Download - Legal Aspects Of Starting an OMC
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Legal aspects of businessOil marketing
Team Members
Mayank Garg PGP05.076
Kriti Gupta PGP05.075
Karan Singh Chadha PGP05.074
Jyotsana Chadha PGP05.073
Joel Kuruvilla Daniel PGP05.072
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OIL MARKETING SECTOR IN INDIA
Increasing liberalization and privatization, resulting in the participation from private entities, both domestic and foreign
Power to legislate in Oil and Natural Gas conferred to the Union Government of India
Oil and Gas Industry divided into 3 major sector :Upstream, Midstream and Downstream
Marketing deals with midstream and downstream sectors
Major PlayersPSUs
IOCL
BPCL
HPCL
OIL
Private Players
Essar Oil
Reliance Industries Ltd
Royal Dutch Shell
Joint Ventures
Essar Oil and RIL
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RELEVANT RULES AND REGULATIONS
Petroleum and Natural Gas Regulatory Board Act, 2006
PNG Act 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
Protect the interest of consumers and entities engaged in specific activities relating to petroleum, petroleum products and natural gas and to ensure uninterrupted and adequate supply of these products in all parts of the country
Provides for a legal framework for downstream gas sector regulation
Adjudicate disputes between entities engaged in activities set out in the PNG Act and to conduct inquiry into such entities as well
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RELEVANT RULES AND REGULATIONS
Petroleum Act The Petroleum Act, 1934and the Petroleum and Natural Gas Rules, 1959 are key legislations for
the regulation of the O&NG sector
Procedural requirements to be complied with by companies engaged in practically any other activity associated with O&NG in India
Regulates the import into India, transfers within, storage, production, refining and blending of petroleum
Uniformity in each of the individual states regarding the above activities
Petroleum Order 1999 Regulation of supply and distribution of petroleum products-The Central Government for
uninterrupted and equitable distribution and availability of petroleum products may, by order, require any oil marketing company to supply or cause to be supplied one or more petroleum products from the stocks held by it at any place in India
Regulation of retail supply of petroleum products-If the central Government is of the opinion that a petroleum product may not be available at the retail outlet to meet the demand of the general public, it may direct any OMC to deliver, till the original supplying company is able to restore the supply.
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RELEVANT RULES AND REGULATIONS
Hydrocarbon Vision 2025 Lays down the framework which would guide the policies relating to the hydrocarbons sector
for the next 25 years
E&P, refining, marketing, external policy, oil security, tariff and pricing, and restructuring and disinvestment are addressed by the Group, to ensure that an optimal mix of energy resources are made available to the consumer at the right price
Competition Law The PNG Act empowers the Regulatory Board under Section 11 to ‘protect the interest of
consumers by fostering fair trade and competition’
Competition Commission of India has also taken major steps in this regard
Relevant Case: Investigation of CCI into the alleged cartelization of State-owned OMCs
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CORPORATE STRUCTURE
Private Limited Company is a suitable option for entering into the oil marketing business
Responsible for distribution, can lay its pipelines or use the existing network in accordance with government regulations
Operate its retail stations for fuel distribution
The procurement of petroleum products would be through companies working in the upstream sector, such as IOCL, HPCL etc
The supply of the refined products can be availed by signing anMoU with the upstream company.
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THREATS TO A PRIVATE PLAYER
The National Oil Companies hold about 86 % market share of India’s oil E&P, 77% of natural gas, 74% of oil refining capacity and 86% of marketing infrastructure. As such NOCs do have an edge over new private sector entrants
NOCs often incur huge losses on the sale of diesel, PDS kerosene and domestic LPG. The bailout package by the Union Govt. every year, going out of taxes paid by the public, have actually been subsidizing losses
Private oil marketing companies do not have the luxury of being compensated for under-recoveries
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CHOOSING A PRODUCT AND LOCATION
Petrol and Diesel market dominated by PSU’s
Products like lubricants and engine oil are profitably marketed by Private companies currently
Even if the company is selling a different mix of fuel or lubricant, all regulations for petroleum and natural gas products will apply
Relevant Case: Ruling in the Satish Maganlal Vs The Union Govt of India underlines the dominant role Petroleum Act plays in regulation of activities in relation to petroleum and petroleum products
Various components of cost as explained under Pricing can largely depend upon the location of operation chosen by the company
Situate its storage and distribution outlets in such a manner that overhead costs (mainly transportation andpersonnel salaries) are reduced
Proximity to the supplier refinery and cheaply available workforce would reduce the cost incurred
In this respect Andhra Pradesh and Assam which have a prospering petroleum market and PPP support seem to be favourable locations
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PRICING
Prior to 2002, the marketing and pricing of petroleum products including transportation fuels, namely, motor spirit (MS) and high-speed diesel (HSD), were controlled by the government under a mechanism known as administered price mechanism (APM).
PNGRB is to regulate anti-competitive behaviour like predatory pricing
The price of fuel at the retail station comprises the product cost, central government excise and taxes, State government taxes and operating costs and margin
Petrol prices de-regularized while Diesel still continues to be subsidized
The pricing decision is influenced by a number of factors including:1) Cost of bringing the fuel to the retail site (product and distribution costs)2) Cost of running the service station (e.g. salaries, rent, utilities)
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REGISTRATION AND AUTHORIZATION
Under PNGRB Act every entity desirous of the below activities and fulfilling the eligibility conditions has to make an application to the Board for its registration under the PNGRB Act
The Board makes the necessary enquiry and subject to certain terms and conditions, issues a certificate of registration allowing the entity to start operations
The company is registered in petroleum and natural gas register
Authorization is required if an entity proposes to lay, build or expand the pipeline network for petroleum products
The transportation tariff for various petroleum products is also decided by the board
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DISPUTE RESOLUTION
Litigation in the O&NG sector is generally governed by rules of the relevant PSU which is awarding a contract or in the form of representations before an authority under the Ministry of PNG
Contracts with PSUs generally have an arbitration clause
Initiation of arbitration, there are generally provisions for mediation and conciliation before the dispute resolution mechanism is invoked
Relevant Case: Union of India v. Reliance Industries - the partial award passed by the Arbitral Tribunal was challenged on the ground that subject-matter of the arbitration comprising of payment of royalty, cess, service tax and audit issues involved questions of public policy and therefore are non-arbitrable
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MATERIAL CONTRACTS
Capacity Reservation Contract
Buyer pays to reserve a certain level of capacity at the supplier
A menu of prices for different capacity reservations provided by supplier
Buyer signals true forecast by reserving a specific capacity level
Advance Purchase Contract
Supplier charges special price before building capacity
When demand is realized, price charged is different
Buyer’s commitment to paying the special price reveals the buyer’s true forecast
Long Term Contract
They are also termed as forward or fixed commitment contract
Contracts specify a fixed amount of supply to be delivered at some point in the future
Supplier and buyer agree on both price and quantity
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