Legal aspects of businessOil marketing

Team Members

Mayank Garg PGP05.076

Kriti Gupta PGP05.075

Karan Singh Chadha PGP05.074

Jyotsana Chadha PGP05.073

Joel Kuruvilla Daniel PGP05.072

OIL MARKETING SECTOR IN INDIA

Increasing liberalization and privatization, resulting in the participation from private entities, both domestic and foreign

Power to legislate in Oil and Natural Gas conferred to the Union Government of India

Oil and Gas Industry divided into 3 major sector :Upstream, Midstream and Downstream

Marketing deals with midstream and downstream sectors

Major PlayersPSUs

IOCL

BPCL

HPCL

OIL

Private Players

Essar Oil

Reliance Industries Ltd

Royal Dutch Shell

Joint Ventures

Essar Oil and RIL

RELEVANT RULES AND REGULATIONS

Petroleum and Natural Gas Regulatory Board Act, 2006

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

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

Provides for a legal framework for downstream gas sector regulation

Adjudicate disputes between entities engaged in activities set out in the PNG Act and to conduct inquiry into such entities as well

RELEVANT RULES AND REGULATIONS

Petroleum Act The Petroleum Act, 1934and the Petroleum and Natural Gas Rules, 1959 are key legislations for

the regulation of the O&NG sector

Procedural requirements to be complied with by companies engaged in practically any other activity associated with O&NG in India

Regulates the import into India, transfers within, storage, production, refining and blending of petroleum

Uniformity in each of the individual states regarding the above activities

Petroleum Order 1999 Regulation of supply and distribution of petroleum products-The Central Government for

uninterrupted and equitable distribution and availability of petroleum products may, by order, require any oil marketing company to supply or cause to be supplied one or more petroleum products from the stocks held by it at any place in India

Regulation of retail supply of petroleum products-If the central Government is of the opinion that a petroleum product may not be available at the retail outlet to meet the demand of the general public, it may direct any OMC to deliver, till the original supplying company is able to restore the supply.

RELEVANT RULES AND REGULATIONS

Hydrocarbon Vision 2025 Lays down the framework which would guide the policies relating to the hydrocarbons sector

for the next 25 years

E&P, refining, marketing, external policy, oil security, tariff and pricing, and restructuring and disinvestment are addressed by the Group, to ensure that an optimal mix of energy resources are made available to the consumer at the right price

Competition Law The PNG Act empowers the Regulatory Board under Section 11 to ‘protect the interest of

consumers by fostering fair trade and competition’

Competition Commission of India has also taken major steps in this regard

Relevant Case: Investigation of CCI into the alleged cartelization of State-owned OMCs

CORPORATE STRUCTURE

Private Limited Company is a suitable option for entering into the oil marketing business

Responsible for distribution, can lay its pipelines or use the existing network in accordance with government regulations

Operate its retail stations for fuel distribution

The procurement of petroleum products would be through companies working in the upstream sector, such as IOCL, HPCL etc

The supply of the refined products can be availed by signing anMoU with the upstream company.

THREATS TO A PRIVATE PLAYER

The National Oil Companies hold about 86 % market share of India’s oil E&P, 77% of natural gas, 74% of oil refining capacity and 86% of marketing infrastructure. As such NOCs do have an edge over new private sector entrants

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

Private oil marketing companies do not have the luxury of being compensated for under-recoveries

CHOOSING A PRODUCT AND LOCATION

Petrol and Diesel market dominated by PSU’s

Products like lubricants and engine oil are profitably marketed by Private companies currently

Even if the company is selling a different mix of fuel or lubricant, all regulations for petroleum and natural gas products will apply

Relevant Case: Ruling in the Satish Maganlal Vs The Union Govt of India underlines the dominant role Petroleum Act plays in regulation of activities in relation to petroleum and petroleum products

Various components of cost as explained under Pricing can largely depend upon the location of operation chosen by the company

Situate its storage and distribution outlets in such a manner that overhead costs (mainly transportation andpersonnel salaries) are reduced

Proximity to the supplier refinery and cheaply available workforce would reduce the cost incurred

In this respect Andhra Pradesh and Assam which have a prospering petroleum market and PPP support seem to be favourable locations

PRICING

Prior to 2002, the marketing and pricing of petroleum products including transportation fuels, namely, motor spirit (MS) and high-speed diesel (HSD), were controlled by the government under a mechanism known as administered price mechanism (APM).

PNGRB is to regulate anti-competitive behaviour like predatory pricing

The price of fuel at the retail station comprises the product cost, central government excise and taxes, State government taxes and operating costs and margin

Petrol prices de-regularized while Diesel still continues to be subsidized

The pricing decision is influenced by a number of factors including:1) Cost of bringing the fuel to the retail site (product and distribution costs)2) Cost of running the service station (e.g. salaries, rent, utilities)

REGISTRATION AND AUTHORIZATION

Under PNGRB Act every entity desirous of the below activities and fulfilling the eligibility conditions has to make an application to the Board for its registration under the PNGRB Act

The Board makes the necessary enquiry and subject to certain terms and conditions, issues a certificate of registration allowing the entity to start operations

The company is registered in petroleum and natural gas register

Authorization is required if an entity proposes to lay, build or expand the pipeline network for petroleum products

The transportation tariff for various petroleum products is also decided by the board

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

Initiation of arbitration, there are generally provisions for mediation and conciliation before the dispute resolution mechanism is invoked

Relevant Case: Union of India v. Reliance Industries - the partial award passed by the Arbitral Tribunal was challenged 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

MATERIAL CONTRACTS

Capacity Reservation Contract

Buyer pays to reserve a certain level of capacity at the supplier

A menu of prices for different capacity reservations provided by supplier

Buyer signals true forecast by reserving a specific capacity level

Advance Purchase Contract

Supplier charges special price before building capacity

When demand is realized, price charged is different

Buyer’s commitment to paying the special price reveals the buyer’s true forecast

Long Term Contract

They are also termed as forward or fixed commitment contract

Contracts specify a fixed amount of supply to be delivered at some point in the future

Supplier and buyer agree on both price and quantity