“ OIL AND GAS INDUSTRY : A PANORAMIC OVERVIEW ”
The oil and gas industry refers to the exploration, production, transportation, and distribution of oil and gas resources. This industry is important to the global economy, as oil and gas are major sources of energy for transportation, heating, and industrial processes.
From a legal perspective, the oil and gas industry is subject to a wide range of laws and regulations, both at the national and international levels. These laws and regulations cover a variety of issues, including licensing and permitting, environmental protection, health and safety, labor and employment, taxation, and contracts.
In many countries, the government plays a significant role in regulating the oil and gas industry. Governments may own or control oil and gas resources and may grant licenses or permits to private companies to explore and extract these resources. Governments may also impose taxes and royalties on companies that extract and sell oil and gas, and may regulate the prices at which these resources are sold.
The oil and gas sector is among the eight core industries in India and plays a major role in influencing the decision-making for all the other important sections of the economy.
India’s economic growth is closely related to its energy demand, therefore, the need for oil and gas is projected to increase, thereby making the sector quite conducive for investment. India retained its spot as the third-largest consumer of oil in the world as of 2021.
The industry is often divided into three segments:
- upstream, the business of oil and gas exploration and production;
- midstream, transportation and storage; and
- downstream, which includes refining and marketing.
DISTINCTION BETWEEN OIL AND GAS IN CONTRACTS
The terms “oil” and “gas” are often used interchangeably in contracts, they refer to different substances that are found and extracted in different ways.
Oil, also known as petroleum, is a liquid hydrocarbon that is extracted from underground reservoirs using drilling and pumping techniques. It is primarily used as a fuel source for transportation and heating, as well as in the production of chemicals and plastics.
Gas, on the other hand, refers to several different gases that are extracted from underground reservoirs or produced from other sources, such as biomass or waste. The most commonly extracted gas is natural gas, which consists primarily of methane and is used as a fuel source for heating, electricity generation, and industrial processes. Other types of gas that may be mentioned in contracts include liquefied petroleum gas (LPG), which is used as a fuel for cooking and heating, and helium, which is used in various industrial and medical applications.
In contracts, it is important to clearly specify the type of substance being referred to and to use accurate terminology. This can help avoid confusion and ensure that both parties understand the terms of the agreement. Additionally, contracts may include provisions related to the quality, quantity, and delivery of the substance, as well as pricing and payment terms.
ESSENTIAL REQUIREMENTS FOR RESGISTRATION AND LICENCING OF OIL AND GAS INDUSTRY
The requirements for registration and licencing of oil and gas industry can vary depending on the country or region where the industry is operating. However, some requirements for registration and licencing of oil and gas industry are:
- Business registration: The oil and gas company must register its business with the relevant government authorities in the country where it intends to operate. This includes obtaining the necessary licenses and permits.
- Financial records: The company must maintain proper financial records, including accounts of its income, expenses, and profits.
- Environmental permits: The company must obtain permits and comply with regulations related to environmental protection, such as air and water quality standards and waste management.
- Technical capacity: The company must demonstrate that it has the technical expertise and capacity to safely and efficiently carry out its operations. This may involve providing information on the qualifications and experience of the company’s personnel and the technology and equipment that will be used.
- Health and safety: The company must comply with regulations related to the safety of its workers and the public.
- Compliance with local content requirements: In some countries, the company may be required to use local resources and employ local workers.
- Payment of royalties and taxes: The company may be required to pay royalties to the government for the right to extract resources, as well as taxes on its profits.
JURISDICTION OF OIL AND GAS INDUSTRY IN INDIA
The jurisdiction of the oil and gas industry in India is primarily governed by the central government, as per the Constitution of India. The central government has the authority to regulate the exploration, production, transportation, distribution, and marketing of petroleum products in the country.
The Ministry of Petroleum and Natural Gas is the primary government agency responsible for the regulation and development of the oil and gas industry in India. It formulates policies and regulations, issues licenses and permits, and oversees the activities of public and private sector companies in the industry.
In addition to the central government, the state governments also have jurisdiction over the oil and gas industry in their respective states. They may issue permits and licenses for certain activities, such as land acquisition and environmental clearances. However, the central government retains overall control over the industry.
LEGISLATIVE FRAMEWORK OF OIL AND GAS INDUSTRY
There are some national legislative and regulatory provisions, policies, rules and regulations that govern the oil and gas industry which are as follows:
- Petroleum Act, 1934: This was enacted to consolidate and amend the law relating to the import, transport, storage, production, refining and blending of petroleum.
- Oilfields (Regulation and Development) Act, 1948 (‘Oilfields Act’): This provides for the regulation of oilfields and the development of mineral oil resources in India.
- Mining leases in India must be granted consistent with the rules framed under this legislation.
- Petroleum and Natural Gas Regulatory Board Act, 2006: This was enacted to establish the Petroleum and Natural Gas Regulatory Board (PNGRB). The PNGRB is empowered to regulate the refining, processing, storage, transportation, distribution, marketing and sale of petroleum, petroleum products and natural gas.
- The Mines Act, 1952 and the Oil Mines Regulations, 2017: These:
- set forth the duties of owners, managers and agents in relation to oil mines;
- provide for penalties for specified offences; and
- regulate the operating conditions in oil mines by providing for safety standards.
- The Petroleum and Natural Gas Rules 1959 (‘PNG Rules’): These rules, framed under the Oilfields Act, regulate the grant of petroleum exploration licences (PELs) and petroleum mining leases.
- Oil Industry (Development) Act, 1974 (‘OIDB Act’): The OIDB Act established the Oil Industry Development Board (OIBD) to provide financial assistance for the development of the oil industry and levy of excise on crude oil and natural gas. The OIBD functions under the administrative control of the Ministry of Petroleum and Natural Gas (MoPNG).
- Hydrogen Exploration and Licensing Policy (HELP): The central government approved HELP in 2016 to enhance domestic oil and gas production by encouraging exploration in sedimentary basins. HELP introduced provisions for:
- a uniform licence regime for conventional as well as non-conventional hydrocarbons;
- an open acreage licensing policy (‘OALP’) (whereby companies can choose and submit expressions of interest for blocks from a designated area across the year without having to wait for auctions); and.
- a graded system for reduced royalty rates to incentivise offshore exploration.
- New Exploration and Licensing Policy (NELP): NELP was formulated by the government in 1997 to provide a level playing field to both public and private sector companies in the exploration and production of hydrocarbons.
Rules and regulations:
- Petroleum and Natural Gas (Safety in Offshore Operations) Rules, 2008 (‘Offshore Safety Rules’): The Offshore Safety Rules, framed under the Oilfields Act, contain provisions on health, safety and environmental protection measures, among other
REGULATORY BODIES RESPONSIBLE FOR ENFORCING LAWS
There are some national regulatory bodies also which are responsible for enforcing the laws and regulations of oil and gas industry:
- Directorate General of Hydrocarbons (DGH): The DGH was established in 1993 and operates under the administrative control of the MoPNG. It is the nodal agency for the implementation of the HELP, NELP, CBM and DSF policies, and advises the MoPNG on exploration strategies and production policies. It is further tasked with reviewing exploration programmes of companies operating with a PEL under the Oilfields Act and the PNG Rules.
- PNGRB: The PNGRB 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 among oil and gas companies.
- Oil Industry Safety Directorate (OISD): The OISD is the safety regulator designated under the Offshore Safety Rules. It is tasked with implementing the Offshore Safety Rules and exercises other powers and functions provided for under those rules.
- Petroleum and Explosives Safety Organisation (PESO): The PESO regulates the transportation of petroleum by land and water in accordance with the Petroleum Act and the Petroleum Rules, 2002.
- Directorate General of Mines Safety (DGMS): The DGMS operates under the Ministry of Labour and Employment and is responsible for regulating the occupational safety, health and welfare measures to be taken for the protection of persons employed in mines.
TAX LAWS ON OIL AND GAS INDUSTRY
There are various tax laws applicable to the oil and gas industry in India. Below are some of the major taxes and levies.
- Corporate Tax: Corporate tax is a tax levied on the income or profits earned by domestic and foreign companies. In the oil and gas industry, corporate tax is applicable on the profits earned by companies engaged in exploration, production, refining, and marketing of oil and gas.
Corporate tax is levied at the rate determined by the Income Tax Act, 1961. Domestic companies with a turnover of up to INR 250 billion pay a standard corporate tax of 25%; those with a turnover of more than INR 250 billion pay corporate tax at a rate of 30%. A 4% health and educational cess is also levied on domestic companies.
Similarly, foreign corporations (or their branches) pay a standard corporate tax rate of 40% on income earned in India. In addition, a surcharge of 2% on tax for a foreign company must be paid if income is in excess of INR 10 million. Both domestic and foreign companies are also subject to surcharge.
- Royalty: Royalty is the payment made by oil and gas producers to the government for the right to extract oil and gas from the land. The royalty rates vary depending on the type of oil or gas, the location, and the depth of the field.
The government levies a 10-20 per cent royalty on the price of oil and gas as also an oil cess of 20 per cent on production from areas given to state-owned Oil and Natural Gas Corporation (ONGC) and Oil India Ltd (OIL) on a nomination basis.
- Goods and Services Tax (GST): GST is a comprehensive indirect tax that is levied on the supply of goods and services in India. In the oil and gas industry, GST is applicable on various products and services such as crude oil, natural gas, petroleum products, and transportation services. The GST rates vary depending on the product or service. The current GST rate is 18% on any petroleum gas in India.
- Custom Duty: Custom duty is a tax levied on goods imported into India. In the oil and gas industry, custom duty is applicable on the import of crude oil, natural gas, and petroleum products. The current custom duty rates vary depending on the product and the country of origin.
Please note that the tax rates mentioned above are approximate and subject to change as per the latest tax laws and regulations.
OIL AND GAS INDUSTRY SCENARIO IN INDIA
India plans to almost double its oil refining capacity to 450 MT in the next 10 years to meet the rising domestic fuel demand as well as cater to export market.
India‘s refining capacity stands at ~251 MMTPA as of October 2022, comprising 23 refineries. Refinery capacity utilization is about 96% for the year 2021-22. Indian Oil Corporation (IOC) is the largest domestic refiner with a capacity of 70.1 MMTPA.
The total refining capacity is planned to increase by the CAGR of 2.5 % in the next 5 years, to reach 283.62 MMTPA.
Crude oil processing increased by 9% from 221.77 MMT in 2020-21 to 241.7 MMT in 2021-22.
One Nation One Gas Grid: A total of 22,306 km of the natural gas pipeline is operational and about 13,029 km of gas pipelines are under construction as of June 2022, as part of the Gas Grid. India targets increasing the pipeline coverage by ~54% to 34,500 km by 2024-25. All states are intended to be connected by a trunk national pipeline network by 2027. As on 30th September 2022, 221 Geographical Areas have been operationalized for the supply of CNG.
Petroleum product production saw an increase of 8.9% in FY 2021-22 vis-à-vis FY 2020-21. The production of petroleum products stood at 254.3 MMT in FY 2021-22.
Cumulative crude oil production during FY 21-22 was 29.7 MMT. Natural Gas production for FY 21-22 was 34.024 BCM.
Petroleum Refinery production (weight: 28.04 %) increased by 4.5 % in January 2023 over January 2022. Its cumulative index increased by 5.4 % during April to January 2022-23 over the corresponding period of previous year. Natural Gas production (weight: 6.88 %) increased by 5.3 % in January 2023 over January 2022. Its cumulative index increased by 1.4 % during April to January 2022-23 over the corresponding period of previous year.
Export of petroleum products increased by 107.47% from $21.4 Bn in the FY 2020-21 to $ 44.4 Bn in the FY 2021-22. Further, Exports of petroleum products in April – December 2022 were $ 70.28 Bn registering a growth of 52.15% over $ 46.19 Bn in April – December 2021.
OMCs have taken several steps to encourage better consumption of LPG and reduce diversion and delay in supplies. There are 3123 lakh active domestic customers of LPG as of October 2022.
Liquefied Natural Gas (LNG) supply is forging ahead on both coasts with 06 operational LNG terminals. Total capacity of LNG terminals stands at 42.7 MMTPA.
Union Budget 2023 Highlights – (i) INR 35,000 crores for priority capital investments towards energy transition and net zero objectives, and energy security. (ii) INR 10,000 crore for compressed bio-gas plants and 300 community and cluster-based biogas plants.
In this article we have seen the various policies that govern the nature, production, usage, and licensing of the oil and gas industry. Oil and gas is a very important sources of energy to India. In fact, India is also the third largest consumer of petroleum products, after the US and China. India has always been an import-dependent nation in Oil and gas. The oil and gas industry contributes to 8% of India’s GDP. Over the years, we can see the regulation of the industry has magnified into folds as we realize the importance of this industry. The government has been trying to bring radical changes into the country in the aspect of reducing the import of oil and gases as well. It is a natural understanding among many experts that India needs to expend a tremendous amount of energy in the coming years to reach the state of a developed country and it would not be possible on any other sources of energy apart from relying on gas and oil, so, it is also my belief that the import of oil and gas and also it’s production will increase over the years and therefore the number of regulatory bodies and legislative controls on this industry will increase times fold too.
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JUDGMENT REVIEWED BY ABHINAV CHATURVEDI