Oil and Gas Industry in India Legal, Regulatory & Tax

M U M B AI
SILICON VALLEY
BANGA LORE
SINGA P ORE
MUMBA I BK C
NE W DE L HI
MUNICH
Oil and Gas

Industry in India
Legal, Regulatory & Tax
July 2014
Copyright 2014 Nishith Desai Associates
www.nishithdesai.com
Oil and Gas Industry in India

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Contents
1.
Introduction 01
2. O&G Industry at a Glance 04
Key Players and Market Shares 04
3. Governing Bodies, Legislation and Regulatory Framework
06
I.
Legislation 07
A.
Oilfields Act 07
B.
Petroleum Act 08
C.
Petroleum Rules 08
D. Petroleum and Natural Gas Regulatory Board Act, 2006
09
E.
NELP 09
F.
Environmental Law 10
G.
Competition Law 11
II.
Regulation 12
A.
Directorate General of Hydrocarbons 13
B.
Regulatory Board 13
C.
Oil Industry Development Board 14
4. Foreign Investment Opportunities and Market Status
15
5. Fiscal Framework for Upstream Sector in India
16
I.
Overview 16
II.
Salient Features of NELP 16
A.
Level Playing Field 16
B.
Royalty Rates 16
C.
Cost Recovery 16
D.
Customs Duty 16
E.
Excise Duty and Cess 17
III.
Process Under NELP 17
IV.
NELP Bidding Rounds 18
A.
Beginnings: NELP-I 18
B.
Major Discoveries Under NELP 19
C.
NELP VII and VIII 19
D.
NELP IX and X 19
V.
Taxes 19
A.
Corporate Income Tax 19
B.
Dividends 20
C.
Capital Gains 20
D.
Withholding Taxes 20
E.
Double Tax Avoidance Treaties 20
F.
Anti-Avoidance 20
G.
Indirect Taxes 21
6. Report of the Committee on the Production Sharing Contract

Mechanism in Petroleum Industry, 2012
(Rangarajan Committee) 22
7. Policy Guidelines for Exploration and Exploitation of Shale Gas
23
8. Open Acreage Licensing Policy 24

9. Dispute Resolution 25
I.
Arbitration 25
II.
Litigation 26
10. Conclusion 27

The Indian oil and gas sector is forecasted to grow from US$ 117.5 billion in 2012 (estimated) to
US$ 139.8 billion by 2015. 1
1.
Datamonitor Report Oil and Gas in India.

1. Introduction
The Oil and Natural Gas (O&NG) sector has
tremendous growth potential in India. It is a well
regulated industry and in spite of the slowdown in
the Indian and global economy, demand for O&NG
has been consistent. Traditionally, O&NG has been
the domain of the Government of India (Union
Govt.) and select government enterprises. With
liberalization and privatization, there has been
participation from private entities, both domestic
and foreign.
From a legal perspective, it is the Union Govt., under
the Constitution of India, 1950 (Constitution)
that has the power to legislate in respect of O&NG.
Legislative powers are conferred on the Union
Govt. by Entry 53, to List I of Schedule VII of the
Constitution.2
This paper provides a comprehensive insight with
respect to investment and regulatory aspects of the
O&NG sector in India. We will discuss the governing
bodies, regulatory framework, the New Exploration
and Licensing Policy (NELP) regime, salient
features of NELP and latest developments in the
Shale Policy of India.
India has always been an import dependent nation as
far as O&NG is concerned. Historically, Saudi Arabia
and Iraq have been the largest crude oil exporters
to India.3 India imports nearly three-fourths of its
requirement of crude oil from the Middle East.4
According to Ministry of Petroleum and Natural Gas,
India (Ministry of PNG), India has total reserves of
760 million metric tons of crude oil and 1330 billion
cubic meters of natural gas as on April 1, 2012.5
From an industry perspective, O&NG industry

is divided into three major sectors: upstream,
midstream and downstream. The upstream sector
is a term commonly used to refer to exploration,
recovery and production of O&NG. In industry
parlance it is simply called Exploration and
Production (E&P). The downstream sector is a term
commonly used to refer to the refining of crude oil
and the selling and distribution of natural gas and
products derived from crude oil. The midstream
industry processes, stores, markets and transports
commodities such as crude oil, natural gas, natural
gas liquids (liquefied natural gas such as ethane,
propane and butane) and sulphur.6
In spite of considerable domestic7 potential, India
imports more than half the requirement of crude
oil.8 India has 3.14 million square km. of sedimentary
basins including onshore and offshore.9 Fifteen
percent of these areas are still unexplored. The
reason for overdependence on crude oil imports
cannot be attributed solely to lack of crude O&NG
reserves. India has a hydrocarbon10 resource base
of 21 billion tons with an additional 9 billion tons
from deep-water areas. However, only 6.8 billion
tons of geological reserves have been established
through exploration, leaving two-thirds of the area
unexplored.11 For the year 2011-12, India was the
fourth largest consumer of oil and consumed 4% of
the total consumption in the world.12 Even the global
slowdown has not impacted the oil consumption in
India and in fact Indias demand for O&NG continues
to be highly fuelled by a rapidly growing automobile
industry.13 This burgeoning demand has not been
matched by the required supply.14 Going forward, as
2.
Regulation and development of oil fields and mineral oil resources; petroleum and petroleum products; other liquids and substances declared by
Parliament by law to be dangerously inflammable.
3.
Source: http://in.reuters.com/article/2012/08/06/india-crude-import-idINL4E8IU4HI20120806, (accessed on July 15, 2014)
4. Ibid
5.
See, Basic Statistics on Indian Petroleum and Natural Gas, 2011-12, available at http://petroleum.nic.in/petstat.pdf (page 8).
6.
Source: http://www.trencome.com/petroleumindustry.htm (accessed on July 15, 2014).
7.
Source: http://www.ibef.org/industry/oil-gas-india.aspx (accessed on July 15, 2014)
8.
Source: Basic Statistics on Indian Petroleum & Natural Gas 2011-12, published on September, 2012
9.
See, http://www.dghindia.org/SedimentaryBasins.aspx (accessed on July 15, 2014).
10. A substance (such as coal or natural gas) that contains only carbon and hydrogen, [Source: http://www.merriam-webster.com/dictionary/
hydrocarbon (accessed on July 15, 2014)]
11. RK Pachauri and Pooja Mehrotra, Vision 2020: Sustainability of Indias Material Resources, Report available at http://planningcommission.gov.in/
reports/genrep/bkpap2020/13_bg2020.pdf (accessed on July 15, 2014).
12. See, Energy Statistics, available at http://mospi.nic.in/mospi_new/upload/Energy_Statistics_2013.pdf (accessed on July 15, 2014)
13. Worldwide consumption of crude oil has not increased substantially since 2006 and continues to fluctuate around 4000 Mn Tonne. For details,
See Basic Statistics on Indian Petroleum & Natural Gas 2011-12, published on September, 2012, available at http://petroleum.nic.in/petstat.pdf
(accessed on July 15, 2014). For details on consumption of O&NG, See Energy Statistics, available at http://mospi.nic.in/mospi_new/upload/Energy_
Statistics_2013.pdf (accessed on July 15, 2014).
14. Oil & Gas Production as of 2011-12: Crude Oil- 38.2 Mn (Mega Newton) Tons, available at http://petroleum.nic.in/pngstat.pdf
Introduction
Indias domestic consumption of goods and services

coupled with industrial output continues to grow,
the demand for crude oil and gas will automatically
rise.15
Discovery of O&NG for the first time, in the
offshore region, was made by Oil and Natural Gas
Corporation (ONGC) in 1974, in Bombay High.
This opened up new vistas for O&NG exploration
and production in India. Subsequently, more
discoveries were made in the Krishna-Godavari,
Cauvery and Rajasthan sedimentary basins. The
responsibility for carrying out E&P activities in the
country was entrusted to the national oil companies
(NOCs) till the beginning of 1990s, when they used
to be granted the Petroleum Exploration License16
(PEL) on nomination basis. The Union Govt. in
1997 introduced NELP and liberalized the sector by
opening up acreages17 to private and joint venture
companies through various exploration bidding
rounds for development of discovered fields.
Realizing that NOC alone cannot solve E&P
problems in India, Union Govt. decided that one
way of overcoming Indias upstream woes would
be by encouraging more participation from the
private sector in E&P activity. It was expected that
the private sector will bring two critical inputs to the
fore - technology and finance. In essence, chances
of new discoveries would be greatly enhanced by
involving private and foreign players because further
oil production from old and depleting fields may
be sustained over long periods by applying suitable
enhanced oil recovery techniques.18 Hence opening
up acreages for active exploration by private or joint
venture companies, in addition to efforts of NOCs,
was considered necessary. The acreages offered by
the Union Govt. under various exploration rounds
met with partial success.19 It was only in 1997, when

NELP was introduced, that E&P received an impetus
and produced effective results.20
In India, the O&NG industry contributes over
15% to the nations GDP.21 However, as mentioned
earlier, in order to meet the increasing demand for
petroleum products, India imports more than 75%
of its crude oil requirement.22 In an effort to lessen
dependence on foreign oil sources, the Union Govt.
is committed to promoting increased E&P activity.
Recently, the Cabinet Committee on Investment23
(CCI) cleared 25 E&P blocks24 worth Rs. 249 billion
of investments.25 As natural gas comprises only 10%
of the nations energy basket, compared to the global
average of 24%, there is significant opportunity for
growth in this sector as well.
Indias refining capacity has also increased by about
14% to 213.066 million metric tons per annum
(MMTPA) as on April 1, 2012 from 187.386
MMTPA on April 1, 2011,26 with the entry of private
companies like Essar Oil along with public sector
undertakings (PSUs) like Indian Oil Corporation
Ltd. (IOCL), Bharat Petroleum Corporation Ltd
(BPCL) and Hindustan Petroleum Corporation
Ltd (HPCL). Marketing and distribution is largely
dominated by four PSUs namely IOCL, HPCL, Oil
India Corporation (OIL) and BPCL. Decontrolling
the market with new policy to invite foreign direct
investment (FDI) and private companies has made
it possible for new entrants like Essar Oil, Reliance
Industries Limited (RIL), and Royal Dutch Shell
to make their presence felt in the marketing sector.
Apart from the untapped potential in upstream
sector, there are huge investment opportunities in
the distribution network of petroleum products as
well.
15. Crude oil is a naturally occurring, unrefined petroleum product composed of hydrocarbon deposits. Crude oil can be refined to produce usable
products such as gasoline, diesel and various forms of petrochemicals [Source: http://www.investopedia.com/terms/c/crude-oil.asp, accessed on July
15, 2014].
16. No person can prospect for petroleum except in pursuance of a petroleum exploration license (PEL), See, The Petroleum and Natural Gas Rules, 1959.
17. Acreage in O&NG parlance refers to an area that has the potential of possessing hydrocarbon reserves.
18. See Paragraph 3.1(a), 3.3(ii) and 3.4(i), India Hydrocarbon Vision 2025, available at http://petroleum.nic.in/vision.doc (accessed on July 15, 2014).
19. Source: PIB (Press India Bureau) Notification, available at http://pib.nic.in/feature/feyr2001/faug2001/f100820012.html (accessed on July 15, 2014).
20. Source: PIB (Press India Bureau) Notification, available at http://pib.nic.in/feature/feyr2001/faug2001/f100820012.html (accessed on July 15, 2014)
21. Source: http://www.investindia.gov.in/?q=oil-and-gas-sector (accessed on July 15, 2014)
22. Source: http://www.thehindubusinessline.com/industry-and-economy/indias-crude-oil-import-bill-rises-95-in-aprilaug/article5160388.ece (accessed
on July 15, 2014); http://zeenews.india.com/business/news/economy/india-imports-nearly-80-of-its-crude-oil-needs_82701.html (accessed on July 15,
2014).
23. The Cabinet Committee on Investment has been set up to monitor investment proposals as well as projects under implementation, including stalled
projects, and guided decision-making in order to remove bottlenecks and quicken the pace of implementation [Source: http://pib.nic.in/newsite/
erelease.aspx?relid=92767], See http://www.thehindubusinessline.com/economy/cabinet-panel-clears-25-oil-gas-blocks/article4644283.ece
24. An oil exploration block is a large area of land, typically in 1000s of sq. kilometers, that is awarded to oil drilling and exploration companies by a
countrys government. It is either awarded by the government and paid for by taxes on the company, or it is auctioned by the government that owns
the land [Source: http://www.wikinvest.com/wiki/Oil_exploration_block]
25. India Brand Equity Foundation, The Indian Oil and Gas Sector: Recent Developments, Growth and Prospects, (January 2013), available at http://www.
ibef.org/download/Oil-Gas-Sector-040213.pdf (IBEF Oil & Gas)
26. See, Basic Statistics on Indian Petroleum & Natural Gas, available at http://petroleum.nic.in/petstat.pdf (accessed on July 15, 2014)

The current key players in Indias O&NG sector are:
A. ONGC
ONGC is the leader in E&P activities in India
contributing 72% of Indias total production of crude
oil and 48% of natural gas extraction/production.
ONGC has established more than 7 billion tonnes
of in-place hydrocarbon reserves in the country. In
fact, six out of seven production basins in India have
been discovered by ONGC. ONGC produces more
than 1.27 million Barrels of Oil Equivalent (BOE)
per day.27
B. GAIL
GAIL (India) Ltd was incorporated in August 1984
as a Central PSU under the Ministry of PNG. The
company was initially given the responsibility of
construction, operation and maintenance of the
Hazira Vijaypur Jagdishpur (HVJ) pipeline
project. It was one of the largest cross-country
natural gas pipeline projects in the world. Originally
this 1800 Km long pipeline was built at a cost of Rs.
17 billion and it laid the foundation for development
of market for natural gas in India.28
C. ONGC Videsh
ONGC Videsh Ltd. (OVL) is a Central Public Sector
Enterprise (CPSE) of the Union Govt. under the
administrative control of the Ministry of PNG. It is a
wholly owned subsidiary and overseas arm of ONGC,
the flagship NOC of India. The primary business of
OVL is to prospect for O&NG acreages outside India,
including exploration, development and production
of O&NG. OVL owns participating interests in 32
O&NG assets in 16 countries and contributes to 12%
of oil and 7 % of natural gas production of India
respectively.29
D. IOCL
IOCL is Indias largest company by sales with a
turnover of Rs. 4149.09 billion and profit of Rs. 50.05
billion for the year 2012-13. IOCL is the highest
ranked Indian company in the latest Fortune Global
500 listings, ranked at the 88th position.30
E. BPCL
BPCL is an Indian state-controlled O&G company
headquartered in Mumbai, Maharashtra. BPCL
has been ranked 225th in the Fortune Global 500
rankings of the worlds biggest corporations for the
year 2012.31
F. HPCL
HPCL is a Union Govt. enterprise with a Navratna
Status, and a Fortune 500 and Forbes 2000 company,
with an annual turnover of Rs. 1900.48 billion
and sales/income from operations of Rs. 2156.75
billion during the year 2012-13, having about 20%
marketing share in India among PSUs and a strong
market infrastructure.32
G. OIL
OIL in 1981 became a wholly-owned Union Govt.
enterprise. OIL is engaged in the business of
exploration, development and production of crude
oil and natural gas, transportation of crude oil and
production of LPG.33
27. http://www.ongcindia.com/wps/wcm/connect/ongcindia/Home/Company/History/
28. http://www.gail.nic.in/final_site/successstory.html
29. Source: http://www.ongcvidesh.com/company.aspx, (accessed on July 15, 2014)
30. Source: http://www.iocl.com/aboutus.aspx,(accessed on July 15, 2014)
31. Source: http://www.bharatpetroleum.in/Index.aspx (accessed on July 15, 2014)
32. Source: http://www.hindustanpetroleum.com/En/UI/AboutUs.aspx, (accessed on July 15, 2014)
33. Source: http://www.oil-india.com/Profile.aspx, (accessed on July 15, 2014)
2. O&G Industry at a Glance

[All the figures in the chart below are based on Basic Statistics on Indian Petroleum & Natural Gas 2011-12,
published on September, 2012]34
A. Import
Item
Quantity [000 Tonne]
Crude Oil
Value [Rs. (billion)]
171,729
6722.20
9,703
203.73
14,997
541.66
Item
Quantity [000 Tonne]
Value [Rs. (billion)]
Crude Oil
N.A.
N.A.
LNG
N.A.
N.A.
Petroleum Products
60837
2846.44
LNG
35
Petroleum Products
B. Export
C. Other Details
Contribution to GDP
15% 36
Expected growth in the market
The value of the Indian oil and gas sector is forecasted to

grow from US$ 117.5 billion in 2012 (estimated) to US$
139.8 billion by 2015 37
Key Players and Market Shares

Upstream (E&P)
Oil and Natural Gas

Corporation
Oil Production: 531,000 b/d
Gas Production: 25.6 bcm
Turnover: US$ 13,782 mn.
74% state owned
Oil India Limited
Cairn Energy

98.1% state owned

Turnover: US$ 340 mn.
Private sector
34. Source: http://petroleum.nic.in/petstat.pdf, (accessed on July 15, 2014)

35. Liquefied natural gas or LNG is natural gas (predominantly methane, CH4) that has been converted to liquid form for ease of storage or transport
[Source: http://www.qe-energy.com/lng.php (accessed on July 15, 2014)]
36. Source: http://www.investindia.gov.in/?q=oil-and-gas-sector, (accessed on July 15, 2014)
37. India Brand Equity Foundation, The Indian Oil and Gas Sector: Recent Developments, Growth and Prospects, (January 2013), available at http://www.
ibef.org/download/Oil-Gas-Sector-040213.pdf

Midstream (storage
and transportation)
Downstream
(Refining, Processing
& Marketing)
Indian Oil
Gas Authority of India
Pipelines: 10,329 km
89% state owned
Pipelines: 12,000 km
57% state owned
Indian Oil
Bharat Petroleum
Hindustan Petroleum
Refining: 880,000 b/d

Retail Outlets: 18,643
89% state owned
Refining : 450,000 b/d

66% state owned
Refining : 260,000 b/d

51% state owned
[Source: Business Monitor International: India Oil and Gas Report, 2012, IBEF]
While few large private sector companies are
key players in the O&NG market (the largest
being Cairn Energy), foreign involvement is slim.
Private sector refineries belong to RIL and Essar
Oil.38 In 2011, RIL signed a $7 billion deal with BP
Plc., allotting 30% share in 23 of RILs oil and gas
acreages.39 The deal included formation of a 50:50
joint venture between the two companies, which
necessitated establishment of infrastructure for
receiving, transporting, and marketing petroleum
and natural gas products.40 This landmark agreement
involved one of the largest foreign investments
into India.41 Paired with the Union Govt.s efforts
to simplify investment procedure and revisit caps
on FDI, it seemed likely that the success of the BPRIL partnership would attract further large-scale
investments in Indias oil and gas industry.
However, the optimism resulting from the RILBP deal has been tempered by doubts arising over
production concerns in Mangla field one of
Indias biggest oil finds in the last 25 years.42 Cairn
India (subsidiary of Cairn Energy) put the field into
production, but encountered several difficulties
in executing a sale of its shares. British Company
Vedanta Resources agreed to purchase 51% of
Cairn India, and ONGC had a 30% share in the
agreement. Cairn India maintained that ONGC

was contractually liable for 100% of royalties on
these assets, while the Union Govt. offered a royalty
holiday scheme to Cairn as part of the exploration
deal. ONGC demanded a change in contract for
the sale, wherein Cairn India would be liable for
payment of royalty and cess on oil produced As
ministers were asked to decide whether imposing
conditions on the company [would] violate Indias
bilateral investment promotion treaty (BIPA) with
the UK, the deal was stuck for over nine months.43
Eventually, the Ministry of PNG supported ONGC,
and told the Union Cabinet that asking Cairn
to accept the state firms views on royalty and
withdrawing litigation on cess were reasonable
conditions for approving the $9.6-billion CairnVedanta deal.44 Accordingly, the Cabinet Committee
on Economic Affairs (CCEA) made cost recovery
of royalty and payment of cess a precondition for
approval of the deal.45 Unfortunately, the delays
and uncertainty involved in the transaction cast
doubts over investing in the O&NG industry. Such
doubt could partially explain why despite relaxed
procedural requirements governing FDI, few foreign
companies have capitalized on opportunities to
invest into refineries where PSUs are partners.46
38. IBEF Oil & Gas, p.8.

39. Reliance News, RIL-BP deal: Leading Indias FDI inflows, http://reliance-news.blogspot.in/2011/08/ril-bp-deal-leading-indias-fdi-inflows.html (accessed on July 15, 2014).
40. Ibid
41. Hindustan Times, Reliance strikes gold with BP (Feb 21, 2011), available at http://www.hindustantimes.com/business-news/Markets/BP-partnersReliance-in-7-2-bn-oil-tie-up/Article1-665124.aspx; See also The Economic Times, RIL-BPs USD 7.2 bn deal biggest FDI into India ahead of Posco,
Arcelor Mittal investments (Jul 22, 2011), available at http://articles.economictimes.indiatimes.com/2011-07-22/news/29803563_1_transactionforeign-direct-investment-fdi
42. Shilpa Kannan, Foreign investment in Indian oil exploration waning, BBC News (May 26, 2011), available at http://www.bbc.co.uk/news/business-13559082
43. Ibid
44. Rajeev Jayaswal, Oil ministry supports ONGC views on Cairn-Vedanta deal, The Economic Times, (April 5, 2011), available at http://articles.economictimes.indiatimes.com/2011-04-05/news/29384628_1_cairn-vedanta-deal-cairn-energy-plc-cess-and-royalty
45. BT Online Bureau, ONGC gets upper hand, Cairn India may accept govts conditions on Vedanta deal, Business Today (July 20, 2011), available at
http://businesstoday.intoday.in/story/ongc-set-to-gain-on-govt-conditions-on-cairn-vedanta-deal/1/17159.html
46. Richa Mishra, Oil industry not enthused by easing of FDI norms, The Hindu Business Line (July 17, 2013), available at http://www.thehindubusinessline.com/industry-and-economy/oil-industry-not-enthused-by-easing-of-fdi-norms/article4924769.ece
3. Governing Bodies, Legislation and

Regulatory Framework
Planning Commission
Policy
Ministry of Finance
Petroleum Act, 1934 (import,

transport, storage)
Oil Fields Act, 1948 (development of

oil fields)
Petroleum and Natural Gas Rules,
1959
Legislation
NELP (competitive bidding)
Petroleum and Natural Gas Regulatory

Board Act, 2006
Other laws (e.g. environmental, tax,
competition law)
Directorate General of Hydrocarbons
Regulation
Oil Industry Development Board
Petroleum and Natural Gas Regulatory

Board

I. Legislation
As stated above the power to legislate in respect of
matters relating to development of oilfields, mineral
oil resources, petroleum and petroleum products and
liquids and substances declared by Parliament to be
dangerously inflammable is provided for in Entry 53
of List I of Schedule 7 to the Constitution. Parliament
has sole and exclusive power to legislate in respect of
subjects mentioned in List I of Schedule 7. In exercise
of these powers Parliament has passed several laws
which directly affect/ regulate O&NG sector.
The power of Parliament to legislate in these matters
to the exclusion of States in the Union of India
has been consistently upheld by courts in India.47
The effect of these provisions of the Constitution
and judgments is that only Parliament can pass
laws in respect of O&NG. The scope of this entry
was discussed in considerable detail in Babubhai
Jashbahi48where the High Court of Gujarat noted
that due to the strategic nature of minerals, mineral
oils and oilfields, these subjects were retained within
the exclusive domain of the Union Govt. Explaining
the scope of the powers relating to Entry 53, the
High Court explained that these were national
assets and that the entire nation had a stake in the
same. The object of Entry 53 was for Parliament to
legislate in respect of an important national asset
and was not for Parliament to legislate in respect of
land or property belonging to the State. However,
the High Court noted that Entry 42 of List III of
Schedule 7 (acquisitioning and requisitioning of
property) was wide enough to empower Union
Govt. to acquire a property belonging to a State
Government. Therefore, in respect of oilfields,
mineral oil resources and petroleum and petroleum
products, the Union Govt. has the legislative powers
to legislate and regulate. Where required, Union
Govt. has the powers under the Constitution to make
acquisition of property which is within the territory
of a particular State by virtue of Entry 42 of List III.49
The Petroleum Act, 1934 (Petroleum Act) and the
Petroleum and Natural Gas Rules, 1959 (Petroleum
Rules) are key legislations for the regulation of
the O&NG sector. Particularly for E&P activities,
key regulations and policies include the Oilfields
(Regulation and Development) Act, 1948 (Oilfields

Act), the Petroleum Rules, and the NELP. Together,
these acts, rules and policies prescribe substantive
as well as the procedural requirements to be
complied with by companies engaged in exploration,
production, import, transport, storage, refining, or
practically any other activity associated with O&NG
in India.
A. Oilfields Act
The Oilfields Act constitutes the basic statute for
licensing and leasing of petroleum and gas blocks
by the Union Govt.50 The Oilfields Act empowers
the Union Govt. with broad authority to make
rules providing for the basic regulation of oilfields
and for the development of mineral oil resources.51
Together with the Petroleum Rules, the Oilfields Act
governs grant of PEL and mining leases. In particular,
Petroleum Rules may also provide for matters such as
where and by whom applications for mining leases
may be made, the terms upon which such licenses
are granted, the maximum area and time frame for
leases etc.52 While the Oilfields Act prescribes that
royalties in respect of petroleum and natural gas
are to be paid by the holder of a mining lease, it also
provides that Union Govt. may exempt petroleum or
natural gas produced from offshore areas from any
royalty.53 This exemption allows for the Union Govt.
to encourage exploration in these less accessible
frontiers.
The effect of the Oilfields Act was discussed at length
in Babhubhai Jasbhai where two members of the
Gujarat Legislative Assembly challenged royalty
to be paid to the State Government in terms of a
notification issued under the Oilfields Act. The
Gujarat High Court dismissed the challenge on the
ground that only the Supreme Court could examine
disputes between the Union Govt. and a State
Government under Article 131 of the Constitution.
However, the Gujarat High Court also examined
the purpose of the Oilfields Act and explained the
subject matter of the Oilfields Act as relating to
regulation of matters set out in Entry 53. This would
mean that even though oilfields are physically
situated within a State in India, it is only the Union
Govt. that can pass laws in respect of the same and
47. Satish Maganlal Vora v. Union of India & Ors. L.P.A. No. 692 of 2000, Babubhai Jashbhai Patel & Ors. v. Union of India & Ors. Special Civil application
No. 2912 of 1982. See also Reliance Natural Resources Limited v. Reliance Industries Limited (2010) 7 SCC 1 for a discussion on natural resources.
48. Ibid.
49. State of West Bengal v. Union of India (1964) 1 SCR 371.
50. The Oilfields (Regulation and Development) Act, 1948 (53 of 1948), available at http://petroleum.nic.in/ordact.pdf (accessed on July 15, 2014)
51. Ibid
52. Ibid
53. Ibid
Governing Bodies, Legislation and Regulatory Framework

any dispute that a State chooses to raise in respect of

an oilfield, it must do so with the Union Govt. only
in the Supreme Court. In Satish Maganlal the Gujarat
High Court had occasion to examine regulatory
framework in relation to petroleum and petroleum
products and in this background, the Gujarat High
Court noted that the Oilfields Act empowers Union
Govt. to pass laws for conservation and development
of mineral oils. Further, Oilfields Act essentially
regulates production aspect of petroleum.
(i) Prohibition on prospecting and mining except

under a license or lease granted under the rules
[Rule 4] (ii) Only Central Government has 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)];
(iii) State Government has power to grant license or
lease over lands vested with it [Rule 5(ii)]; (iv) Person
obtaining exploration license obtains exclusive right
to a lease for producing (i.e. extracting) oil/gas over
any part of area covered in license.
B. Petroleum Act
Petroleum Act and Petroleum Rules are often

invoked together for the purpose of regulating the
sale and distribution of petroleum and petroleum
products.55 As explained in Municipal Corporation
of Greater Bombay v. Bharat Petroleum Corporation
Limited & Ors.,56 the scope of Petroleum Act was to
consolidate and amend the law relating to import,
transport, storage, production, refining and blending
of petroleum. Although the transport and storage of
petroleum and petroleum products relates to laws
of the municipality where the petroleum is situated,
in favor of uniform standards, the power to legislate
in respect of petroleum and petroleum products
was vested in the Union Govt. In exercise of the rule
making powers under the Petroleum Act, Union
Govt. framed the Petroleum Rules and along with
the Petroleum Act, both were designed to regulate
transport, distribution and storage of petroleum
and petroleum products. Interestingly, the powers
of the Union Govt. and State Govt. with respect to
regulating petroleum and petroleum products was
tested in Municipal Corporation57 and the Bombay
High Court ruled that the power of Union Govt. to
legislate on this subject would supersede the power
of State Govt.
The Petroleum Act regulates the import into India,

transfers within, storage, production, refining and
blending of petroleum. The Petroleum Act is one of
the oldest legislation in the oil and gas sector. Prior
to this law the rules regarding the above specified
activities were separate for each of the individual
States. The Petroleum Act brought in uniformity in
this field.
The effect of Petroleum Act was explained in Satish
Maganlal where the power of Union Govt. to
regulate petroleum products was traced to Section
5 and Section 2(a) of the Petroleum Act. In this case,
the Appellant claimed that a product invented
by him was in fact not petrol and consequently
could not be regulated by Union Govt. However, it
was established that the chemical component was
essentially hydrocarbons as stated in Section 2(a) of
the Petroleum Act54 and hence, by virtue of Section
5, Union Govt. could regulate any product that had
characteristics of petroleum.
The effect of this ruling is the dominant role
Petroleum Act plays in regulation of activities in
relation to petroleum and petroleum products.
Contrasting with Oilfields Act, it would be seen
that while the latter deals with upstream activities,
Petroleum Act deals substantially with midstream
activities.
C. Petroleum Rules
The Petroleum Rules provide framework for grant
of exploration licenses and mining leases. Some
of the salient features of the Petroleum Rules are
In the cases referenced above,58 the terms of grant

of license and cancellation of license in the event
of non-compliance of conditions of license was
also examined. It is important to note that Union
Govt. has the power to regulate petroleum products
as the same are hazardous material and also since
petroleum products are covered by Essential
Commodities Act, 1955. Another important
point to note is that rules and regulations are
subordinate to the parent statute and hence, a rule
or a regulation cannot enforce a standard more than
54. Any liquid hydrocarbon or mixture of hydrocarbons and any inflammable mixture (liquid, viscous or solid) containing any liquid hydrocarbon.
55. Satish Maganlal, supra note 48, Ravindra Singh Sando v. Bharat Petroleum Corporation Ltd. L.P.A. No. 392 of 1998 (High Court of Madhya Pradesh),
Babu Filling Station v. The Divisional Retail Sales Manager Indian Oil Corporation, O.P. No. 585 of 2009 (High Court of Madras), Municipal Corporation of Greater Bombay v. Bharat Petroleum Corporation Limited and Ors. Appeal No. 1114 of 1988 (High Court of Bombay).
56. Appeal No. 1114 of 1988 (High Court of Bombay).
57. Ibid
58. Supra Note 56.

what the statute mandates.59 This principle assumes

significance in the context of interpretation and
enforcement of provisions of statutes, rules and
regulations.
D. Petroleum and Natural Gas

Regulatory Board Act, 2006
The Petroleum and Natural Gas Regulatory Board
Act, 2006 (PNG Act) was notified on April 3, 2006.
The PNG Act provides for the setting up of the
Regulatory Board to regulate the refining, processing,
storage, transportation, distribution, marketing and
sale of petroleum, petroleum products and natural
gas excluding production of crude oil and natural
gas so as to protect the interest of consumers and
entities engaged in specific activities relating to
petroleum, petroleum products and natural gas
and to ensure uninterrupted and adequate supply
of these products in all parts of the country and
to promote competitive markets and for matters
connected therewith or incidental thereto. The PNG
Act provides for a legal framework for downstream
gas sector regulation and development of natural gas
pipelines and city or local gas distribution networks.
The Regulatory Board has certain functions under
the PNG Act in terms of Section 11 in respect of the
market and the various players in the O&NG market.
The Regulatory Board is also conferred with powers
under Section 12 to adjudicate disputes between
entities engaged in activities set out in the PNG Act
and to conduct inquiry into such entities as well. The
powers of the Regulatory Board were challenged in a
case where the Regulatory Board sought to authorize
entities for laying, building and operating local gas
distribution networks.60 The Delhi High Court ruled
that Section 16 of the PNG Act had not been notified
by the Union Govt. and hence, the Regulatory Board,
could not exercise powers set out in Section 16. The
court noted that the intent of the legislation was for
the establishment of a multi-member regulatory
board to regulate the refining, processing, storage,
transportation, distribution, marketing and sale of
petroleum and petroleum products. The objectives
behind these functions were to protect the interests
of the consumers and entities engaged in specified
activities relating to these products and to ensure

proper supply throughout the country and to
engender competition.
With regard to the functioning of the Chairman, the
court noted that the PNG Act envisaged collective
decision making process. While Indias vast body of
law on administrative policy and executive decision
making process recognize the principle of delegation
of responsibilities, in the present case, the Chairman
had sub-delegated his powers and this was held to be
impermissible. The court noted that the Chairman,
being a sub-delegate under the PNG Act would have
to act in strict compliance with the PNG Act and its
regulations.
Although this is a reiteration of the settled position
of law in India61, it clarifies the scope of the powers
of the Chairman and the Regulatory Board under the
PNG Act. This ruling of the Delhi High Court was
challenged by the Regulatory Board in the Supreme
Court and while the appeal was pending, the Union
Govt. notified Section 16, thus, empowering the
Regulatory Board to take actions in terms of section
16.62
The power of the Regulatory Board to fix tariff in the
gas market was challenged before the Delhi High
Court.63 The Delhi High Court ruled that based on
the provisions of the PNG Act, the Regulatory Board
lacked the power to fix the price of gas to be sold in
the market. This decision has been challenged in
the Supreme Court64 and the same is pending in the
Supreme Court. The next hearing is on August 12,
2014.
The PNG Act and the Regulatory Board are new
creatures and it will be sometime before the extent
of the law and the powers of the Regulatory Board
are clarified. Another interesting facet of these laws
is that in the tussle between specialized laws there is
no clear test for resolving the tension as the Supreme
Court is yet to adjudicate such a dispute.
E. NELP
NELP was formulated by the Union Govt. with
Directorate General of Hydrocarbons (DGH) as the
59. Avinder Singh & Ors. v. State of Punjab (1979) 1 SCC 137.
60. Voice of India v. Union of India, W.P. (C) No. 8415 and Indraprastha Gas Ltd. v. Petrol and Natural Gas Regualtory Board & Anr. W.P. (C) No. 9022 of
2009.
61. Gwalior Rayon Silk Manufacturing (Weaving) Company Ltd. v. The Assistant Commission of Sales Tax & ORs. (1974) 4 SCC 98.
62. In 2013, by way of Order dated January 28, 2013, the appeal of the Regulatory Board was disposed of granting liberties to both parties to take recourse
under law in case they were aggrieved by the actions of either party. Order of the Supreme Court available at http://courtnic.nic.in/supremecourt/
temp/5408201012812013p.txt.
63. Indraprastha Gas Ltd. v. Petroleum and Natural Gas Regulatory Board and Anr. WP (C) No. 2034 of 2012.
64. Special Leave Petition (C) No. 22273 of 2012

nodal agency in 1997-98 to provide a level playing

field to both public and private sector companies in
E&P of hydrocarbons. DGH has been entrusted with
the responsibility of implementation of NELP. It is
important to note that NELP is not law by itself and
is not passed in exercise of any rule-making powers.
Further, in the recent past, transactions relating
to gas-pricing65, acquisition of shares in O&NG
companies66 among others have been challenged in
public interest litigations (PIL). These are petitions
filed in the High Court of a State or Supreme Court
challenging executive decisions of the Union Govt.
Although NELPs are exposed to challenge, thus far,
the policy of NELP itself has not been challenged and
on the contrary, the Supreme Court has taken note
of this change in policy and its salutary effects on
harnessing the potential of the O&NG sector.67
not available in respect of O&NG blocks awarded

post March 31, 2011. Although before Finance Act
2013, there were speculations that tax holidays will
again be granted for E&P in O&NG blocks, in order to
attract further investments75 but nothing was done
to affect any changes. Even the Finance Bill 2014, has
not made any announcements to this effect.
NELP promotes investments in E&P Sector by

facilitating allotment of exploration blocks through
international competitive bidding. Since 1999 NELP
has accelerated the pace of petroleum and natural
gas exploration activities by providing a level
playing field for all parties to compete for award of
exploration acreage.68 National, private, and foreign
companies compete on equal terms and conditions
to secure PEL through bidding.69 To further promote
E&P activities in particular, NELP allows for
FDI up to 100 % in E&P activities. Over the past
decade, more than 275 blocks70 allotted over nine
bidding rounds, resulting in discovery of sixty-eight
O&NG fields.71 Further, the Union Govt. is going to
introduce NELP X, under which 86 blocks will be
offered.72 73 One of the benefits of NELP was the seven
year corporate tax holiday for the production of
mineral oil, exemption from custom duty on imports
required for petroleum operations, and biddable cost
recovery up to 100%.74 However, the tax holiday is
Under the PSC, Union Govt. and the contractor

recognizing that petroleum operations cause
some impact on the environment, have to conduct
petroleum operations with due regard to concerns
with respect to protection of the environment and
conservation of natural resources and in particular:
The successful bidder enters into a Production

Sharing Contract (PSC) with the Union Govt. In
terms of the PSC, the successful bidder is granted
the requisite license under the Oilfield Act76 and
Petroleum Rules77 for carrying out E&P activities,
more particularly described in the Model Contract.78
F. Environmental Law
i. employ modern oilfield and petroleum industry

practices and standards including advanced
techniques, practices and methods of operation
for the prevention of environmental damage in
conducting its petroleum operations;
ii. take necessary and adequate steps to:
a) prevent environmental damage and, where
some adverse impact on the environment is
unavoidable, to minimize such damage and
the consequential effects thereof on property
and people;
b) ensure adequate compensation for injury to
65. GAIL (India) Limited v. Gujarat State Petroleum Corporation Limited (2014) 1 SCC 329. See a similar case reported in http://articles.economictimes.
indiatimes.com/2014-03-26/news/48595241_1_reliance-industries-ltd-cpi-mp-gurudas-dasgupta-kg-d-6.
66. Arun Kumar Agrawal v. Union of India and Ors. (2013) 7 SCC 1.
67. See for instance Reliance Natural Resources Limited v. Reliance Industries Limited (2010) 7 SCC 1 (paragraphs 81 and 111).
68. General Knowledge Today, New Exploration License Policy (NELP)-VIIII, (2009) http://www.gktoday.in/current-article-new-exploration-licensepolicy-nelp-viii (accessed on July 15, 2014)
69. Indian Energy Sector, NELP New Exploration Licensing Policy, http://www.indianenergysector.com/oil-gas/nelp-new-exploration-licensing-policy
(accessed on July 15, 2014)
70. An oil exploration block is a large area of land, typically in 1000s of sq. kilometers, that is awarded to oil drilling and exploration companies by a
countrys government.
71. IBEF Oil & Gas, p.6
72. See, http://articles.economictimes.indiatimes.com/keyword/new-exploration-licensing-policy (accessed on July 15, 2014)
73. Source: http://www.thehindu.com/business/Economy/86-blocks-on-offer-in-round-ten-of-nelp/article5394325.ece (accessed on July 15, 2014)
74. Confederation of Indian Industry, Indian Hydrocarbon Industry Policy Framework, http://www.cii.in/PolicyAdvocacyDetails.aspx?enc=fwDi/
BDXuTpTb667OBcacl7dij+kpMfZ/NOhYDyHEVnPN6yCrBdE10uzYRkuydDF (accessed on July 15, 2014).
75. Budget 2013: Give tax holiday to oil & gas sector for exploration, demands FICCI, available at http://articles.economictimes.indiatimes.com/2013-0228/news/37353005_1_definition-of-mineral-oil-holidays-for-other-sectors-tax-holiday
76. Section 6 of Oilfields Act (For details, see http://petroleum.nic.in/ordact.pdf )
77. Rule 5 of the Petroleum Rules (For details, see http://petroleum.nic.in/pngrules.pdf)
78. Source: http://petroleum.nic.in/nelp8a2.pdf (accessed on April 6, 2014).
10

persons or damage to property caused by the

effect of petroleum operations; and
iii. comply with the requirements of applicable laws
and the reasonable requirements of the Union
Govt. from time to time.
iv. In case of failure to comply with the above steps;
the contractor has to remedy the failure.79
Before commencing E&P, it is mandatory to conduct
an Environmental Impact Assessment (EIA) for the
project site, in accordance with the Environmental
Impact Assessment Notification, 1994.80
Subsequently, a proposal has to be submitted to
the Ministry of Environment and Forests (MoEF),
Union Govt. outlining the details relating to the
drilling activity, the co-ordinates of drilling, and EIA
report along with public hearing report.
The first of the aforementioned studies has to be
carried out in two parts, namely, a preliminary part
which has to be concluded before commencement
of any field work relating to a seismographic or
other survey, and a final part relating to drilling
in the exploration period. The part of the study
relating to drilling operations in the exploration
period has to be approved by Union Govt. before
the commencement of drilling operations, and such
approval is not generally unreasonably withheld.
The second of the aforementioned studies shall be
completed before commencement of development
operations and shall be submitted by the contractor
as part of the development plan, with specific
approval of Union Govt. being obtained before
commencement of development operations,
and such approval is not generally unreasonably
withheld.
The MoEF subsequently approves the project if they
are satisfied that all requirements are met.81
G. Competition Law
The PNG Act empowers the Regulatory Board under
Section 11 to protect the interest of consumers by
fostering fair trade and competition... However,
the issue relating to unfair trade practices has also
come up before the Competition Commission

of India (Competition Commission constituted
under the Competition Act, 2002 (Competition
Act). Unlike the previous legislation, Monopolies
and Restrictive Trade Practices Act, 1957, (MRTP
Act), the Competition Act expressly makes the law
applicable to State owned Enterprises (SoE). This
issue came up for consideration early on in Reliance
Industries Ltd. v. Indian Oil Corporation Limited
& Ors.82 when the Competition Commission had
to examine applicability of Competition Act to
SoE. The Competition Commission emphatically
and unequivocally upheld the applicability of the
restrictions under the Competition Act to SoEs and
PSUs in two subsequent decisions.83 As a result of the
provisions of the Competition Act and the forwardlooking approach of the Competition Commission,
SoEs and PSUs can no longer thrive on legal
monopoly and avoid healthy competition.
For instance, in O&NG sector, the NOCs hold
about 86 % market share of Indias oil E&P, 77% of
natural gas, 74% of oil refining capacity and 86% of
marketing infrastructure.84 These NOCs do have an
edge over new private sector entrants. Shell and RIL
ventured into marketing of oil in a big way but had
to close their oil distribution outlets due to absence
of competitive neutrality between public sector
and private sector in view of the subsidy (state aid)
only to public sector oil companies. Appreciating
these realities, law makers in India have placed an
obligation on Competition Commission to examine
such issues while determining dominance thereby
bringing Indias competition law in line with
international practice.
NOCs often incur huge losses on the sale of diesel,
PDS kerosene and domestic LPG. The bailout package
by the Union Govt. every year, going out of taxes
paid by the public, have actually been subsidizing
losses / inefficiency of these oil companies. On the
contrary, private oil marketing companies do not
have the luxury of being compensated for underrecoveries. Consequently, this has affected the entry/
growth plans of private oil marketing companies as
competing with NOCs is not viable under the present
circumstances. Clearly, this has a direct impact on
the incidence of investment by private oil marketing
79. See Model Production Sharing Agreement,

http://www.dghindia.org/pdf/MODEL%20PRODUCTION%20SHARING%20CONTRACT(MPSC).pdf. The details on specific compliance is listed in
the Model PSC.
80. Environmental Impact Assessment is notified in exercise of the power conferred under Section 3 (c) of Environmental Protection Act, 1986.
81. See, http://www.iocl.com/download/Environmental_Clearance040512.pdf and http://www.ongcindia.com/wps/wcm/connect/2add4a8f-24bb4587-a014-fbefc23ffc00/indara%231+EC.pdf?MOD=AJPERES&CACHEID=2add4a8f-24bb-4587-a014-fbefc23ffc00
82. Case No. 26 of 2010.
83. Suo moto case No. 03 of 2013 and Case No. 3 of 2012, Maharashtra State Power Generation Company Ltd. V. Mahanadi Coalfields Ltd.
84. Market Study Report Competition in Indias Energy Sector by TERI and available on the website of the CCI
11

companies, and throughout the entire oil value

chain, and ultimately on greater market competition.
In 2010 Reliance Industries brought an action against
IOCL, BPCL, HPL and National Aviation Company
Limited alleging that these companies (Opposite
Parties in the complaint under Competition Act)
were guilty of having violated the Competition
Act.85 Reliance Industries contended that Opposite
Parties were behaving like a cartel, enjoyed a
dominant position in the market and was abusing
their dominant status. The Opposite Parties however
objected to the complaint on the ground that
Reliance Industries had already filed a complaint
with the Regulatory Board and the issues raised by
Reliance Industries was to be adjudicated only by
the Regulatory Board. The Competition Commission
ruled on a preliminary point of jurisdiction holding
that Competition Commission could entertain
such a complaint even though Reliance Industries
had already filed a complaint before the Regulatory
Board. This order was challenged by the Opposite
Parties in the Delhi High Court.86
As noted by the Opposite Parties, Reliance Industries
had filed a case before the Regulatory Board in 2008
alleging restrictive and unfair trade practices adopted
by the oil marketing companies.87 This case was
dismissed in 2012 by the Regulatory Board on the
ground that complainants before the Regulatory
Board had failed to prove that the oil marketing
companies had acted in an anti-competitive manner
or obtained any pecuniary benefits.
In 2013, after the order of the Regulatory Board,
Competition Commission issued notices to
IOCL, HPCL and BPCL (Opposite Parties in
the suo moto complaint case) to examine the
issue of pricing.88 Here too, the Opposite Parties
challenged Competition Commissions jurisdiction
on the ground that only the Regulatory Board
had jurisdiction to examine the issue of pricing.
Competition Commission by its order dated
October 21, 2013 dismissed the objections of the
Opposite Parties. This order too was challenged by
the Opposite Parties in the Delhi High Court89 and
the Delhi High Court by its order dated November
22, 2013 directed that both writ petitions be heard
together. The next hearing is on August 26, 2014
and it is expected that the Delhi High Court would
rule on issues relating to jurisdiction of Competition
Commission and the Regulatory Board.

The two cases from Competition Commission
demonstrate that issues relating to anti-competitive
practice, regulatory compliance under other laws are
matters that O&NG companies will have to comply
with under the respective legislations even though
there are specific legislative measures relating to
O&NG companies. In the cases before the Delhi
High Court, the substantive issue relates to pricing
and cartelization. While it is arguable that pricing
is an issue within the exclusive jurisdiction of the
Regulatory Board, an argument which is more
likely to find favor with the Delhi High Court is
that matters relating to anti-competitive practice,
supply and distribution of goods and services and
restrictions on entry into the market are matters that
the Competition Commission will have to examine.
Issues relating to regulatory conflict will ultimately
have to be resolved by the Supreme Court and we
can expect that in a few years the issue of regulatory
conflict will ultimately be resolved by the Supreme
Court. Until then, O&NG companies would have
to ensure compliance with each of the individual
regulatory requirements.
II. Regulation
In the hierarchy of laws, the Constitution is supreme.
All laws are subordinate to the Constitution. A
law may be struck down as being unconstitutional
due to lack of legislative competence or because
it violates fundamental rights.90 Decisions of the
Union or State Executive, including decisions of
statutory authorities, constitutional functionaries
and quasi-judicial authorities may be challenged in
a State High Court under the Constitution. Rules,
regulations, notifications and circulars passed by
authorities under the relevant statute may also be
challenged on the ground that the same violate the
Constitution.
The Constitution empowers, and the Supreme
Court has recognized, authorities created under a
statute to delegate certain functions to subordinate
authorities.91 To facilitate in the effective
implementation of government policies certain
executive authorities have the power to pass rules
85. Reliance Industries v. Indian Oil Corporation Limited and Ors. Case No. 26 of 2010 decided on September 30, 2010.
86. W.P. No. 8211 of 2010.
87. Reliance Industries & Ors. v. IOCL & Ors. Complaint No. 4 of 2008.
88. Re: Fixing of petrol price by public sector Oil Marketing Companies, Suo Moto Case No. 03 of 2013.
89. W.P. No. 7303 of 2013.
90. I.R. Coelho v. State of Tamil Nadu (2007) 2 SCC 1.
91. See Gwalior Rayon Silk Manufacturing (Weaving) Company Ltd., supra note 61.
12

and regulations which have the force of law. These

rules and regulations are subordinate to the parent
law and cannot transgress the limits set out by the
parent law. Rules and regulations cannot confer
excessive discretion on subordinate authorities.
It is also settled law that authorities acting in
furtherance of a statute must carry out their
functions in a manner that best achieves the
objectives of the statute. These principles are
designed to reduce the scope of discretion and
eliminate arbitrariness in executive action.
Ordinarily, decisions of these authorities may be
challenged in appeal before an appellate authority.
However, in exceptional circumstances, where there
is an egregious violation of fundamental rights,
principles of natural justice or when an authority
acts in violation of its jurisdiction, an aggrieved party
may file a petition in the State High Court.
It is important to note that while challenging the
decision of a statutory authority, generally the
scope of appeal is limited and there is a high degree
of deference by courts. The Supreme Court has
recognized that in matters relating to economic
policy, courts must not interfere unless arbitrariness
is writ large in the decision making process. Even
in cases where intervention of the court is justified,
the court would only examine the decision making
process and not the decision itself. These principles
have been applied even in the context of gas price
fixing and performance of contracts in the O&NG
sector.92
Gas pricing is an issue that has cropped up several
times before the courts as will be gathered from
the litigious history of gas pricing. Although the
Supreme Court unequivocally and emphatically
set the boundary for itself with respect to judicial
review, it has not prevented litigants from
approaching the courts. In Oil & Natural Gas
Commission & Anr. v. The Association of Natural
Gas Consuming Industries of Gujarat and Ors,93
the Supreme Court upheld the right of ONGC to
fix the price as per its discretion provided it was on
principle and not caprice. Supreme Court noted
that exploration of oil is capital-intensive and

money-consuming and the ONGC would be well
justified in supplying gas to voluntary contractors at
a price which several parties are willing to accept and
which will enable the ONGC to build up a surplus to
meet its manifold requirements. The principle laid
down in this case was that considerable latitude was
granted to ONGC to fix prices. However, this liberty
has been called into question and the concerned
entities will have to justify the faith reposed in them
by the courts.94
A. Directorate General of Hydrocarbons

DGH was established under Regulation No.O20013/2/92-ONG, D-III, Union Govt. Ministry of
P&NG, dated 8th April, 1993.95 The DGH, under
the administrative control of the Ministry of
PNG, is responsible for the environmental, safety,
technological, and economic activities related to
the oil and gas industry. The DGH facilitates E&P
activities through regulation as well as research.
In unexplored or poorly explored areas, the DGH
conducts studies, surveys, information drilling,
and other related activities.96 The DGH reviews the
exploration programs and reservoir production
of companies for adequacy and advises the Union
Govt. on such activities.97 Further, the DGH oversees
matters concerning production sharing contracts
for discovered field and exploration blocks. To
ensure compliance with Ministry of Defence
guidelines, DGH scientists remain onboard all of the
seismic vessels and deep water drilling rigs during
operation.98
B. Regulatory Board
As stated above, the Regulatory Board was
established in 2006 in terms of Section 3 (2) of the
PNG Act.99 The Regulatory Board is empowered
to regulate the refining, processing, storage,
transportation, distribution, marketing and sale of
petroleum and petroleum products and natural gas,
and to foster fair trade and competition amongst
oil and gas companies.100 The Regulatory Board
92. Supra note 65 and 66 see GAIL (India) Limited, Arun Kumar Agrawal and Gurudas Dasgupta & Anr. v. Union of India & Ors. WP (C) No. 513 of
2013.
93. (1990) Supp. 1 SCC 397.
94. Gurudas Gupta supra Note 93.
95. For details See http://www.dghindia.org/pdf/Resolution.pdf (accessed on March 20, 2014)
96. DGHFunctions and Responsibilities, Ministry of Petroleum & Natural Gas, Govt of India, available at http://dghindia.org/FunctionandResponsibility.aspx (accessed on July 15, 2014)
97. Ibid
98. Ibid
99. For details on power of the Board regarding complaints and resolution of disputes see Section 12 of the PNG Act
100. Ibid
13

registers entities to market petroleum and natural

gas products, establish and operate liquefied natural
gas terminals, and establish storage facilities for
petroleum, petroleum products, or natural gas that
exceed capacity specified by regulations. Further,
the Board is responsible for authorizing pipeline
development.
Unless otherwise provided for arbitration in the
relevant agreement, the Regulatory Board has the
power to adjudicate a dispute arising out of (a)
refining, processing, storage, transportation and
distribution of petroleum, petroleum products
and natural gas by the entities; (b) marketing and
sale of petroleum, petroleum products and natural
gas including the quality of service and security
of supply to the consumers by the entities; and
(c) registration or authorization issued by the
Regulatory Board under Section 15 or Section 19 of
PNG Act.101
The Appellate Tribunal established under Section
110 of the Electricity Act, 2003 is the Appellate
Tribunal for the purposes of PNG Act and the
Appellate Tribunal exercises jurisdiction, powers and
authority conferred on it by under the PNG Act.102
Further, under Section 37 of the PNG Act, an appeal
shall lie against any order, not being an interlocutory
order, of the Appellate Tribunal to the Supreme
Court on one or more of the grounds specified
in Section 100 of Civil Procedure Code (CPC).
However, no appeal shall lie against any decision
or order made by the Appellate Tribunal with the
consent of the parties. The limitation for filing an
appeal before Supreme Court is 90 days.
C. Oil Industry Development Board

Oil Industry Development Board (OIDB) was
established through the Oil Industry (Development)
Act of 1974 (Oil Development Act). This legislation
was enacted in response to increasing international
prices of crude oil since the 1970s.103 Accordingly,
the Oil Development Acts purpose was to facilitate
increased self-reliance in petroleum and natural
gas through various measures such as providing
financial assistance to the organizations engaged in
development programs of the oil industry.104 The
OIDB renders assistance through grant of loans
for Projects, disbursement of grants for Research &
Development programmes, refinancing of loans,
and funding expenditure for scientific advisory
committees, study groups, task forces, etc.105
As per Section 26 of the Oil Development Act no
court inferior to that of a metropolitan magistrate or
a magistrate of the first class has the jurisdiction to
try any offence punishable under Oil Development
Act. Also, no prosecution for any offence punishable
under the Oil Development Act shall be instituted
except with the previous sanction of the Union
Govt.106 Finally, no suit, prosecution or other legal
proceeding shall lie against the Union Govt. or the
Regulatory Board or any committee constituted
by the Regulatory Board or any member of the
Regulatory Board or of such committee or any officer
or other employee of the Union Govt. or of the
Regulatory Board or any agent of or any other person
authorized by the Central Government or the Board,
for anything which is in good faith done or intended
to be done under Oil Development Act or the rules
made thereunder.107
101. Section 24 of PNG Act

102. Section 30 of PNG Act
103. Oil Industry Development Board, About Us, http://oidb.gov.in/index1.asp?linkid=128 (accessed on July 15, 2014)
104. Ibid
105. Ibid
106. Section 27 of the Oil Industry (Development) Act, 1974
107. Section 28 of the Oil Industry (Development) Act, 1974
14

4. Foreign Investment Opportunities and

Market Status
The current competitive environment and foreign
investment opportunities within the O&NG market
are key Indian economic and energy security
concerns. In 1991, the Union Govt. instituted various
policies to facilitate the influx of foreign capital and
encourage entrepreneurs to invest in India.108 These
policies included the deregulation and de-licensing
of various petroleum products, simplification of
the procedure to obtain industrial licenses, freedom
to form joint venture companies, and allowance of
100% FDI in multiple segments of the oil and gas
sector.109
from either the Union Govt. or the Reserve Bank of

India (RBI) (however, certain documents must still
be filed with the RBI). For proposals on FDI that do
not qualify under the automatic route, the Foreign
Investment Promotion Board (FIPB), a government
body offers a single window clearance.111 Under this
policy, government approval112 route, up to 49%
FDI is permitted in petroleum refining by PSUs
without any disinvestment or dilution of domestic
equity in the existing PSUs.113 From 2000-11,
Indias O&NG sector attracted FDI worth US$ 3,152
million.114
According to the Ministry of Commerce and

Industrys 2013 consolidated FDI policy, 100%
FDI is allowed under the automatic route for
E&P, infrastructure related to marketing of
O&NG, marketing of natural gas and petroleum
products, petroleum product pipelines, natural
gas pipelines, liquefied natural gas regasification
infrastructure, market study and formulation
and petroleum refining in the private sector (all
subject to the existing sector policy and regulatory
framework).110To allow 100 % FDI under an
automatic route means that foreign companies are
not required to obtain prior approval for investment
The O&NG industry is currently dominated by the

Union Govt. PSUs.115 In PSUs, 51% or more of the
paid up share capital is owned by Union Govt. or
the various state governments.116 Leading PSUs in
the Indian O&NG industry include ONGC (74%
State owned), OIL (98.1% State owned), IOCL (89%
State owned), Gas Authority of India (57% State
owned),BPCL (66% State owned), and HPCL (51%
State owned).117 ONGC accounts for approximately
67% of oil and gas production, while IOC and its
subsidiaries control the largest market share in
petroleum products.118
108. Ministry of Petroleum and Natural Gas, Introduction, http://petroleum.nic.in/appintr.htm (accessed on July 15, 2014)
109. India Brand Equity Foundation, Oil and Gas Industry in India (June 2013), http://www.ibef.org/industry/oil-gas-india.aspx (accessed on July 15, 2014).
110. Ministry of Commerce and Industry, Consolidated FDI Policy (Effective 05 Apr 2013), available at http://www.dipp.nic.in/English/Policies/FDI_Circular_01_2013.pdf (accessed on July 15, 2014)
111. Register in India, Automatic route of RBI, http://www.registerinindia.com/automatic-route-of-RBI.html (accessed on July 15, 2014).
112. Register in India, Approval Route of Government, http://www.registerinindia.com/approval-route-of-government.html (accessed on July 15, 2014).
113. Ministry of Oil and Natural Gas, Information revised FDI Policy, available at http://petroleum.nic.in/fdi.pdf.
114. IBEF Oil & Gas, p.6 (citing Invest in India Oil and Gas Sector).
116. Public Sector Undertakings in India, http://www.india.gov.in/spotlight/public-sector-undertakings-india (accessed on July 15, 2014).
118. Ibid
15
5. Fiscal Framework for Upstream Sector in

India
I. Overview
As stated earlier the fiscal framework of a country
determines to a great extent the volume of
investment from private and foreign players in the
upstream sector. Since 1997 NELP has been at the
cornerstone of Indias upstream fiscal system. The
pre NELP fiscal regime was not perceived as very
investor friendly. This prompted the Union Govt.
to take a liberal approach and significantly revise
the rates on royalty, tax and duties. The Union Govt.
has started the practice of preparing a Petroleum
Tax Guide for every new bidding round. This
guide consolidates all the relevant laws dealing
with income tax, customs duty, central excise, cess,
royalties and license/lease fees thereby giving some
clarity to bidders vis-a-vis the fiscal framework. The
key parameter that determines whether the fiscal
system is flexible or rigid is the Contractors take.
The process of calculating the contractors take
and Union Govt.s take gives an understanding of a
countrys fiscal system. As NELP-VII, VIII and NELP
IX (bidding rounds) did not generate enthusiasm as
expected; there may be a need to relook the fiscal
framework of the upstream business in India.
II. Salient Features of NELP

A. Level Playing Field
There is no mandatory state participation through
ONGC/OIL nor is there any carried interest of
the State. ONGC and OIL compete for obtaining
PEL on a competitive basis instead of the earlier
system of granting them on nomination basis. At
the same time, ONGC and OIL also get the same
fiscal and contractual terms available to private
companies. Open availability of exploration acreages
provides continuous window of opportunities to oil
companies. The acreages are demarcated on a grid
system and pending preparation of grid, blocks are
carved out for offer. Accordingly, companies are free
to choose and propose acreages.
B. Royalty Rates
Under NELP, a royalty payment for crude oil is at
the rate of 12.5% for the onshore areas and 10%
for offshore areas and 10% royalty on natural gas
both for onshore and offshore. Half the royalty
from the offshore area is credited to a hydrocarbon
development fund to promote and fund exploration
related activities such as acquisition of global data
on poorly explored basins, promotion of investment
opportunities in the upstream sector, institution
building, etc. In order to encourage exploration in
deep water and frontier areas, royalty is charged at
half the prevailing rate for normal offshore area for
deep water areas beyond 400 metres bathymetry119
for the first seven years after commencement of
commercial production. It is important to note that
royalty is cost recoverable.120
C. Cost Recovery
The contractor is allowed full cost recovery (i.e.
100%) out of the percentage of the total value of
petroleum produced from the contract area.121 Costs
that the contractor is allowed to set off include
exploration, development and production costs and
royalty as well. It is important to note that 100%
cost recovery does not mean that the contractor is
allowed to recover all cost associated with petroleum
operations. Cost recovery is a biddable component,
i.e. while allotting acreages the contractor has to give
an estimate of the exploration costs that they will
incur.
D. Customs Duty
Several concessions or exemptions have been
provided for import of goods for specified contracts
for exploration, development and production
of petroleum goods. Further, concessions or
exemptions have been provided for the import of
crude oil and other petroleum products. Also, import
of certain petroleum products also attracts other
customs duties, in addition to the duties listed above,
such as additional duty on import of motor spirit and
119. The term bathymetry is defined as the depth of water relative to sea level.
120. See Article 17 Model NELP PSC.
121. See Article 15 Model NELP PSC.
16

high-speed diesel, and national calamity contingent

duty on import of crude oil.
E. Excise Duty and Cess

No excise duty or cess is levied on production of
petroleum under PSCs including extracting of crude
oil.
III. Process Under NELP
D. Step Four
Bidders are required to furnish bid bond at the time
of submission of the bid, for each block, which is
valid for one year period. The bid bond is released on
signing of PSC for the block. If the PSC is not signed
within 90 days after the award of the block, the bid
bond is forfeited. The following amount is taken as
bid bond:
i. Deepwater block Rs. 2.0 million
ii. Shallow water block Rs. 1.5 million
iii. Onland block Rs. 1 million
A. Step One
iv. Onland Type S block Rs. 5 million123
The Union Govt. identifies exploration blocks to be

offered under the NELP
E. Step Five
Qualification of Bid
B. Step Two
The Union Govt. issues a notice inviting offers for
exploration of O&NG under NELP. The blocks are
described accordingly and include on land blocks
which are of Type S blocks, shallow water blocks and
deep-water blocks (beyond 400 metre bathymetry122).
Companies are allowed to bid for one or more blocks,
singly or in association with other companies,
through an unincorporated or incorporated venture.
C. Step Three
There are certain items that the contractors are
required to bid for:
i. Work programme commitment.
ii. Percentage of value of annual production sought
to be allocated towards cost recovery.
iii. Profit petroleum share offered to Union Govt. at
the lowest tranche (less than or equal to 1.500)
and the highest tranche (3.500 and above) of PreTax Investment Multiple (PTIM).
i. Payment of tender fees, by bidding company

or any member of the consortium, by way of
purchase of the requisite data package of the
block to be bid as the case may be, on or before
bid closing date.
ii. The bidder must be a company singly or in
association with other companies, through an
unincorporated or incorporated venture.
iii. Technical capability of the proposed operator.
iv. Financial capability of the bidding company/
consortium - The annual report including the
audited annual accounts for the latest completed
year and a certificate of net worth from
companys statutory auditor(s) based on the latest
audited annual accounts certifying the net worth
of the bidding company should be submitted.
In case the parent company provides financial
and performance guarantee, the annual report,
annual accounts and net worth certificate in
respect of parent company should be submitted
and the financial capability of the parent
company shall be considered for evaluating the
financial capability of a bidding company.
122. The term bathymetry originally referred to the oceans depth relative to sea level, although it has come to mean submarine topography, or the
depths and shapes of underwater terrain. [Source: http://oceanservice.noaa.gov/facts/bathymetry.html]
123. The bid bond amounts are based on figures disclosed in NELP IX.
17
Fiscal Framework for Upstream Sector in India

v. Work programme.
vi. Fiscal Package
F. Step Six
Evaluation of bid and Rejection criteria
The Ministry of PNG has the sole discretion either

to accept or reject the bids. The bids are submitted
to the DGH124 who prepares a report and gives
its recommendation to Ministry of PNG for final
decision.125 However, the Union Govt. is not bound
by these recommendations and its decision is final.
Bids are evaluated on technical capability of the
proposed operator, work programme and fiscal
package. With regard to the fiscal criteria, the
bidder is evaluated on the basis of bid cost recovery
percentage and offered profit share to Union Govt.
The bidder offering highest Union Govt. share in
profit petroleum will get maximum points and other
bidders will get points proportionately. Similarly the
bidder who submits the lowest cost recovery bid will
get maximum points.
G. Step Seven
The Union Govt. enters into a PSC with the
successful bidder in respect of each block offered,
which is based on the Model Production Sharing
Contract (MPSC).126
H. Step Eight
Other Procedures such a clearance from various
departments.
i. Clearance from Ministry of Defence, Union Govt. -
As per the existing procedure, all foreign vessels,

drilling rigs, barges, platforms, supply vessels, etc.
engaged in E&P activities in India are required to
obtain security clearance from Ministry of Defence
(Integrated Headquarters of Ministry of Defence -
Navy) and the applications are submitted to DGH

for obtaining approval from Ministry of Defence on
behalf of operator.127
ii. Clearance from MoEF
Two EIA has to be carried out (a) to determine at

the time of the studies the prevailing situation
relating to the environment, human beings and local
communities, the flora and fauna in the contract
area and in the adjoining or neighbouring areas; and
(b) to establish the likely effect on the environment,
human beings and local communities, the flora and
fauna in the contract area and in the adjoining or
neighbouring areas in consequence of the relevant
exploration period of petroleum operations to
be conducted under the PSC, and to submit, for
consideration by the parties, methods and measures
for minimizing environmental damage and carrying
out site restoration activities.
IV. NELP Bidding Rounds

A. Beginnings: NELP-I
Since its inception 277 PSCs have been signed and
210 are under operation under the NELP regime.128
Under NELP-I a total of 48 blocks were offered of
which 27 received bids. RIL emerged as the largest
private sector bidder for oil exploration blocks
followed by ONGC.129 RIL`s bids were for blocks
in the Mumbai offshore region, Kerala-Konkan
basin, Kutch, North Eastern Coast, and the Krishna
Godavari basin. Cairn Energy emerged as the
second largest private player putting in bids for
three blocks in the Krishna-Godavari basin. The
first round was significant on two aspects - first, it
marked the consolidated entry of the private sector
both domestic and foreign into the area, second the
reaction for the blocks showed that the policy had
still some way to go before it could attract world oil
majors to explore in India.
124. The DGH comes under the administrative control of the Ministry of Petroleum & Natural Gas (MOPNG). Objectives of DGH are to promote sound
management of the oil and natural gas resources having a balanced regard for environment, safety, technological and economic aspects of the
petroleum activity. DGH has been entrusted with several responsibilities like implementation of NELP, matters concerning the PSCs for discovered
fields and exploration blocks, promotion of investment in E&P Sector and monitoring of E&P activities including review of reservoir performance of
producing fields.
125. Source: http://www.dghindia.org/InternalGovernance.aspx?tab=0 (accessed on July 17, 2014).
126. See, Model Production Sharing Contract (MPSC), available at http://www.dghindia.org/pdf/MODEL%20PRODUCTION%20SHARING%20
CONTRACT(MPSC).pdf (accessed on July 15, 2013).
127. Source: http://www.dghindia.org/Clearances.aspx?tab=1 (accessed on July 15, 2014)
128. Source http://www.dghindia.org/pdf/1DGH%20Annual%20Report%202011-12.pdf, (accessed on July 15, 2014)
129. Reliance acquired 12 blocks while ONGC captured 5 blocks.
18

B. Major Discoveries Under NELP
D. NELP IX and X
The highlights of the NELP regime have been the

discoveries made at the Krishna-Godavari deep water
blocks of the Andhra Pradesh coast by RIL in 2002.
This block (also called KG-DWN-98/3/ or KG-D6
block) was awarded to RIL in 2000 under NELP-I. The
KG-D6 block was said to be the worlds largest gas
discovery for 2002. It is among the worlds largest
and most complex deep-water gas production facility
and has the potential of transforming Indias energy
landscape. Presently, RIL is producing approximately
60 Million Metric Standard Cubic Meters per day
(MMSCMD) of gas which is being supplied to
several priority sectors identified by the Union Govt.
under its gas utilization policy. Since production
commenced in April 2009, the field has produced
over 14.5 billion cubic metres of gas, contributing
significantly to the countrys critical industrial
sectors.
A total of 33 exploration blocks were offered during

the bidding process. ONGC bagged 10 of the 33 oil
and gas exploration blocks, OIL bid for as many as 29
blocks and managed to get 10. RIL bid for two deepsea blocks in the Andaman Basin in the Bay of Bengal
and four onshore blocks in Rajasthan and Gujarat.
Another major oil discovery was made in the Mangla

region of the State of Rajasthan. Mangla is located in
the Barmer basin and consists of 16 separate O&NG
fields. This block (also called RJ-ON-90-1) was first
awarded to the Shell Group in 1992. Later in 2002
Cairn India purchased this block from Shell. In
January 2004, 3.7 BOE was found in Mangala thereby
making it 2004s biggest discovery of on-shore oil
in the world. This discovery has been hailed as a
historic event and promises to alleviate Indias
O&NG woes.
C. NELP VII and VIII

Under NELP VII, 57 blocks were offered out of which
45 blocks received bids from the participants. A total
of 181 bids were received for these blocks. NELP-VII
attracted more domestic players than foreign players
with the exception of British Petroleum. The round
netted US $1.49 bn in investment committed to
exploration expenses. Finally a total of 41 PSC were
signed with the Union Govt.
Under NELP-VIII while 70 blocks were offered for
bidding, only 36 blocks received bids. Almost 50% of
the blocks went to ONGC thereby reaffirming their
status as the premier company in O&NG exploration.
RIL abstained from bidding under this round and the
reception from the private and foreign players didnt
match expectations. BHP Billiton, BG India and Cairn
India were among the few foreign players who were
awarded acreages.
A total 46 blocks (17 Onland, 15 Shallow water and

14 deep water blocks) are being offered under tenth
round of NELP-X in 26 prospective sedimentary
basins of India for exploration of oil and natural gas,
covering a total area of 3.14 million Square Km.130
V. Taxes
A. Corporate Income Tax
Resident companies are taxed at the rate of 32.44%
(rates mentioned herein are the maximum effective
rates inclusive of applicable surcharge and education
cess) and non-resident companies are taxed at
the rate of 42.02% on net taxable income. While
residents are taxed on their worldwide income, nonresidents are only taxed on income arising from
sources in India. A company is said to be resident
in India if it is incorporated in India or is wholly
controlled and managed in India. A minimum
alternative tax is payable at the rate of around 20%
(18.5% plus surcharge and education cess).
Non-residents 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% (plus surcharge and education
cess) of the gross revenues.
A number of special allowances and incentives have
been provided which are relevant to the oil and gas
industry in India:
With respect to exploration and production

activities, a special allowance may be claimed in
relation to infructuous or abortive exploration
expenses, drilling or exploration activities, and
depletion of mineral oil in the mining area
(subject to the terms of the agreement with the
Government).
An allowance may be claimed with respect

to capital expenditure incurred in laying and
operating a cross-country natural gas, crude or
130. For details, see http://www.dghindia.org/admin/Document/Topstory/13.pdf
19
Fiscal Framework for Upstream Sector in India

petroleum oil pipeline network for distribution,

including storage facilities.
A special allowance of up to 30% (15% each for

2013 and 2014) may be claimed with respect to
cost of a new plant or machinery (where the cost
exceeds INR 1 billion) acquired and installed
between March 31, 2013 and April 1, 2015.
With effect from April 1, 2014 income earned

by a foreign company from sale of crude oil to
any person in India is exempt from income tax
if the income is earned in Indian currency, the
agreement is entered into or approved by the
Central Government, the agreement and foreign
company is specifically notified by the Central
Government and the foreign company does not
have any other activity in India.
Accelerated depreciation at the rate of 60% is

available for plant (with a few exceptions) used
by mineral oil concerns. New machinery or plant
acquired or installed after March 31, 2005 may be
subject to additional depreciation of 20%.
A 7 year tax holiday is available for undertakings

engaged in commercial production of mineral
oils or refining of mineral oils. This is not
available for concessions awarded after March 31,
2011 (or March 31, 2012 with respect to refining
of mineral oils).
Business losses can be carried forward for a

period of 8 years, subject to a 51% continuity of
ownership test.
B. Dividends
Dividends distributed by Indian companies are
subject to a dividend distribution tax (DDT)
at the rate of 16.22%, payable by the company.
However, no further Indian taxes are payable by the
shareholders on such dividend income once dividend
distribution tax is paid. An Indian company would
also be taxed at the rate of 21.63% on gains arising to
shareholders from distributions made in the course
of buy-back or redemption of shares.
C. Capital Gains
Tax on capital gains depends on the period of
holding of a capital asset. Short term gains may arise
if the asset is held for a period lesser than 3 years (or
1 year for securities). Long term gains may arise if
the asset is held for a period more than 3 years (or 1
year for securities). Long term capital gains earned
by a non-resident on sale of unlisted securities may
be taxed at the rate of 10.5% or 21% depending on
20
certain considerations. Long term gains on sale of

listed securities on a stock exchange are exempt, and
only subject to a securities transaction tax (STT).
Short term gains earned by a non-resident on sale
of listed securities (subject to STT) is taxable at the
rate of 15.76%, or at ordinary corporate tax rate
with respect to other securities. India has recently
introduced a rule to tax non-residents on the
transfer of foreign securities the value of which are
substantially (directly or indirectly) derived from
assets situated in India.
D. Withholding Taxes
Tax would have to be withheld at the applicable
rate on all payments made to a non-resident, which
are taxable in India. The obligation to withhold
tax applies to both residents and non-residents.
Withholding tax obligations also arise with respect
to specific payments made to residents. Failure to
withhold tax could result in tax, interest and penal
consequences.
E. Double Tax Avoidance Treaties

India has entered into more than 80 treaties for
avoidance of double taxation. A taxpayer may be
taxed either under domestic law provisions or the
tax treaty to the extent it is more beneficial. A nonresident claiming treaty relief would be required
to file tax returns and furnish a tax residency
certificate issued by the tax authority in its home
country. Certain tax treaties such as the treaties with
Mauritius, Singapore, and Netherlands provide
significant relief against Indian withholding tax
on capital gains and interest income in specific
circumstances.
F. Anti-Avoidance
A number of specific anti-avoidance rules are
enforced in India. Cross-border transactions between
related parties would be viewed for tax purposes on
an arms length basis. Transfer pricing rules apply to
certain domestic transactions as well. India does not
have any thin capitalization rules at the moment.
However, effective from April 1, 2015 wide general
anti avoidance rules (GAAR) shall be implemented
to tax or disregard certain impermissible avoidance
arrangements that are abusive or lack commercial
substance. GAAR is likely to impact some of the
conventional tax optimization structures for India.

G. Indirect Taxes
Indirect taxes are imposed at the federal and state
level. This includes service tax, customs and excise
duty, value added tax (VAT) and central sales tax.
Service tax is payable by the service provider at the
rate of 12.36% on all services except for services
specified in a negative list. Services provided outside
the taxable territory of India is not subject to service
tax. The rate of customs, excise duty and VAT varies
depending on the product. Certain petroleum
products may be subject to additional duties. India
is in the process of introducing a goods and services
tax (GST) to consolidate and harmonize all indirect

taxes on a value added basis. The implementation of
GST will require the cooperation of the central and
state governments, which is still awaited.
21
6. Report of the Committee on the Production

Sharing Contract Mechanism in Petroleum
Industry, 2012 (Rangarajan Committee)
The Union Govt. constituted the Rangarajan
Committee under the chairpersonship of Dr.
C. Rangarajan, Chairman, Economic Advisory
Council to the then Prime Minister of India Mr.
Manhoman Singh, to look into the PSC mechanism
in petroleum industry. The Rangarajan Committee
has recommended scrapping the cost recovery
model, and shifting to post-royalty-payment revenuesharing (without setting off any costs). Also, the
Rangarajan Committee suggested that revenue share
be determined by competitive bidding for future
PSCs. The Rangarajan Committee further suggested
taking trailing 12-month average of:
The CCEA has agreed upon the gas price formula

suggested by the Rangarajan Committee. It was
proposed to come into effect from April 2014 and
with an expectation to offer the explorers nearly
double the price for natural gas than what it is at
present.132 However, on June 23, 2014, CCEA deferred
the gas price hike by three months, and has said
that it would have further consultation with all
stakeholders. Further, on July 1, 2014 the Ministry
of P&NG has passed a note to the Union Cabinet
demanding a fresh formula.133
i. volume-weighted net-back pricing at well-head

for gas producers and
ii. volume weighted price of USs Henry Hub,
UKs NBP and Japans JCC linked price, while
determining the basis/formula for domestically
produced gas.131
131. Source: http://eac.gov.in/reports/rep_psc0201.pdf (accessed on July 15, 2014)

132. Source: http://www.ibef.org/industry/oil-gas-india.aspx (accessed on July 15, 2014)
133. Source: http://www.dnaindia.com/money/report-oil-ministry-wants-fresh-formula-for-gas-price-1999453 (accessed on July 16, 2014)
22

7. Policy Guidelines for Exploration and

Exploitation of Shale Gas
Shale gas is natural gas produced from shale, a
type of sedimentary rock. It is commonly said that
the exploration and production of shale gas in the
United States has been a game changer, making the
country self-sufficient in natural gas over the last
few years. This has created considerable excitement
globally, particularly in Europe. Similarly, India has
been looking at exploring shale gas domestically to
fill in the supplydemand gap. In the United States,
RIL has made big investments (US$ 3.5 billion) in
the Marcellus and Eagle Ford shales through joint
ventures with Chevron, Carrizo, and Pioneer.134
Recently, India has approved a policy that allows
exploration and exploitation of unconventional
shale gas and oil on licenses that have already been

awarded for conventional efforts. The proposal by
the Ministry of PNG was approved by the CCEA.
The policy will allow companies to apply for
shale gas and oil rights in their PEL and petroleum
mining lease. Companies will be permitted three
assessment phases, each with a maximum period
of 3 years. Royalties and taxes would be the same as
for conventional production in a particular area. In
the first phase, the Union Govt. has restricted shale
exploration to state-run ONGC and OIL in the blocks
awarded to them on a nomination basis before the
advent of NELP in 1997.
134. Shale Gas in India: Look before you Leap, The Energy and Resources Institute, available at http://www.teriin.org/policybrief/docs/Shale_gas.pdf
(accessed on July 15, 2014).
23
8. Open Acreage Licensing Policy

Open Acreage Licensing Policy (OALP) has been
long due. Since 2009, there have been speculations
that open licensing for exploration and production
rights will come into force replacing the existing
NELP regime. As on date there have been nine NELP
rounds since 1999. NELP is often criticized for its
failure to attract widespread participation by large
international oil and gas operators, in particular
NELP VIII and IX. In response to the criticism, the
24
Union Govt. has begun work on OALP. Accordingly,

DGH has started work on a national data repository
as a prerequisite of formulating the OALP. Here,
companies would get the freedom to select any block
on offer any time, compared to the existing NELP,
where the government puts a particular area up for
bidding. Canada and the UK are among the countries
that offer acreage for E&P on an open basis.

9. Dispute Resolution
Litigation in the O&NG sector is generally governed
by rules of the relevant PSU which is awarding a
contract or in the form of representations before an
authority under the Ministry of PNG. Contracts with
PSUs generally have an arbitration clause. However,
before initiation of arbitration, there are generally
provisions for mediation and conciliation before the
dispute resolution mechanism is invoked.
I. Arbitration
PSCs have an arbitration clause and disputes arising
out of PSCs are settled by arbitration. In Union of
India v. Reliance Industries,135 the partial award
passed by the Arbitral Tribunal was challenged
under Section 34 of the Arbitration and Conciliation
Act, 1996 (Arbitration Act) by Union Govt. on
the ground that subject-matter of the arbitration
comprising of payment of royalty, cess, service
tax and audit issues involved questions of public
policy and therefore are non-arbitrable. The
matter highlights that significant issues including
arbitrability of claims pertaining to tax and audit
would clearly be in violation of public trust doctrine
and the constitutional mandate.
The Delhi High Court held that questions of
arbitrability of claims cannot be tested only as per
the applicable law of arbitration or lex arbitri136 but
needs to be analysed in accordance with the public
policy and intention of parties governed as per laws
of the country to which it has the closest connection.
The ruling clarified that clauses of the agreement
need to be read in a holistic manner to discern
intention of parties and whether exclusion of Indian
laws done for the purpose of governing arbitration
could be extended if subject matter of the arbitration
is non arbitrable. It is in this context that the Delhi
High Court rejected the objections on lack of
jurisdiction due to express choice of law provisions.
The matter was appealed in the Supreme Court by
way of Special Leave Petition and on May 28, 2014,
the Supreme Court held that Section 34 Petition filed
in Delhi High Court was not maintainable. Supreme
Court held that when a final award is made against

the respondent, the enforceability of the same in
India can be resisted on the ground of Public Policy.
Supreme Court opined that the conclusion of the
Delhi High Court that in the event, the award is
sought to be enforced outside India, it would leave
the Indian party remediless is without any basis
as the parties have consensually provided that
the arbitration agreement will be governed by the
English law.
Recently, the Supreme Court after hearing the
arguments of RIL for the appointment of a foreign
tribunal chair to preside over a dispute concerning
cost recovery at the two gas fields off the coast
of Andhra Pradesh, against Union Govt., has
appointed an arbitrator to adjudicate the dispute.
In this arbitration, RIL claimed that its PSC with
Union Govt. entitled it to recover fully the cost of
developing the two fields before sharing profits, and
the PSC contained no provisions for the Union Govt.
to restrict cost recovery. The Indian oil company has
a 60% interest in the two fields, Niko has a 10% stake
and BP has a 30% stake. The parties had approached
the Supreme Court because the two party nominated
arbitrator had failed to appoint the chair.137
Contractual claims form a substantial part of
arbitration claims in the context of O&NG sector.
These may be claims by or against O&NG companies
including NOCs. It is important to note that in
respect of a domestic arbitration SOEs typically
provide for a technical person as the authority to
who claims are to be referred. In such cases, in the
event of a dispute relating to claims, if mediation
/ negotiation fails, parties will have to refer their
claims to an officer / employee of the NOC. Such
a clause which provides for an employee of one of
the parties to be the arbitrator has been upheld on
the ground that it is reasonable and does not violate
any principle of natural justice (rule of bias).138
Further, even if there is a delay in appointment of an
arbitrator pursuant to invocation of such a clause,
the courts may be reluctant to appoint an arbitrator
in view of the agreed upon dispute resolution
mechanism.139 It is only when there is a refusal or
135. 199(2013)DLT469
136. Law governing the seat of arbitration.
137. Alipak Banerjee, M S Ananth & Vyapak Desai, Supreme Court of India considers independence and impartiality in appointment of an arbitrator,
available at http://www.nishithdesai.com/information/research-and-articles/nda-hotline/nda-hotline-single-view/article/supreme-court-of-indiaconsiders-independence-and-impartiality-in-appointment-of-an-arbitrator.html?no_cache=1&cHash=1488b1e940c05fab32dc6351cf81c01d
138. Indian Oil Corporation Limited v. Raja Transport (P) Ltd. (2009) 8 SCC 520.
139. Ace Pipeline Contracts Private Limited v. Bharat Petroleum Corporation Limited (2007) 5 SCC 304
25
Dispute Resolution
unjustified delay in appointment of an arbitrator

that the court will exercise jurisdiction under Section
11 of the Arbitration Act.
II. Litigation
Apart from initiating arbitration against a PSU,
another right exercised by companies in the O&NG
sector is the right to approach the state High Court
under the Constitution seeking extraordinary
remedies in the nature of writs. Historically, a writ is
a relief by which a court can restrain the government
from taking any action, or it can set aside any action
taken by the government or provide directions. In
the O&NG sector, at the stage of tender, an aggrieved
party can approach the High Court and challenge the
process of tender if the process adopted was arbitrary
or if the grant of the tender in favor of another party
was arbitrary.
In recent times, the Supreme Court and High
Courts have also examined policies relating to FDI,
liberalization and privatization. Although the courts
have shown an inclination to examine issues relating
to policy, they have generally adopted a hands-off
approach, unless there is a serious allegation of fraud
or arbitrariness in the decision making process.
In this context, recently, with respect to spectrum
wavelength, mines and minerals and other natural
resources, the Supreme Court has held these to be
resources that belong to India.140 Consequently, a
challenge to an executive decision relating to such
resources would always be open to examination on

the ground that the decision affects public policy of
India.
As stated above, even in the context of gas pricing,
in the past, the Supreme Court and the Delhi High
Court have refused to intervene in policy matters.
However, as the Gurudas case cited above141
demonstrates, where petitioners have been able to
demonstrate a degree of arbitrariness in the policy
matters, courts have shown a willingness to exercise
jurisdiction. The rationale for such intervention is
the Supreme Courts recognition of the fact that142:
..the people of the entire country have a stake in

natural gas and its benefit has to be shared by the
whole country.
This observation was in the context of water and

other natural resources. However, this principle
has since been applied to mines, minerals and
pertinently, O&NG.143
140. Reliance Natural Resources, supra note 48; Centre for Public Interest Litigation and Ors. v. Union of India (UOI) and Ors, AIR 2013 SC 3725
141. Supra note 93.
142. In Re: Special Reference No.1 of 2011 (2004) 4 SCC 489.
143. Reliance Natural Resources, supra note 48.
26

10. Conclusion
From a commercial and business perspective, Indias
O&NG sector is a promising one as there is huge
untapped potential basin while many large blocks
offshore are unexplored. NELP has changed the
E&P scenario in India for the better. A comparison
with the pre-NELP rounds in itself would sustain
this statement. Moreover NELP regime heralded the
entry of the big players of O&NG industry such as
British Petroleum and RIL. Also with relaxation in
FDI norms, allowing 100% FDI under the automatic
route for E&P, infrastructure related to marketing
of O&NG, marketing of natural gas and petroleum
products, petroleum product pipelines, natural
gas pipelines, liquefied natural gas regasification
infrastructure, market study and formulation and
petroleum refining in the private sector, is certainly
a welcome step as it would encourage future
investments in near future. Further, the new Shale
gas policy initiative is commendable and hopefully
private players will be allowed to participate in
this segment as well, in future. Recently, in Budget
2014-2015, Union Govt. has proposed an additional
15,000 km of gas pipelines using appropriate PPP
models in order to complete the gas grid and to help
in reducing dependence on any one energy sources.
Finally, the Report of the Rangarajan Committee
which proposed scrapping the cost recovery model,
and shifting to post-royalty-payment revenuesharing (without setting off any costs) is a good
move. However, recently CECA deferred the gas price
hike by three months, and has said that it would
have further consultation with all stakeholders.
Hopefully, the Union Govt. will take notice of the
recommendations and bring suitable changes in the
existing policy framework.
It is important to note that even from pricing
perspective, the Supreme Court has recognized
that companies engaged in activities such as
exploration, mining and harnessing resources, can
reasonably expect fair compensation.144 Additionally,

the Supreme Court and even the Competition
Commission have recognized importance of
freedom of contract subject to certain reasonable
caveats.145 Such caveats are that pricing mechanisms
would have to be within the limits of the statutory
provisions and statutory contracts and any variation
cannot be arbitrary.146 The regulatory framework in
respect of O&NG is relatively nascent and the length
and breadth of the law has not been fully tested.
However, the Supreme Court has recognized that in
policy matters which affect foreign investment, it is
imperative that there be uniformity, consistency and
predictability in application of laws.147 Therefore,
ventures in O&NG certainly promise to be lucrative
and exciting.
In the final analysis, it must be noted that from an
economical and financial perspective, investment
in O&NG is lucrative with substantial prospects in
India. The elaborate regulatory framework and the
participative nature of framing policies also ensure
that all stakeholders are duly represented when
O&NG policy is framed. Given the growing demand
for crude oil in India and its wide application in
household and industrial activities, it would be
seen that demand for this investment is not likely
to decline in India. While the Union Govt. resolves
teething issues in the O&NG sector, the landscape in
the O&NG sector promises to be dynamic with scope
for growth for business entities and development of
the sector.
Alipak Banerjee,
M S Ananth,
Vivek Kathpalia
For any queries feel free to write to
oilandgas.nda@nishithdesai.com
144. Oil & Natural Gas Commission & Anr. v. The Association of Natural Gas Consuming Industries of Gujarat and Ors. (1990) Supp. 1 SCC 397
145. Reliance Natural Resources, supra note 48
146. Reliance Natural Resources, supra note 48
147. Vodafone International Holdings B.V. v. Union of India (2012) 6 SCC 613.
27

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Oil and Gas Industry in India

5. Fiscal Framework for Upstream Sector in India

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6. Report of the Committee on the Production Sharing Contract

8. Open Acreage Licensing Policy 24

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Oil and Gas Industry in India

Datamonitor Report Oil and Gas in India.

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Oil and Gas Industry in India

From an industry perspective, O&NG industry

Source: http://in.reuters.com/article/2012/08/06/india-crude-import-idINL4E8IU4HI20120806, (accessed on July 15, 2014)

Source: http://www.trencome.com/petroleumindustry.htm (accessed on July 15, 2014).

Source: http://www.ibef.org/industry/oil-gas-india.aspx (accessed on July 15, 2014)

See, http://www.dghindia.org/SedimentaryBasins.aspx (accessed on July 15, 2014).

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Indias domestic consumption of goods and services

met with partial success.19 It was only in 1997, when

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Oil and Gas Industry in India

The current key players in Indias O&NG sector are:

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2. O&G Industry at a Glance

Quantity [000 Tonne]

Value [Rs. (billion)]

Quantity [000 Tonne]

Value [Rs. (billion)]

Expected growth in the market

The value of the Indian oil and gas sector is forecasted to

Key Players and Market Shares

Oil and Natural Gas

Oil India Limited

Oil Production: 73,000 b/d

Oil Production: 25,000 b/d

34. Source: http://petroleum.nic.in/petstat.pdf, (accessed on July 15, 2014)

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Oil and Gas Industry in India

Gas Authority of India

Refining: 880,000 b/d

Refining : 450,000 b/d

Refining : 260,000 b/d

agreement. Cairn India maintained that ONGC

38. IBEF Oil & Gas, p.8.

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3. Governing Bodies, Legislation and

Petroleum Act, 1934 (import,

Oil Fields Act, 1948 (development of

Petroleum and Natural Gas Regulatory

Directorate General of Hydrocarbons

Oil Industry Development Board

Petroleum and Natural Gas Regulatory

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Oil and Gas Industry in India

(Regulation and Development) Act, 1948 (Oilfields

Oil and Gas Industry in India Legal, Regulatory & Tax

Oil and Gas Industry in India Legal, Regulatory & Tax