Indian Oil & Gas: Examining Opportunities With Legal Caveats

February 24, 2011

This article was first prepared and published in Infrastructure Journal

The oil and gas industry has played a significant role in the rapid growth of the Indian economy. It represents a significant opportunity for international and domestic investors and exemplifies the robust growth the economy has enjoyed over recent years. The rate of growth is predicted to only accelerate and this has led to more intensified searches for new fields and more efficient methods of extraction, refining and distribution.

In line with a recent collection of articles published in Infrastructure Journal by Fox Williams LLP examining the regulation of oil and gas industries in jurisdictions around the globe, this article examines those industries and their importance within India. India is home to an abundance of natural resources which, as the country occupies an increasing prominence on the global stage, become more commercially exploited and thus require sophisticated governing regimes.

Consumption

India is one of the world's most densely populated countries with its population standing around the 1.15 billion figure in 2010. It is currently the second largest country in the world after China in terms of population and by 2030 it is estimated to be the largest in the world at around 1.53 billion. The rapid increase in India's population since Independence is set to continue and with this trend comes an upsurge in energy demand from the country's commercial centres and, increasingly, more rural areas. According to the Ministry of Petroleum and Natural Gas, demand for oil and gas is likely to increase from 186.54 million tonnes of oil equivalent (mmtoe) in 2009-10 to 233.58 mmtoe in 2011-12.

How can the Government of India ensure that such demand is met? Firstly, production (and the level of exports) are on their way up. According to the Ministry of Petroleum and Natural Gas in 2009, India's total reserves stood at 775 million metric tonnes (MMT) of crude oil and 1074 billion cubic metres (BCM) of natural gas and its petroleum exports totalled up to the value of US$ 26.2 billion. During April-May 2010, crude oil production increased to 5.82 MMT, a 5.5 per cent increase over the same period in 2009, and natural gas production increased to 9.1 BCM, an increase of 43.5 per cent over the same corresponding period in 2009. The sale of oil products in the country rose 3.8 per cent in April 2010 to 12.13 million tonnes.

Exploration and Production

Prior to 1991, The Oil and Natural Gas Commission ('ONGC') and Oil India Limited ('OIL'), both state owned entities, were the major players in domestic exploration and production ('E&P') activities. However in 1991, a landmark year in India's political agenda, the Government instigated the liberalisation of the petroleum E&P policies by inviting private companies, both overseas and domestic, to participate in oil and gas field development. To further introduce new technologies and improve production, the Government also entered into various Production Sharing Contracts ('PSC') with joint ventures and/or private companies.

New Exploration Licensing Policy

A major player in India's energy drive continues to be The New Exploration Licensing Policy ("the NELP"). It was launched by the Government over a decade ago to address the increasing gap between the demand and supply of energy by increasing hydrocarbon exploration throughout the country and contributing to increased exploration success. This initiative has proved to be successful in attracting the interest of domestic and foreign parties, and according to India's Directorate General of Hydrocarbons ('DGH'), European oil and gas companies in particular have expressed a significant interest to invest in oil and gas exploration in India offered due to, and throughout, the NELP licensing rounds. The latest (Ninth Round) of the NELP was launched by the Government in October 2010, offering 34 further exploration blocks covering an area of 81,000 sq km and thus cementing the industry’s growth over the coming year.

Gas

In line with its rapidly increasing population India's natural gas demand is expected to nearly double to 320 million metric standard cubic metre per day by 2015. To satisfy this predicted upsurge, the Gas Authority of India Ltd ('GAIL') declared in January 2010 that gas availability in India is expected to grow at 23 per cent compounded annual growth rate to 312 mscmd by 2013-14, with GAIL investing significantly in its pipeline network. Over the next three years, GAIL is projected to invest US$ 660.7 million to US$ 770.8 million in expanding its transmission capacity from the current 150 mscmd to 300 mscmd.

The supply of energy across the country received further support when The Petroleum and Natural Gas Regulatory Board ('PNGRB') declared that it aims to make Piped Natural Gas (PNG) and Compressed Natural Gas (CNG) available in new cities across the country, as well as facilitating the construction of infrastructure to transport natural gas to demand centres. The lack of available supplies has so far hindered the growth of this segment. Some gas-based power plants have been operating at low loads due to the shortage of fuel. The PNGRB is the downstream oil and gas regulator, established by the Government under the Petroleum and Natural Gas Regulatory Board Act 2006, with the aim of promoting competitive markets by regulating the refining, processing, storage, transportation and distribution, amongst others, of petroleum, petroleum products and natural gas.

In 2012 the Government is planning its first ever offer of shale gas exploration (gas locked in sedimentary rocks). According to Mr Murli Deora, India’s Petroleum and Natural Gas Minister, "Shale gas is an emerging area. It has become an important source of energy in the few countries who have been able to commercially exploit this resource".

Legal Disputes

With an increase in crude oil production, natural gas development, transportation pipelines and associated infrastructure comes an increase in the risk of legal disputes arising between the parties involved in these core activities. How are such disputes governed?

As a brief overview, licences granted by the relevant state government or the national Government itself under the PNG Rules provide for arbitration mechanisms. Should the relevant agreement in place not provide for arbitration, the PNGRB has the power to adjudicate upon any matter or dispute concerning refining, processing, storage, transportation or distribution. In addition, India is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and has incorporated its provisions into the Arbitration and Conciliation Act 1996.

There is no particular difficulty in litigating, or seeking to enforce judgments or awards, against Government authorities in India. The Government does not benefit from state immunity in contracts and there are few procedural difficulties in suing, enforcing judgments or seeking awards against the Government except, that, before commencing or filing any action against the Government, a statutory notice of two months is required to be given. The Indian courts do not differentiate between foreign and domestic entities and are not averse to ruling against the Government or state entity should they contravene the relevant law or breach their contractual obligations. As part of India's Supreme Court ruling in the recent high profile Ambani case confirmed, all natural resources in India belong to the people and not to private interests they are a 'national asset'. Indian natural resources are a primary source to advance the welfare of the Indian people. The Government therefore has control over those resources in trust for the advancement of the Indian people, and should they abuse that position they will be held accountable by the law, the voice of the people for whom they hold such precious materials in trust.


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