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OIL EXPLORATION AND PRODUCTION IN INDIA

As held by the Supreme Court in Threesiamma Jacob and Others v Geologist, Department of Mining and Geology and Others ((2013) 7 SCR 863), there is nothing in the law that declares that all mineral wealth subsoil rights vest in the state; the ownership of subsoil or mineral wealth should normally follow the ownership of the land, unless the owner of the land is deprived of the same by a valid process of law.

Under article 297 of the Constitution:

  • all lands, minerals and other things of value underlying the ocean within the territorial waters, or the continental shelf, or the exclusive economic zone, of India shall vest in the Union and be held for the purposes of the Union;
  • all other resources of the exclusive economic zone of India shall also vest in the Union and be held for the purposes of the Union; and
  • the limits of the territorial waters, the continental shelf, the exclusive economic zone, and other maritime zones, of India shall be such as may be specified, from time to time, by or under any law made by parliament.

Exploration and production – general

What is the general character of oil exploration and production activity conducted in your country? Are areas off-limits to exploration and production?

Both onshore and offshore oil exploration activities are undertaken in India. Some areas may be off-limits due to defence requirements or other reasons like existence of national parks and will not come under bidding for exploration. Moreover, no drilling is allowed (except with special permissions of the central government) within minimum distances (prescribed by the central government) of any pipelines, railways, dwellings, industrial plants, aircraft runways, buildings used for military or public purposes or within 3 kilometres of any mine.

Exploration and production – rights

How are rights to explore and produce granted? What is the procedure for applying to the government for such rights? To what extent are the terms of licences or contracts negotiable?

The rights to explore and produce are granted by the Ministry of Petroleum and Natural Gas (MoPNG) through international competitive bidding and pursuant to the policies of the government. The government executes a revenue-sharing contract (RSC) with the successful bidder. RSCs are not open for any significant negotiations.

The successful bidder is required to submit an application for a licence or a mining lease to the relevant government in accordance with the Petroleum and Natural Gas Rules 1959. A fee of 100,000 Indian rupees for a licence and 200,000 Indian rupees for a lease is to be paid to the relevant government along with the application. There are no timelines prescribed for grant of a licence or lease. The amount of fees provided here is subject to change.

Every licence or lease shall contain terms and conditions prescribed by applicable rules and such additional conditions as may be provided in the agreement between the government and the licensee or lessee.

Government participation

Does the government have any right to participate in a licence? If so, is there a maximum participating interest it can obtain and are there any mandatory carry requirements for its interest? What cost-recovery mechanism is in place to recover such carry? Does the government have any right to participate in the operatorship of a licence?

A state oil company does have a right to participate in a licence. There is no mandatory participation through state oil companies or any carried interest of the government. Statutory mandate is with respect to participating interest.

The model RSC also provides for the determination of the government’s share of revenue. Under this model of operation, the government receives a share of the gross revenue from the sale of oil, gas, etc, from the first day of production. Bidders are required to quote revenue share in their bids. They are required to quote a different share at two levels of revenue called ‘lower revenue point’ and ‘higher revenue point’.

Royalties and tax stabilisation

If royalties are paid, what are the royalty rates? Are they fixed? Do they differ between onshore and offshore production? Aside from tax, are there any other payments due to the government? Are any tax stabilisation measures in place?

Royalties are paid to central government (in the case of offshore blocks) and to the state government (in the case of onshore blocks) at rates specified in the respective RSCs. Royalty rates shall be in accordance with the current model RSC under the Discovered Small Fields Policy:

  • onshore area – 12.5 per cent of the value of crude oil and condensates and 10 per cent of the value of natural gas produced and saved in the contract area;
  • offshore area – 10 per cent of the value of crude oil, condensates and natural gas produced and saved in the contract area; and
  • offshore area beyond 400-metre isobath – 5 per cent of the value of crude oil, condensates and natural gas produced and saved for the first seven years and 10 per cent of the value of crude oil, condensates and natural gas produced and saved after the first seven years.

 

Under the Hydrocarbon Exploration and Licensing Policy (HELP):

  • onshore area – 12.5 per cent for oil and 10 per cent for gas and coal-bed methane (CBM);
  • shallow water – 7.5 per cent for oil, gas and CBM;
  • deep water – no royalty for the first seven years. After seven years – 5 per cent for oil, gas and CBM; and
  • ultra-deep water – no royalty for the first seven years. After seven years – 2 per cent for oil, gas and CBM.

MoPNG Resolution dated 28 February 2019 prescribed concessional royalty rates if production is commenced within four years for onshore and shallow water blocks, and five years for deepwater and ultra-deepwater blocks from the effective date of contract.

The government’s share of revenue shall be paid (in addition to the royalties) at rates specified in the RSCs. There are no tax stabilisation measures in India.

Licence duration

What is the customary duration of oil leases, concessions or licences?

A licence is valid for four years and extendable for two further periods of one year each. The term of a mining lease is ordinarily 20 years and the area for a mining lease is 250 square kilometres. The central government may, by way of public interest and by notification, relax the condition regarding the area and term.

Under the model RSC issued under HELP, an exploration period of eight years has been provided for onshore (including coal bed methane) and shallow water blocks, and a period of 10 years for frontier, deepwater and ultra-deepwater areas. The exploration period is divided into two phases. The period can be extended up to six months. Extension for a period more than six months is subject to written approval from the government (acting through DGH).

Extent of offshore regulation

For offshore production, how far seaward does the regulatory regime extend?

The sovereignty of India extends to the territorial waters of India (up to 12 nautical miles from the nearest point of the appropriate baseline), seabed and subsoil underlying and the airspace over the waters.

The contiguous zone of India is an area beyond and adjacent to the territorial waters and the limit of the contiguous zone is the line every point of which is at a distance of 24 nautical miles from the nearest point of the baseline.

The continental shelf of India comprises the seabed and subsoil of the submarine areas that extend beyond the limit of its territorial waters throughout the natural prolongation of its land territory to the outer edge of the continental margin or to a distance of 200 nautical miles from the baseline where the outer edge of the continental margin does not extend up to that distance.

The exclusive economic zone of India is an area beyond and adjacent to the territorial waters and the limit of such zone is 200 nautical miles from the baseline.

The central government, may by notification make provisions with respect to exploration, exploitation and protection of the resources in the continental shelf, and the exclusive economic zone. With respect to the exclusive economic zone, the central government may by notification also make provisions for other activities for the economic exploitation and exploration of such designated area such as the production of energy from tides, winds and currents.

The Territorial Waters, Continental Shelf, Exclusive Economic Zone and Other Maritime Zones Act 1976 prohibits any person including a foreign government from:

  • exploring or exploiting any resources of the exclusive economic zone;
  • carrying out any search or excavation or conducting any research within the exclusive economic zones; or
  • drill therein or construct, maintain or operate any artificial island, offshore terminal, installation or other structure or device therein for any purpose whatsoever in an exclusive economic zone except in agreement with the central government or in accordance with the terms of a licence of letter of authority issued by the central government.

Onshore offshore regimes

Is there a difference between the onshore and offshore regimes? Is there a difference between the regimes governing rights to explore for or produce different hydrocarbons?

There are certain differences in the onshore and offshore regimes under the Petroleum and Natural Gas Rules 1959 and model RSCs such as the time period for exploration licences, rates of royalty payable to the government and insurance.

The policies, acts, rules and regulations are common for both onshore, and offshore regimes. HELP provides for a single, uniform licence to enable exploration and production operators to explore and extract all hydrocarbon resources which are regulated by the Oilfields Regulation and Development Act 1948 and the rules made under it.

Authorised E&P entities

Which entities may perform exploration and production activities? Describe any registration requirements. What criteria and procedures apply in selecting such entities?

All entities, Indian or foreign, may undertake exploration and production activities in India, subject to foreign exchange laws. Filing requirements would apply to all domestic companies and foreign companies under companies’ legislation.

An approval process applies to a person who is not a resident and wishes to set up a company, branch office or project in India. A time frame of around four weeks may be estimated for the registration process. The conservation cost estimate is around US$2,500. The entities are selected through international competitive bidding and pursuant to the policies of the government.

Regulatory powers over operators

What controls does the regulatory body have over operators? Can operatorship be revoked?

The operators under the respective revenue sharing agreements are governed by the terms and conditions of the licence or mining lease granted under the Oilfields (Regulation and Development) Act 1948 and the terms and conditions stated in the respective RSCs, or joint operating agreement, if any.

The RSC under HELP does not envisage a situation where operatorship may be revoked. However, no change in operator may be undertaken without the approval of the government.

Joint ventures

What is the legal regime for joint ventures?

Joint ventures are a matter of commercial arrangement and there is no specific statute governing them. Incorporated joint ventures would be required to follow the domestic laws as applicable to any company in India.

Normally, unincorporated joint ventures are formed for participation in the upstream sector.

 

Reservoir unitisation

How does reservoir unitisation apply to domestic and cross-border reservoirs?

Reservoir unitisation is envisaged in the RSCs. However, there are no policies in India that deal with cross-border reservoirs.

Licensee liability

Is there any limit on a party’s liability under a licence, contract or concession?

In accordance with the model RSC under HELP, the liability of the members comprising the contractor is both joint and several. The liability of each of the members is limited to the extent of their individual participating interests and the liability of the contractor shall be limited to any liability undertaken by or on behalf of the contractor, in respect of the contract, or in relation or connection to the contract. Further, if the contractor fails to complete the committed work programme, it shall be liable to pay to the government liquidated damages as specified under the RSC.

Joint liability and limitation of liability flows to the extent provided under contract law.

Guarantees and security deposits

Are parental guarantees or other forms of economic support common practice or a regulatory requirement? Are security deposits required in respect of any work commitment or otherwise?

Under the RSCs, there is a requirement for a parental bank guarantee, by a parent company that is acceptable to the government. In addition, each member of the contractor, or the operator on behalf of the contractor, in respect of work commitments, is required to furnish a bank guarantee in favour of the government.