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Upstream SectorBy:Ashwani Aman (35)Anadita Trivedi

Oil and Gas Sector

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Upstream SectorIncludesProspectingExplorationProduction

Major PlayersGovt.ONGCOILOVLPrivate PlayersReliance PetroleumCairn Energy

5Jurisdiction over Oil and Natural Gas ResourcesJurisdiction to regulate oilfields vested with Central GovernmentCoI: Entry 53 of List IRegulation and development of oilfields and mineral oil resources; petroleum and petroleum productsCoI: Entry 25 of List IIGas and Gas WorksPresidential reference, Supreme Court judgmentNatural gas- a petroleum product and hence, a central subject

6Jurisdiction over Oil and Natural Gas ResourcesPresidential reference (contd.)Right in natural gas and oil resources as publici jurisUpstream regulation of exploration and transmission of natural gas also in central domain.Jurisdiction to regulate gas clearly identified with Centre by the judgmentPaved the way for a unified central legal framework for the energy sector

RegulatorDirector General of Hydrocarbon

8The Oilfields (Regulation & Development) Act, 1948Basic enabling statute for licensing and leasing of petroleum and gas blocks by the appropriate government Covers mineral oils which is defined as including natural gas and petroleum [S.3(c)]Mining lease is defined exhaustively to cover all forms of exploring and exploiting mineral oils and all purposes connected thereto [S.3(d)]

9The Oilfields (Regulation & Development) Act, 1948Empowers central government to make rules with regard to mining leases [S.5]Also empowers central government to make rules for the development of mineral oil [S.6]NELP Enabling ProvisionsPower to vary royalty or exempt it altogether [S.6A]PSC additional terms and conditions to PEL [S.12]

10New Exploration Licensing PolicyUses auctions to allocate petroleum blocks thus bringing benefits of transparency and efficiencyIdentifies biddable areas. Identifies commercial terms on which the bid would be evaluated including profit sharingLays down the bidding procedure

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CONTRACTUAL FRAMEWORK BIDDER 1 Joint Bidding AgreementCONSORTIUM / CONTRACTOR

GOVERNMENTBid

Production sharing contract

License

Work program & budget approvals Exploration Activities.

DISCOVERY

Notification to Government Appraisal and testing

COMMERICAL

mining lease Development and productionBIDDER 2BIDDER 3

MOPNGNOTICE OF OFFER

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The Petroleum and Natural Gas Rules, 1959

Rules provide framework for grant of exploration licenses and mining leases Salient features of the Rules:Prohibition on prospecting and mining except under a license or lease granted under the rules [Rule 4]Central Government has the power to grant licenses or leases in respect of any land vested with it or minerals underlying the ocean within the territorial waters or the continental shelf [Rule 5(i)]

13The Petroleum and Natural Gas Rules, 1959Salient features of Rules (contd)State government has power to grant license or lease over lands vested with it [Rule 5(ii)]Person obtaining exploration license obtains the exclusive right to a lease for producing (i.e. extracting) oil/gas over any part of area covered in license AsLicensee, prospector required to furnish security deposit and annual license fees for exploration license;

14The Petroleum and Natural Gas Rules, 1959Salient features of Rules (contd)License fees increase every year in a pre-determined mannerAs Lessee, producer required to furnish security deposit and dead rent or royalty (payable to appropriate government) whichever is higher as well as surface rent (payable to SG)Increasing Licensing fee structure and dead rent payments incentivise early exploitation of license and leases

15The Petroleum and Natural Gas Rules, 1959Salient features of Rules (contd)Provides for arbitration of disputes which may arise between the Government and the licensee or lessee

16Territorial Waters, Continental Shelf, Exclusive Economic Zone And Other Maritime Zones Act, 1976

Article 297 of the Constitution vests resources found in these areas with Central government No exploration in the Continental shelf and exclusive economic zone permitted without Central Governments permission

17Regulating the upstream sectorCreation of an independent and impartial upstream regulator is a key challenge for regulation in upstream sectorCurrently MoPNG is in charge of regulating upstream sector. Director General of Hydrocarbons performs technical advisory functionBut government has a significant ownership stake in certain upstream companies Regulatory functions should not be discharged by the government when it is also competing with private players. Will avoid conflict of interest

18Regulating the upstream sectorThis has been achieved in other infrastructure sectors like Electricity and Telecom by constitution of independent regulatory bodies through comprehensive statutory frameworkThe downstream sector will soon see the introduction of a omnibus regulator for oil and natural gas (Petroleum Regulatory Board Bill 2002)Independent regulator for upstream would assure private players that they would be provided a level playing field. This should attract greater competition and the benefits of this greater competition would increase value for all the stakeholders

19Regulating the upstream sectorOther areas which would benefit from such regulatory oversight include:Better appreciation of operators commercial interest and minimizes opportunities for rent seeking behaviorCoordination with downstream regulation Acting against anti-competitive practicesRole as arbitrator in case of dispute arising between operator entities and other stake holders; minimizes delay in exploitation of resources due to dispute

20Regulating the upstream sectorOptions for creation of independent regulatory bodyCreate a new regulatory authority and vest it with power to implement licensing policy as well as regulatory functionsIncrease the independence of DGH possibly through separate statutory framework and confer additional powers on it to enable it to discharge role of upstream regulator

UALPRevenue Sharing ModelCover both conventional & Non-Conventional Resource

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THANK YOU!