INDUSTRY BACKGROUND

India has always been an import dependent nation in the Oil and Natural Gas (“O&NG”) sector. According to the International Energy Agency (“IEA”), primary energy demand increased in India by over 4% or over 35 Million Tonnes of Oil Equivalent (“mtoe”), accounting for 11% of global growth, the third-largest share in 2018.1 Growth in India was led by coal (for power generation) and oil (for transport), the first and second biggest contributors to energy demand growth, respectively. India is expected to account for almost one-third of the global growth in energy demand by 2040. Natural Gas consumption is forecasted to increase at a compound annual growth rate (CAGR) of 4.18 per cent to 143.08 million tonnes (“mmt”) by 2040 from 58.10 MT in 2018. Consumption of natural gas in India is projected to increase to 143.08 billion cubic meters (“bcm”) by 2040.2

O&NG industry contributes over 15% to the nation’s GDP and the landscape in the O&NG sector promises to be dynamic with scope for growth of business entities and development of the sector.

In May 2020, India had 4.5 thousand million barrels of proven oil reserves at the end of 2018 and produced 39.5 million tonnes in 2018. As of April 1, 2019, India had a network of 10,419 km of crude pipeline having a capacity of 145.6 million metric tons per annum (“mmtpa”).3

From an industry perspective, O&NG industry is divided into three major sectors:

Upstream: Comprises activities pertaining to exploration, recovery and production of O&NG. In industry parlance it is simply called Exploration and Production (“E&P”).

Midstream: 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.

Downstream: Refers to the refining of crude oil and the selling and distribution of natural gas and products derived from crude oil.

IMPORTANT TRENDS IN THE INDUSTRY

The Hydrocarbon Exploration and Licensing Policy (“HELP”) was introduced in 2016, in order to revamp the oil and gas sector and address various industry concerns in the New Exploration and Licensing Policy (“NELP”) regime. HELP is a huge improvement from NELP in so far as it provided (a) uniform license for exploration and production of all forms of hydrocarbon; (b) marketing and pricing freedom for the crude oil and natural gas produced; (c) easy to administer revenue sharing model; and (d) an open acreage policy.4

The Discovered Small Fields Policy and Bidding Round, 2016, (“DSF Bid”) aims to develop and commercialize production from the already discovered small fields and marks India’s moves towards a new era of hydrocarbon production. The bidding under DSF Bid Round-II started in August 2018 where 25 contract areas were on offer covering 59 discovered oil and gas fields, spread over 3,000 Sq. Kms with prospective resource base of over 190 MMT (O+OEG).5 The Empowered Committee of Secretaries (ECS) and Group of Ministers on March 1, 2019 approved the award of 23 contract areas as part of the DSF Bid Round – II. The bid submission process under this Round completed on January 30, 2019.

Further, under the Open Acreage Licensing Policy, an Expression of Interest (EOI) can be made round the year with bidding round every six months. The EOIs form the basis of blocks being offered in the bidding rounds.6

MAJOR PLAYERS

The major industry players in India’s O&NG sector currently are:

Upstream Sector: Oil and Natural Gas Corporation, Oil India Limited, Cairn Energy

Midstream Sector: Indian Oil Corporation, Gas Authority of India

Downstream Sector: Indian Oil Corporation, Bharat Petroleum Corporation Limited, Hindustan petroleum

Further, the key players globally are: Gazprom (Russia), Rosneft (Russia), Exxon Mobil (USA), PetroChina (China), British Petroleum (BP), Royal Dutch Shell (Netherlands), Chevron (UK), Petrobras (Brazil), Lukoil (Russia), Total (France).

VARIOUS LAWS APPLICABLE TO THE O&NG INDUSTRY IN INDIA

The Union Government, under the Constitution of India, 1950 (“Constitution”) has the power to legislate in respect of O&NG. Legislative powers are conferred on the Union Govt. under Entry 53, to List I of Schedule VII of the Constitution.

The Petroleum Act, 1934 regulates the import into India, transfers within, storage, production, refining and blending of petroleum and deals substantially with midstream activities.

The Oilfields (Regulation and Development) Act, 1948 (“Oilfields Act”) constitutes the basic statute for licensing and leasing of petroleum and gas blocks by the Union Government, empowering the same with broad authority to make rules providing for the basic regulation of oilfields and for the development of mineral oil resources. Along with Petroleum Rules, the Oilfields Act governs grant of Production Exploration Licenses and mining leases.

The Petroleum and Natural Gas Rules, 1959 provide a framework for grant of exploration licenses and mining leases, and together with the Petroleum Act, 1934, regulate the sale and distribution of petroleum and petroleum products.

The Petroleum and Natural Gas Regulatory Board Act, 2006 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).

The HELP aims to enhance domestic oil and gas production by encouraging exploration in sedimentary basins, and introduces a number of measures including a uniform license regime for conventional as well as non-conventional hydrocarbons, an open acreage licensing policy, a revenue sharing model and freedom in marketing and pricing (subject to certain limits).

INVESTMENT IN OIL AND NATURAL GAS

In the O&NG industry, Foreign Direct Investment (“FDI”) is allowed through the automatic route.

FDI is allowed:

  • up to 100% in areas such as exploration of oil and natural gas fields, infrastructure & marketing related aspects of the industry, refining in the private sector, etc. and

  • Up to 49% in PSUs engaged in petroleum refining.7

In India, the O&NG industry has huge potential and contributes over 15% to the India’s GDP.8 The landscape in the O&NG sector promises to be dynamic with scope for growth of business entities. This industry has always attracted foreign direct investments, and according to data released by the Department for Promotion of Industry and Internal Trade Policy (DPIIT), the petroleum and natural gas sector attracted FDI worth US$ 7.07 billion between April 2000 and December 2019. With 3.14 million sq. km of potential reserves lying unexplored until 2016, India’s potential in the oil and gas sector is immense and there exists vast headroom for new discoveries.9

Further, the Government of India’s push towards a gas based economy10 is estimated to present new investments and opportunities in this area. India’s focus on a gas-based economy is in line with the global commitment made at the Paris meeting on climate change, which aims to reduce India's carbon emissions by up to 35% from 2005 levels by 2030 and producing 40% of the power from non-fossil fuel sources by 2030. These developments present an opportunity for India’s downstream and midstream oil and gas sectors.

From an economical and financial perspective, investment in O&NG is lucrative with substantial prospects in India. Given the growing demand for crude oil in India and its wide application in household and industrial activities, it is unlikely that there will be any reduction in investment in this sector. While the Union Government 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.


1 Global Energy & CO2 Status Report 2019, IEA, Paris (IEA 2019), available on https://www.iea.org/reports/global-energy-co2-status-report-2019 (accessed on August 22, 2020).

2 IBEF Indian Oil and Gas Industry Analysis (published in July 2020) available on https://www.ibef.org/download/Oil-and-Gas-August-2019.pdf (accessed on August 22, 2020).

3 IBEF is a trust established by the Department of Commerce, Ministry of Commerce and Industry, Government of India. IBEF’s objective is to promote and create international awareness of the Made in India label in markets overseas and to facilitate dissemination of knowledge of Indian products. Available at: https://www.ibef.org/industry/oil-gas-india.aspx (hereinafter “IBEF”) (accessed on August 22, 2020)

4 Press Information Bureau, Government of India, Hydrocarbon Exploration and Licensing Policy (HELP), (published on March 10, 2016), available on http://pib.nic.in/newsite/PrintRelease.aspx?relid=137638 (accessed on August 22, 2020) .

5 Press Release - Discovered Small Fields Bid Round – II, 2019, DGH, available at http://dghindia.gov.in/assets/downloads/5c790f6729839Press_Release_Award_of_blocks_DSF_Bid_Round_II_ver1.pdf (accessed on August 22, 2020)

6 The announcement of OALP – 1 is available on http://online.dghindia.org/oalp/Content/pdf/NIO_OALP_Bid_Round_1_01.pdf. The procedure for operationalization of Open Acreage Licensing Policy is available on http://online.dghindia.org/oalp/Content/pdf/OALP_03.pdf. A copy of the Model Revenue Sharing Contract is available on http://online.dghindia.org/oalp/Content/pdf/MRSC_booklet_02.pdf

7 Consolidated FDI Policy Circular dated October 15, 2020, available on https://dipp.gov.in/sites/default/files/FDI-PolicyCircular-2020-29October2020.pdf (accessed on November 8, 2020).

8 Oil and Gas Industry, Invest in India available at http://www.investinindia.com/industry/oil-and-gas/oil-and-gas-industry (accessed on August 22, 2020).

9India’s time to capitalize on oil and gas sector’ (published on December 22, 2017), available on http://www.livemint.com/Opinion/FjMgDDggOkPZ05qounbRjM/Indias-time-to-capitalize-on-oil-and-gas-sector.html accessed on August 22, 2020)

10 Press Information Bureau, Government of India, Ministry of Petroleum & Natural Gas, ‘Steps being taken to make India a Gas based economy’, (published on November 21, 2016), available on https://pib.gov.in/newsite/PrintRelease.aspx?relid=153957 (accessed on August 22, 2020)


Nishith Desai Associates 2013. All rights reserved.