Presentation on Infraline conference MohitSaraf-Luthra

8/7/2019 Presentation on Infraline conference MohitSaraf-Luthra

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Regulatory Frameworkfor E&P Activities

Mohit Saraf

Partner

Luthra and LuthraLaw Offices

December 11th, 2004

INFRALINE CONFERENCE

DISCOVERY TO DELIVERY: INDIAS

UPSTREAM OIL AND GAS SECTOR


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11th December 2004 Luthra & Luthra Law Offices 2

Regulatory Framework forUpstream Exploration

Constitution of India (CoI)

Oilfields (Regulation and Development)Act, 1948

New Exploration Licensing Policy(NELP)

Petroleum and Natural Gas Rules, 1959

Territorial Waters, Continental Shelf,

Exclusive Economic Zone And OtherMaritime Zones Act, 1976


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Jurisdiction over Oil andNatural Gas Resources

Jurisdiction to regulate oilfields vested with Central

Government

CoI: Entry 53 of List I

Regulation and development of oilfields and mineral

oil resources; petroleum and petroleum products CoI: Entry 25 of List II

Gas and Gas Works

Presidential reference, Supreme Court judgment

Natural gas- a petroleum product and hence, a

central subject


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Jurisdiction over Oil andNatural Gas Resources

Presidential reference (contd.)

Right in natural gas and oil resources as

publici juris

Upstream regulation of exploration andtransmission of natural gas also in central

domain.

Jurisdiction to regulate gas clearly

identified with Centre by the judgment Paved the way for a unified central legal

framework for the energy sector


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The Oilfields (Regulation &Development) Act, 1948

Basic enabling statute for licensing andleasing of petroleum and gas blocks bythe appropriate government

Covers mineral oils which is defined asincluding natural gas and petroleum[S.3(c)]

Mining lease is defined exhaustively to

cover all forms of exploring and exploitingmineral oils and all purposes connectedthereto [S.3(d)]


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The Oilfields (Regulation &Development) Act, 1948

Empowers central government to makerules with regard to mining leases [S.5]

Also empowers central government to

make rules for the development of mineraloil [S.6]

NELP Enabling Provisions

Power to vary royalty or exempt it

altogether [S.6A] PSC additional terms and conditions to

PEL [S.12]


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New Exploration LicensingPolicy

Uses auctions to allocate petroleum blocks

thus bringing benefits of transparency and

efficiency

Identifies biddable areas. Identifies commercial terms on which the

bid would be evaluated including profit

sharing

Lays down the bidding procedure


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The Petroleum and NaturalGas Rules, 1959

Rules provide framework for grant ofexploration licenses and mining leases

Salient features of the Rules:

Prohibition on prospecting and miningexcept under a license or lease grantedunder the rules [Rule 4]

Central Government has the power togrant licenses or leases in respect of any

land vested with it or minerals underlyingthe ocean within the territorial waters orthe continental shelf [Rule 5(i)]


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Salient features of Rules (contd)

State government has power to grantlicense or lease over lands vested with it

[Rule 5(ii)] Person obtaining exploration license

obtains the exclusive right to a lease forproducing (i.e. extracting) oil/gas over anypart of area covered in license

As Licensee, prospector required tofurnish security deposit and annual licensefees for exploration license;


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License fees increase every year in a pre-determined manner

As Lessee, producer required to furnishsecurity deposit and dead rent or royalty(payable to appropriate government)whichever is higher as well as surface rent(payable to SG)

Increasing Licensing fee structure anddead rent payments incentivise earlyexploitation of license and leases


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Provides for arbitration of disputes which

may arise between the Government and

the licensee or lessee


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Territorial Waters, Continental Shelf, ExclusiveEconomic Zone And Other Maritime Zones Act,

1976

Article 297 of the Constitution vests

resources found in these areas with

Central government

No exploration in the Continental shelfand exclusive economic zone permitted

without Central Governments permission


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Regulating the upstream sector

Creation of an independent and impartial upstream

regulator is a key challenge for regulation in

upstream sector

Currently MoPNG is in charge of regulating

upstream sector. Director General of

Hydrocarbons performs technical advisory function

But government has a significant ownership stake

in certain upstream companies

Regulatory functions should not be discharged bythe government when it is also competing with

private players. Will avoid conflict of interest


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This has been achieved in other infrastructuresectors like Electricity and Telecom by constitutionof independent regulatory bodies throughcomprehensive statutory framework

The downstream sector will soon see theintroduction of a omnibus regulator for oil andnatural gas (Petroleum Regulatory Board Bill2002)

Independent regulator for upstream would assure

private players that they would be provided alevel playing field. This should attract greatercompetition and the benefits of this greatercompetition would increase value for all thestakeholders


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Other areas which would benefit from such

regulatory oversight include:

Better appreciation of operators commercial

interest and minimizes opportunities for rentseeking behavior

Coordination with downstream regulation

Acting against anti-competitive practices

Role as arbitrator in case of dispute arisingbetween operator entities and other stake

holders; minimizes delay in exploitation of

resources due to dispute


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Options for creation of independent regulatory

body

Create a new regulatory authority and vest

it with power to implement licensing policyas well as regulatory functions

Increase the independence of DGH

possibly through separate statutory

framework and confer additional powerson it to enable it to discharge role of

upstream regulator


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"Let me tell you something that we

Israelis have against Moses. He took us

40 years through the desert in order to

bring us to the one spot in the MiddleEast that has no oil!"

-Golda Meir (Israeli founder and primeminister)

The gods have been kinder in our case!Lets ensure that their bounty reaches the

people


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Presentation on Infraline conference MohitSaraf-Luthra

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