Kalpesh Chavda
Oil & Gas Policy for the Next Government
This article originally appeared in centreright.in. CRI content has now been subsumed in swarajyamag.com. The views expressed here are personal and do not necessarily reflect those of the editors of swarajyamag.com


Most Countries consider economic growth, environmental quality, and energy security as their main component of the sound energy policy. India like any other country has created ‘India Hydrocarbon Vision 2025’ and subsequently followed up with integrated energy policy report 2006. Every budget year and via five year plans, GOI has tried to provide guidance on various Oil & Gas Policies. Even so, in the last decade the Oil & Gas industry has seen a lot of perplex policy decisions. What we intend to do in following exercise is to list out the expectations which we think might give a fresh lease of life in current Oil & Gas Industry.

In line with industry structure, we will segment Oil & Gas in to following broad categories

  • Upstream
  • Midstream
  • Downstream


Upstream – Exploration & Production

During the period 2002-03 to 2010-11, India’s crude oil reserves increased at a CAGR of 0.27% while the natural gas reserves increased at a CAGR of 6.5%. The reserves growth in natural gas was on account of the significant gas discovery made by RIL in the KG-D6 block on the east coast of India. Although definite progress has been made, in terms of addition to reserves and production, when compared with other peer countries, the rate at which reserves and production has grown has raised many concerns.

There has been low and declining interest in NELP bidding and not enough progress has been made for the blocks that have been awarded under different NELP rounds.

Key Issues

  • Lack of Fiscal prudence: In many instances, Indian Oil Companies including National Oil companies (NOC) have bid aggressively to win the licence. There have been multiple instances of cost overrun from the original minimum work program submitted.

  • Long delays in clearance of blocks: Getting clearances from multiple ministries such as defence, environment & forest and different state government has caused lot of delays. Dealing with multiple agencies at different stages of the E & P has become cause of major concern for most of the investors.


  • Lack of Market Principle and government interference: NELP was presented as a fiscal regime based on market principles and without direct government interference. NELP’s contract terms are applicable both to Oil & Gas on the same ground. However, contract terms pertaining to gas has caused lot of confusion in the industry. Valuation and utilisation of Oil & Gas produce in India has been major cause of concern among industry participants. Oil producer unless not Oil sold in India gets international prices, however gas production is governed by administered allocation policy which also indirectly gives government to dictate price of the gas to be sold.


  • Inadequate regulatory framework: Although there has been a model NELP production sharing contract which governs all PSC contracts signed under NELP round, model contract still has consistency issues in terms of Gas ownership, pricing and valuation for the purpose of profit sharing. Directorate of Hydrocarbon (DGH) is designated regulator but its involvement in the management committee for finalisation of development plan etc. questions its independence to regulate. Besides DGH is also facing bandwidth issues.


  • Inclusion of all stake holders: Ownership of the hydrocarbon reserves remains with central government, however important stake holders such as state government and land owners in case onshore blocks has been kept out while determining policy. State government needs to be involved in policy decisions to reduce administrative delays and to avoid additional tax on the sales of hydrocarbon products.


  • Unconventional Energy resources: Given the substantial coal resources, India boast of significant Coal Bed Methane (CBM) potentials and opportunity. From its commencement in 2007, four rounds of bidding under the CBM policy have been concluded by the government and a total of 30 blocks have been awarded. So far only approx. 2.6 Billion cubic feet (Equivalent of 73 Million Cubic feet) of net production could have been extracted as against 6 trillion cubic feet of established reserves.

    There has been lot of buzz around Shale gas exploration and its potential, government of India has issued draft shale gas policy in 2012 and ONGC is awarded 1st round of shale gas blocks for exploration. Industry insiders have raised questions on why state oil company is made Guiney-pig for such new initiative.


  • Adoption of Adjusted concession regime: Boston Consulting group (BCG) carried out study for Ministry of Petroleum and recommended that India should move to adjusted concession regime. Under this regime government share will be based on revenue instead of profit. This will remove lot of administrative hassle and dispute regarding cost recovery. Adoption of new framework should be for all existing PSC contracts. Concurrent system of PSC and adjusted concession regime will only add chaos and confusion to E & P industry.

  • Clear stand on Gas Utilisation policy: Success of Gas Utilisation policy is directly dependent on pipeline structure; current pipeline structure is definitely inadequate to support Gas Utilisation policy. Ideal condition would be to give total freedom to Gas producer or contractors to choose their marketing representative and decide customer which gives them maximum revenue. Considering Government of India’s plan to move to adjusted concession regime, more revenue contractor earn, government share of royalty and taxes also increase.

  • Inclusion of state government as stakeholder: Oil & Gas related policy decision has been taken by central government, however in order to expedite various administrative approvals state government should also be made signatories to PSC or adjusted concession agreements. Agreement with state government should be within overall NELP or any other prospective regime adopted by government of India.

  • Inclusion of Land owners as royalty interest owner: In many countries land owners gets royalty for the land access right, India should also move to this system of compensating land owners. Nagaland has recently passed legislation to include land owners as royalty interest owners. This system should include both capital payment and regular payment in terms of royalty to land owners.

  • Facilitating single clearance window: All existing blocks pending various approvals from different ministry and states should be brought under single clearance window; this possible single window might be DGH. All administrative issues pertaining to strengthen DGH should be resolved, DGH should be made full time regulator in line with SEBI, IRDA etc.

  • Leveraging existing accounting & reporting framework: In the area of financial reporting for example DGH should use existing financial reporting requirement as per accounting standards issued by Institute of chartered accountant of India. Currently Institute of chartered accountant of India has issued guidance note in some cases, however Institute should issue additional accounting standard( or provide guidance note on usage of IFRS) to meet global best accounting practice and reporting requirement for Oil & Gas blocks operated out of India.

  • Unconventional Energy Sources: Land acquisition and technology holds key to success for unconventional energy source, such as Coal Bed Methane and Shale Gas. Shale Gas in US has been great success because they develop technology to make shale gas exploration economically viable and causing minimum adverse environmental impact. US has required rules and regulation to protect interest of land owners and they also made part of the economic boon that might come to explorer/contractor by making land owner royalty interest owner. Government of India should create conducive environment to nurture potential fuel source.

  • Usage of Technology: Following is possible usage of technology which DGH and related agencies can use
    • Budget approval and budget utilisation per each Minimum work program
    • Usage of technical information related to 2D, 3D seismic data for further data mining.
    • E-submission of all reporting requirement with fixed due date.
    • Inter departmental workflows


Midstream sector involves transportation (via pipeline, barge or truck), storage and wholesale marketing of crude or refined petroleum products. Infrastructure is important to balance fluctuations between supply and demand. The country’s pipeline infrastructure spans 19,300 km for crude oil, 16,293 km for gas and 15,903 km for products. However, the pipeline density in the country is still among the lowest in the world with onshore natural gas pipeline density being 3 km per 1,000 km2 of area as compared to 50 km per km2 in the USA, China and the UK. Under-developed pipeline remains one of the most important impediments for effective Gas Utilisation policy. The country has close to 13 major and 176 non-major ports. The total volume of traffic handled by the ports during 2010-11 was 850 million metric tonnes (MMT), out of which major ports handled traffic close to 570 MMT. The petroleum, oil and lubricants (POL) traffic handled during the same period was close to 180 MMT. Current penetration of coastal shipping is concentrated in favour of bulk goods like petroleum and coal.

Increased gas availability, improved gas pipeline coverage and gas being one of the priority sectors are the major drivers of the City Gas Distribution (CGD) business in India. The government has aggressive plans to develop CGD network in more than 200 cities across India. Each city would warrant an investment ranging between 65 million USD to 100 million USD. The first round of bidding is complete and the companies have been authorised by PNGRB. In the second round the bids have been received but authorisation is still awaited. The third (8 cities) and fourth (8 cities) rounds of CGD bidding launched by PNGRB are currently underway.

Key Issues

  • Lack of coordination: Existing pipeline developer has installed and proposed to install pipeline based on their marketing plans. Gas allocation made to certain sectors could not even be executed because non availability of the required pipeline structures.

  • Policy Paralysis: Pipeline policy of 2006 gave pipeline developers to choose customers of their choice and develop the pipeline as per their own requirement and business plans. However in 2009, when government of India announced setting up of ‘National gas highway development authority’ which will be directly funded by it (Centre) to lay a pipeline network across the country, Petroleum and Natural Gas regulator board (PNGRB) was apprehended fearing curb on its power. Last we heard is plan to set up ‘National gas highway development authority’ is put up on back burner.

  • Lack of Investment: Unlike upstream and downstream midstream segment has seen zero or little concentrated effort from any of the authority to increase the investment. Whether it is case of additional pipeline development or development of new ports, there is lack of holistic view of how these infrastructure projects needs to be synchronised.

  • Slow Progress on laying of CGD: Government intend to develop CGD network across 200 cities however initial round of bids has not even covered 10% of the cities. Tariff regulation and lack of financial support makes many project unviable or cause cost overrun. Principle challenges faced by CGD includes right of way and right of use in laying gas transmission and distribution pipelines.


  • Integrated Oil & Gas Infrastructure development: There is need to have holistic view to how individual cluster of Oil & Gas Infrastructure projects needs to be initiated across India. Gas find in Bombay High enabled to create required infrastructure in Gujarat and Maharashtra. Similar Oil & Gas Infrastructure needs to be designed for the Eastern, Southern and Northern India. This planning requires integrated development of Ports, Storage facility, LNG terminal and refinery needs to be planned minimising last mile rail and road connectivity.

  • Policy Guidance: Petroleum and Natural Gas regulator board (PNGRB) should be empowered to provide all policy guidance with reference to midstream infrastructure development across the country. Current ambiguity over its role and jurisdiction should be clarified. Today the Government of India assumes all powers in determining the gas price. However, it is felt that looking into the spirit behind setting up the PNGRB and also gradually moving towards a perfect natural gas market) as a regulator, the board should get the power to set prices and also allocate gas.


  • More Cities to be brought under CGD: Laying CGD has to be cohesive effort by central government in coordination with state government. If government intends to phase out LPG subsidy, creating CGD network. In order to bring more cities under CGD, policies should be made investment friendly so that entry barrier is removed and more public private participation can be forged.


India has emerged as a global refining hub on the back of major refining capacity additions involving massive investments. The domestic demand of petroleum products is expected to grow at a CAGR of 7.5% during the next five years. The projected expansion of refinery capacity from 232 MMTPA (4.66 MMbbls per day) in 2012-13 to 311 MMTPA (6.3 MMbbls per day) in 2016-17 is in line with India’s aspiration of becoming a global refining hub. Though the current refining capacity stands at 3.8 MMbbls per day, the throughput in 2011 exceeded 4 MMbbls per day, indicating more than 100% capacity utilisation. India might be Net importer of crude oil however in recent years it has become petroleum exporter. Much of the pain and chaos in downstream sector remains due to subsidy policy adopted by subsequent governments.

Currently government is facing challenge to remove under-recovery and subsidy mainly for Diesel, LPG, and PDS Kerosene.

Key Issues

  • Eliminate Notional Subsidy: There has been lot of misrepresentation over subsidy or under recovery on account of diesel. Government and various agencies have maintained that diesel subsidy has caused lot of drain on government fiscal health. However closer look Diesel pricing under-recovery vs. taxed recovered per litre of diesel sold reveals that central and state tax put together are in excess of under recovery. In the event of removal of under recovery and taxation, there will be further downstream impact on states which rely heavily on taxation on diesel sales to fund their state budget.

  • Domestic LPG Subsidy: Putting cap on number of LPG cylinders is adding woes to already crumbled administrative machinery. Questions remains whether dual pricing system will work considering bureaucratic administration and corrupt practice exist on ground. For instance, there are many Piped gas consumer reluctant to surrender LPG cylinders. This leads to inefficient consumption and diversion of LPG cylinder, mostly for commercial use.


  • PDS Kerosene: Kerosene is primarily used in rural household for lightning purpose. Large volume of subsidized kerosene sold is illegally diverted and resold at higher price or used to adulterate diesel and gasoline.

  • Interference on fuel pricing: Much of the under recovery and subsidy has accumulated because government of India has continued to set the fuel price. Although it has been decade where multiple recommendation committee and planning commission has time and again said that fuel prices should be deregulated. But Diesel, Kerosene and LPG prices are still regulated by government.



  • Rationalisation of Taxation & Adopting correct price determination mechanism: There is argument that under recovery and losses by Oil Marketing companies are not actual financial losses but more of accounting or notional loss. Fuels price formula currently based on trade price parity where 80% weightage is given to import parity price and 20% weightage given to export parity price. It is important to note that India might be importer of crude oil but India is also net exporter of diesel. Using export parity price & reduction in taxes such as Customer duty and special excise duty may reduce under recovery to a larger extent. There is also argument to raise price of diesel by raising taxes to make it equal to petrol, however author of this article feel that this might turn out to be counterproductive. Government of day will always be under pressure not to raise price and taxes and will go back to populism and provide further subsidy. Currently most of the refinery are owned by Oil Marketing companies, in terms of profitability refinery operations are profitable and gross refinery margin (GRM) earned by refinery including public sector are more or less at par with average GRM earned in other refinery across world. Considering most of the under-recoveries have been born by oil marketing companies, it makes sense that either refinery should be part of separate legal entity or along with hydrocarbon retail price build up refinery margin earned should also be disclosed.

  • Domestic LPG Supply: Increasing penetration of LPG and piped natural gas in rural areas should be one of the utmost priorities. Dual Pricing can be implemented easily with piped gases instead of cylinder gas. Co-ordinate efforts along with state government should be made to expand piped gas network. Direct cash transfer with Aadhar enabled bank accounts for BPL households is one of the options to make sure that subsidy is received by segment of society needs most.


  • Creating efficient Cooking fuel for rural sector: Considering rising cost of petroleum and availability of Gas including imported gas, moving rural areas to LPG looks distant dream. Usage Advanced Bio Mass (ABS) cooking fuel should be promoted. Considering health hazard, adverse impact on deforestation and providing efficient cooking fuels this sector needs special attention.

  • Fix Kerosene Subsidy responsibility with power ministry: Very insignificant portion of Kerosene consumption is towards usage in cooking fuel. Since most of other usage is towards lighting purpose it makes sense that onus of the subsidy should be transferred to power ministry. Irrespective of the responsibility, there should be gradual effort to reduce consumption of the kerosene; direct cash transfer remains one of the options to plug the leakages.


  1. BCG Benchmarking report review of upstream commercial structures and insight from global practice
  2. Natural Gas in India: An Analysis of Policy by Anil Jain and Anupama Sen
  3. Exploring India, Country Insight by PWC prepared for Petrotech 2012
  4. Exploring India, Country Insight by pwc prepared for Petrotech 2012
  5. Gujarat — The Model CGD State: Lessons and Expectations by DJ Pandian, IAS, Principal Secretary, Energy & Petrochemical Department, Government of Gujarat
  6. Exploring India, Country Insight by pwc prepared for Petrotech 2012
  7. India’s Fuel Subsidies: Policy recommendation for reform.