Long-term view: Facilitating upstream investment decisionsJanuary 8, 2015
The CEO of GeoEnpro Petroleum, Ajay Ray, weighs in on India’s Ministry of Petroleum and Natural Gas’ plan of replacing the controversial production-sharing contracts (PSC) with a revenue-sharing regime in order to attract investments in the country’s unstable upstream sector. He explains how major restructuring aids drafting and the implementation of rules for the oil and gas industry.
As a capital-intensive industry, the oil and gas industry requires risky investment decisions. Especially in the upstream sector, it takes several years before commercial production of an asset begins. In view of the long-term and capital-intensive character of this industry, facilitating upstream investment decisions needs to be encouraged by attractive petroleum contracts and the government’s pricing policies within a stable and far-sighted regulatory regime. In India, the regulatory framework for upstream operations still remains limited and the hydrocarbons industry’s various activities are regulated by different regulatory authorities.
REGULATORY LEGACY: India’s oil and gas industry inherited most of its regulations from the mining industry, which was initially prepared for the extraction of resources, such as coal and metal. There should be a specific legal framework for the country’s hydrocarbons industry; its rules and regulations should not derive from coal and metal industries’ requirements.
Mostly, the oil and gas industry’s rules originate from the pre-independence era and there is no regulatory segregation between the mining sector and the oil and gas industry. The hydrocarbons industry was only opened up for private companies to participate in the early 1990s, and the industry needs a complete re-hauling of its regulatory framework.
In 1992, Shell won the licensing round for the Rajasthan block. The entrance of private companies into India’s oil and gas industry should have prompted new regulations on competition between public and private companies, and revisions to those in force. The government did not restructure upstream regulations, so any rule implemented before 1992 may not take into account that government-owned companies are no longer the only players in the industry.
REDUNDANCY: The legal framework in India’s oil and gas industry is conflicting with other sectors in the country. For example, the PSC and mining lease are two separate requirements that include the involvement of various governmental institutions. While, the PSC provides a 25-year period to explore and produce oil and gas with a provision for extension, the mining lease is granted for a maximum period of 20 years. This discrepancy means that during the PSC’s tenure, the mining lease needs to be renewed. As a consequence, the PSC loses its significance, since it does not ensure sustained operations for the duration of the contract.
In addition, multiple clearances are required to run an oil or gasfield. While the PSC guarantees the assistance of the government in obtaining these clearances, there is no single agency to process all the requisite clearances for oil and gas projects.
INTERNAL CONFLICT: In practice, multiple authorities and agencies regulate upstream oil and gas activities in India. These include the Ministry of Petroleum and Natural Gas, Ministry of Environment and Forests, Ministry of Defence, Ministry of Finance and Ministry of Shipping, in addition to state-level regulatory bodies. Most of these institutions require separate applications from operators investing in an upstream activity, increasing inefficiency, delays and uncertainty in the authorisation process.
While the Ministry of Petroleum and Natural Gas can guarantee a company the right to commence operations at a block, approval is needed from other regulatory bodies and these are often delayed for different reasons. As a result, the time between the acquisition of a block and the start of commercial operations is very high. This is detrimental to private investments, as India’s hydrocarbons industry has one of the longest lead times.
As India enters an era of growth and is looking to boost its domestic production of oil and gas, establishing a modern, competitive and efficient regulatory system for upstream activities will be essential to further attract local and international investment in the industry.