national oil companies for blocks awarded to these companies on nomination basis. Further, the Government of India, in August 2018 approved the policy on exploration of unconventional hydrocarbons to permit exploration and exploitation of unconventional hydrocarbons such as shale oil and gas and CBM under the existing PSCs, CBM contracts and nomination fields.

For regulation and supervision of the upstream operations, the Ministry of Petroleum and Natural Gas (MoPNG) is the nodal ministry of the Government of India. Further, the Directorate General of Hydrocarbons (DGH) is an agency under the administrative control of the MoPNG which acts as an advisory body to the Central Government for the upstream sector activities, and a nodal agency for implementation of key policies.

Apart from these, the Ministry of Labour and Employment through the Directorate General of Mines Safety is responsible for administration of Mines Act and the Oil Industry Safety Directorate is the safety regulator as has been designated the competent authority for exercising powers and functions under the PNG Safety Rules. There are ancillary legislations and their governing ministries such as the environmental laws and the Ministry of Environment Forest and Climate Change, which are also relevant for the sector given the role of environmental aspects.

Yes, the Government of India is involved in the upstream oil and gas industry, both in terms of regulation of policies, as well as operations through state owned companies. Oil and Natural Gas Corporation (ONGC) and Oil India Limited (OIL) are public sector undertakings having a significant share of the oil and natural gas fields.

As per the Foreign Direct Investment Policy (FDI Policy), read with the Foreign Exchange Management Act 1999 (FEMA) and the relevant regulations thereunder, 100 per cent foreign direct investment (FDI) is permissible without the approval of the Government of India for exploration and production in oil and gas fields. Accordingly, a foreign company can undertake operations in the oil and gas sector either by itself or as a consortium with an Indian partner.

However, under Press Note 3 has been issued by the Department for Promotion of Industry and Internal Trade, Government of India on April 17, 2020 to amend the FDI Policy. Pursuant thereto, an entity of another country, which shares land border with India, or where the beneficial owner of an investment into India is situated in or is a citizen of any such country which shares land border with India, can invest only under the Government route i.e., with the prior approval of the Government of India. While the meaning of beneficial owner has not been defined in the Press Note or FEMA, reliance may be placed on the related and ancillary laws to interpret what constitutes “beneficial ownership”. For instance, under the Companies (Significant Beneficial Owners) Rules 2018 read with the Companies Act 2013, it has been stated that an individual or entity holding not less than 10% shareholding in an entity would be considered a beneficial owner.

In addition to the foreign exchange laws, where participation is proposed by way of acquisition of participating interest in existing blocks then prior approval would be required from the Government of India for transfer or assignment of participating interest or operatorship under the PSC/ RSC.

As noted above, the Mines Act read with the OMR, and the PNG Safety Rules stipulate for provisions governing health and safety related aspects in an and gas fields including provisions relating to safety conditions, facilities, working conditions etc.

Further, in relation to environmental related aspects the environmental laws which have been formulated for protection and improvement of environment, regulation of air and water pollution including the Environment (Protection) Act, 1986, Water (Prevention and Control of Pollution) Act, 1974 (Water Act) and Air (Prevention and Control of Pollution) Act, 1981 (Air Act) would be applicable. There are environmental approvals and permissions that are required to undertake oil and gas exploration and production in India which include general environmental approvals as provided under the environmental legislations and specific approvals based on the location of the field. The general approvals include environmental clearances (for which the Government of India has recently stated that the entities will now require such clearance from the state governments and also an environment impact assessment report or public hearing will not be required), and consent to establish and consent to operate under the Water Act and Air Act. The specific approvals required on the basis of the location of the oilfield include permissions for coastal zones, forest clearances, wildlife clearances etc.

In addition to the above, the PSCs and RSCs also provide for certain additional obligations in relation to protection of the environment. Under the terms of the contract, the contractors are required to adopt modern oilfield and petroleum industry practices and standards or good international petroleum industry practices and standards, as relevant, including advanced technologies, practices and methods of operations for the prevention of environmental damage.

PSCs under the NELP regime was based on the ‘production sharing model’ i.e., the contractor is required to pay a part of the profits to the Government of India, after deducting the operation costs incurred by the contractor. Under the HELP regime, the principle followed under RSCs is that the contractors pay a share of the revenue to the Government of India and the amount proposed to be shared is the biddable criteria. In addition to the above, the contractors are required to pay royalty to the Government of India as determined under the Oilfields Act and the PNG Rules.

In terms of tax concessions provided to entities engaged in exploration and production, the following may be taken into account:

• Foreign companies are exempt from tax on income earned from sale of crude oil 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.
• Under Section 35AD of the Income Tax Act, 1962 (IT Act), 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 Government of India).
• Under Section 32(1) (iia) of the IT Act, in cases of new machinery or plant that have been acquired or installed after March 31, 2005, a sum of 20 per cent of actual cost of the machinery or plant is allowed as deduction when the taxpayer is engaged in the business of manufacture or production of any article or thing or in the business of generation, transmission or distribution of power.
• Finally on the customs front, full exemption from payment of basic customs duty and partial exemption from integrated Goods and Services Tax (GST) is allowed on specific goods imported for use in petroleum or CBM operations, subject to fulfilment of other prescribed conditions. In a recent notification, the requirement to submit an essentiality certificate from DGH has been done away with for seeking exemption from customs duty.

In India, there is prohibition on the export of oil and natural gas which is produced domestically. As per the PSC and RSC, until India becomes self-sufficient, oil and natural gas produced in India are to be sold within the domestic market in India exclusively. Currently, India is a net importer of natural gas and hence export of domestic natural gas looks improbable in the coming years.

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 PNG Rules provide that on termination of the PEL or PML, the area and any wells contained in it must be delivered in good order and condition. 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.

As per the terms of the PSCs and RSCs, the contractors engaged in exploration and production are required to remove all equipment and installations from the contract area in a manner as agreed with the Government of India pursuant to an abandonment plan. The contractor is required to prepare and submit a proposal to the Government of India for site restoration, including an abandonment plan and requirement of funds for site restoration and annual contribution.

In addition, the Site Restoration and Abandonment Guidelines for Petroleum Operations was issued by MoPNG, Government of India in April 2018. These guidelines prescribed detailed obligations regarding decommissioning of offshore and onshore production sites by the exploration and production entities including opening up of site restoration fund (SRF) by the exploration and production entity.

The downstream oil and natural gas sector is regulated by the Petroleum and Natural Gas Regulatory Board (PNGRB), which is an authority established under the Petroleum and Natural Gas Regulatory Board Act, 2006 (PNGRB Act). The PNGRB Act authorizes the PNGRB to formulate regulations for regulating the downstream oil and natural gas sector including for pipelines. Pursuant to such authority, the PNGRB has framed PNGRB (Authorizing Entities to Lay, Build, Operate or Expand Natural Gas Pipelines) Regulations, 2008 (NG Pipeline Regulation), which stipulates for provisions for laying, setting up or expanding a natural gas pipelines, and the PNGRB (Authorizing Entities to Lay, Build, Operate or Expand Petroleum and Petroleum Products Pipelines) Regulations, 2010 (PP Pipeline Regulation) which lays down the manner in which pipelines for petroleum and petroleum products may be constructed and operated. As per the NG Pipeline Regulation and the PP Pipeline Regulation, entities are authorized to lay and operate the pipelines whereby such authorisation are granted by PNGRB including by way of bid process.

Apart from these, PNGRB has also framed regulations regarding access of pipelines which are declared as common carrier for use by other entities, tariff determination, technical safety standards etc.

As per Section 15 of the PNGRB Act, every entity establishing or operating an LNG terminal will be required to make an application to PNGRB and seek registration. The PNGRB has notified the PNGRB (Eligibility Conditions for Registration of Liquefied Natural Gas Terminal) Rules, 2012 whereby in order to be eligible for getting a registration from PNGRB, certain conditions have to be fulfilled by the entities.

The PNGRB has also issued the draft PNGRB (Registration for Establishing & Operating Liquefied Natural Gas (LNG) Terminals) Regulations, 2022 which would regulate the registration of LNG terminals. The draft regulations have defined LNG terminal to mean infrastructure required to receive and store LNG, enable regassification of LNG and transport regassified LNG, LNG outside of the terminal. However, this regulation is at the draft stage and has not been notified.

In India, presently, there are six LNG terminals, namely at Dahej, Hazira, Dabhol, Ennore, Kochi and Mundra.

Under Section 15 of the PNGRB Act, it has been stated that any entity establishing storage facilities for petroleum, petroleum products or natural gas exceeding such capacity as may be specified by PNGRB, would need to be registered with PNGRB.

Under the NG Pipeline Regulation, the definition of natural gas pipeline includes any pipeline including spur lines for transport of natural gas and includes all connected equipment and facilities such as compressors, ‘storage facilities’, metering units but excludes dedicated pipelines laid to transport natural gas to specific customers and also the pipelines in a city gas distribution (CGD) network. Hence, storage facilities associated with natural gas pipelines would have to adhere to the requirements and obligations laid down in the NG Pipeline Regulations.

There is a well-established gas transmission and distribution system in India and the same is principally regulated by the PNGRB. Natural Gas can be transported directly through natural gas pipelines to large consumers having a consumption capacity of more than 100,000 SCMD. These are owned and operated by authorised entity under the NG Pipeline Regulation, and GAIL (India) Limited which is also a state-owned company operates about 70% of the total natural gas pipelines.

Transportation of natural gas to small-scale consumers i.e., with a requirement of up to 50,000 SCMD such as piped natural gas (PNG) for domestic purposes or small-scale industries and compressed natural gas (CNG) as transportation fuel is made through CGD networks. For customers with requirement between 50,000 SCMD and 100,000 SCMD, there is a choice to source the natural gas from the CGD network or from other sources. Under the CGD model, areas are categorised as geographical areas, whereby the PNGRB grants authorisation to an entity to lay, build, operate or expand the CGD network as per the PNGRB (Authorising Entities to Lay, Build, Operate or Expand City or Local Natural Gas Distribution Networks) Regulations, 2008 (CGD Authorisation Regulations). As per the CGD Authorisation Regulations, a proposal for the laying of a CGD network may be submitted by an entity wishing to laying a CGD network or the PNGRB may suo moto initiate a proposal for laying a CGD network in a given area.

In terms of third party access to the CGD network, the same may be restricted on account of exclusivity granted to the authorised entity from providing access to the CGD network on a common carrier or contract carrier basis, for a period of 8 years. However, post the aforesaid exclusivity period, access to the CGD network may be provided to third parties either on common carrier or contract carrier basis. Such access is granted pursuant to the terms of the PNGRB (Access Code for City or Local Natural Gas Distribution Networks) Regulations, 2020 provided that the CGD network has been declared as a common carrier or a contract carrier under the PNGRB (Guiding Principles for Declaring City or Local Natural Gas Distribution Networks as Common Carrier or Contract Carrier) Regulations, 2020, whereby more than one entity can use such pipelines.

As mentioned in the response for Query 15, downstream transportation of natural gas to small-scale consumers i.e., with a requirement of up to 50,000 SCMD such as piped natural gas (PNG) for domestic purposes or small-scale industries is made through CGD networks. As mentioned above, a proposal for the laying of a CGD network may be submitted by an entity or the PNGRB may suo moto initiate a proposal for laying a CGD network in a given area. PNGRB has been authorising entities by way of bidding process, whereby entity is granted with authorisations to lay and operate the CGD network for specified geographical area. The bidding entities can be owned, privately owned, a foreign entity or a consortium of these entities. However, after the completion of the exclusivity period of 8 years, the CGD network may be declared as a common carrier/contract carrier.

The downstream oil and natural gas sector is regulated by the Petroleum and Natural Gas Regulatory Board (PNGRB), which is an authority established under the Petroleum and Natural Gas Regulatory Board Act, 2006 (PNGRB Act).

PNGRB is responsible for, inter alia, registering entities to market notified petroleum and petroleum products and natural gas, establish and operate LNG terminals, establish storage facilities for petroleum, petroleum products or natural gas exceeding such capacity as may be specified by regulations, and as noted above authorise entities to lay and operate NG pipelines, PP Pipelines and CGD network. PNGRB also lays down the technical standards and specifications including safety standards in activities relating to petroleum, petroleum products and natural gas.

Some of the significant changes in government policies and regulations have been summarised below:

• On July 11, 2022, the Government of India announced that with effect from October 1, 2022, the condition in PSCs to sell crude oil to government or government nominee or government companies, shall be waived off, and if such a condition is mentioned in any PSC and the PSC shall stand amended accordingly.
• On June 15, 2021, the Government of India through the DGH issued the draft Oilfields (Regulation and Development) Amendment Bill, 2021 for the purpose of seeking comments from the public. Certain key amendments include inclusion of definition of ‘mineral oil resources’, expansion of definition of ‘mineral oils’ to include within its meaning next-generation fuels like hydrogen and fixed term lease periods.
• In March 2021, in order to facilitate the ease of doing business and attract investments in the Indian upstream oil and gas sector, the Government of India had introduced a simplified procedure for obtaining various approvals required under the PSCs, which was further rationalised in July 2021.
• In October 2020, the Natural Gas Marketing Reforms was introduced whereby marketing freedom for sale of natural gas was granted to those blocks for which a PSC has been executed and where pricing freedom has been granted by MoPNG.
• In recent years several amendments were carried out by PNGRB to the PNGRB (Determination of Natural Gas Pipeline Tariff) Regulations, 2008 (NG Tariff Regulations) pursuant to the vision of the Government of India to have a unified tariff regime for natural gas transportation across the country. As per an amended to the NG Tariff Regulations on November 23, 2020, natural gas pipeline tariffs would differ basis the pipeline falling within and outside in National Gas Grid, i.e., a unified tariff shall be applicable to pipeline falling within the National Gas Grid.
• In September 2020, the PNGRB notified the PNGRB (Gas Exchange) Regulations, 2020 pursuant to which PNGRB provided a framework and allowed trading in gas contracts through a gas exchange.

During COVID-19 pandemic, due to initial nationwide lockdown imposed by the Government of India, oil and gas demands and production was severely impacted. However, the Government of India was proactive to ensure that the operations in the oil and gas sector was continued by declaring it as public utility through notifications issued by the Ministry of Home Affairs, Government of India. This led to subsequent increase in production of oil and gas which had initially declined at the start of the pandemic. However, due to hard lockdown in 2020 and 2021, there was a lack of demand for oil and gas as economic activity was severely affected. For instance, in the financial year 2020-21 (April 1, 2020- March 31, 2021) India’s GDP growth rate had reduced by 23.9% in the Q1 (April-June 2020) and in Q2 (July- September 2020) the GDP growth rate had reduced by 7.5%. Overall, India’s economy contracted by 7.3% at the end of the financial year 2020-21.

The Ukraine crisis has had a deep impact on crude oil and natural gas pricing and supply side factors. India being a net importer of crude oil and natural gas has suffered price volatility and supply side issues. As stated by the Reserve Bank of India (RBI), crude oil prices reached a 14-year high of US$133 per barrel in the first week of March 2022. Prices remained volatile thereafter fluctuating around US$110 per barrel.

During COP 26, India had pledged that:

• India will take its non-fossil energy capacity to 500 GW by 2030.
• India will meet 50 percent of its energy requirements from renewable energy by 2030.
• By the year 2070, India will achieve the target of Net Zero.

In addition, as part of its commitments during COP 27, India launched its Long-Term Low-Emission Development Strategy (LT-LEDS) where it was stated that the plan in the short term is for India to focus on usage of ethanol, compressed natural gas (CBG), biodiesel and liquified natural gas (LNG), use biodiesel and methanol/dimethyl ether (DME) supplemented by pipeline biogas (Bio-PNG) in the medium term and use green hydrogen as long term alternative fuel.

India already has a National Policy on Biofuels, 2018 where the indicative target for 2025 is 20% blending of ethanol in petrol, which will amount to an annual savings potential of INR 300 billion of foreign exchange. The total reductions in CO2 emissions achieved in the last seven years due to the programme for Ethanol Blended Petrol are estimated to be 22.6 MtCO2. In 2020-21 alone, a reduction of 6.44 Mt CO2 was achieved due to this program.

In terms of green hydrogen, the Government of India launched its first Green Hydrogen Policy in February 2022 with policy’s main thrust being towards reduction in the cost of renewable energy for production of hydrogen. Finally, in terms of carbon capture and storage, MoPNG and DGH issued a draft roadmap of adoption of carbon capture utilization and storage technologies by exploration and production companies by 2030. However, the roadmap was only at the draft stage and has not been finalized as on date.