Regulatory Framework for E&P Activities Mohit Saraf Partner Luthra and Luthra Law Offices December 11 th, 2004 INFRALINE CONFERENCE DISCOVERY TO DELIVERY: INDIA’S UPSTREAM OIL AND GAS SECTOR

11th December 2004Luthra & Luthra Law Offices ©2 Regulatory Framework for Upstream Exploration Constitution of India (“CoI”) Oilfields (Regulation and Development) Act, 1948 New Exploration Licensing Policy (“NELP”) Petroleum and Natural Gas Rules, 1959 Territorial Waters, Continental Shelf, Exclusive Economic Zone And Other Maritime Zones Act, 1976

11th December 2004Luthra & Luthra Law Offices ©3 Jurisdiction over Oil and Natural Gas Resources Jurisdiction to regulate oilfields vested with Central Government  CoI: Entry 53 of List I  “Regulation and development of oilfields and mineral oil resources; petroleum and petroleum products”  CoI: Entry 25 of List II  “Gas and Gas Works”  Presidential reference, Supreme Court judgment  Natural gas- a petroleum product and hence, a central subject

11th December 2004Luthra & Luthra Law Offices ©4 Jurisdiction over Oil and Natural Gas Resources  Presidential reference (contd.)  Right in natural gas and oil resources as ‘publici juris’  Upstream regulation of exploration and transmission of natural gas also in central domain.  Jurisdiction to regulate gas clearly identified with Centre by the judgment  Paved the way for a unified central legal framework for the energy sector

11th December 2004Luthra & Luthra Law Offices ©5 The Oilfields (Regulation & Development) Act, 1948 Basic enabling statute for licensing and leasing of petroleum and gas blocks by the appropriate government Covers mineral oils which is defined as including natural gas and petroleum [S.3(c)] Mining lease is defined exhaustively to cover all forms of exploring and exploiting mineral oils and all purposes connected thereto [S.3(d)]

11th December 2004Luthra & Luthra Law Offices ©6 The Oilfields (Regulation & Development) Act, 1948 Empowers central government to make rules with regard to mining leases [S.5] Also empowers central government to make rules for the development of mineral oil [S.6] NELP Enabling Provisions  Power to vary royalty or exempt it altogether [S.6A]  PSC additional terms and conditions to PEL [S.12]

11th December 2004Luthra & Luthra Law Offices ©7 New Exploration Licensing Policy  Uses auctions to allocate petroleum blocks thus bringing benefits of transparency and efficiency  Identifies biddable areas.  Identifies commercial terms on which the bid would be evaluated including profit sharing  Lays down the bidding procedure

11th December 2004Luthra & Luthra Law Offices ©8 The Petroleum and Natural Gas Rules, 1959 Rules provide framework for grant of exploration licenses and mining leases Salient features of the Rules:  Prohibition on prospecting and mining except under a license or lease granted under the rules [Rule 4]  Central Government has the power to grant licenses or leases in respect of any land vested with it or minerals underlying the ocean within the territorial waters or the continental shelf [Rule 5(i)]

11th December 2004Luthra & Luthra Law Offices ©9 The Petroleum and Natural Gas Rules, 1959 Salient features of Rules (contd)  State government has power to grant license or lease over lands vested with it [Rule 5(ii)]  Person obtaining exploration license obtains the exclusive right to a lease for producing (i.e. extracting) oil/gas over any part of area covered in license  As Licensee, prospector required to furnish security deposit and annual license fees for exploration license;

11th December 2004Luthra & Luthra Law Offices ©10 The Petroleum and Natural Gas Rules, 1959 Salient features of Rules (contd)  License fees increase every year in a pre- determined manner  As Lessee, producer required to furnish security deposit and dead rent or royalty (payable to appropriate government) whichever is higher as well as surface rent (payable to SG)  Increasing Licensing fee structure and dead rent payments incentivise early exploitation of license and leases

11th December 2004Luthra & Luthra Law Offices ©11 The Petroleum and Natural Gas Rules, 1959 Salient features of Rules (contd)  Provides for arbitration of disputes which may arise between the Government and the licensee or lessee

11th December 2004Luthra & Luthra Law Offices ©12 Territorial Waters, Continental Shelf, Exclusive Economic Zone And Other Maritime Zones Act, 1976 Article 297 of the Constitution vests resources found in these areas with Central government No exploration in the Continental shelf and exclusive economic zone permitted without Central Government’s permission

11th December 2004Luthra & Luthra Law Offices ©13 Regulating the upstream sector  Creation of an independent and impartial upstream regulator is a key challenge for regulation in upstream sector  Currently MoPNG is in charge of regulating upstream sector. Director General of Hydrocarbons performs technical advisory function  But government has a significant ownership stake in certain upstream companies  Regulatory functions should not be discharged by the government when it is also competing with private players. Will avoid conflict of interest

11th December 2004Luthra & Luthra Law Offices ©14 Regulating the upstream sector  This has been achieved in other infrastructure sectors like Electricity and Telecom by constitution of independent regulatory bodies through comprehensive statutory framework The downstream sector will soon see the introduction of a omnibus regulator for oil and natural gas (Petroleum Regulatory Board Bill 2002) Independent regulator for upstream would assure private players that they would be provided a level playing field. This should attract greater competition and the benefits of this greater competition would increase value for all the stakeholders

11th December 2004Luthra & Luthra Law Offices ©15 Regulating the upstream sector Other areas which would benefit from such regulatory oversight include:  Better appreciation of operators commercial interest and minimizes opportunities for rent seeking behavior  Coordination with downstream regulation  Acting against anti-competitive practices  Role as arbitrator in case of dispute arising between operator entities and other stake holders; minimizes delay in exploitation of resources due to dispute

11th December 2004Luthra & Luthra Law Offices ©16 Regulating the upstream sector Options for creation of independent regulatory body  Create a new regulatory authority and vest it with power to implement licensing policy as well as regulatory functions  Increase the independence of DGH possibly through separate statutory framework and confer additional powers on it to enable it to discharge role of upstream regulator

11th December 2004Luthra & Luthra Law Offices ©17 "Let me tell you something that we Israelis have against Moses. He took us 40 years through the desert in order to bring us to the one spot in the Middle East that has no oil!" -Golda Meir (Israeli founder and prime minister) The gods have been kinder in our case! Lets ensure that their bounty reaches the people

11th December 2004Luthra & Luthra Law Offices ©18 THANK YOU!