oil and gas sector

In this blog post, Alisha Vernekar, a student pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes the career opportunities in India for lawyers in the oil and gas sector.

This article shall discuss in length the opportunities that lawyers in India have in the Oil and Gas Sector. Prior to going into the discussion, I shall succinctly highlight the meaning and the historical background of the Oil and Gas Sector.

In order to study the opportunities that a lawyer in India would have in the sector, one has to assess and evaluate global market trends, market trends prevalent in India, incentives and regulations introduced by the Government and several more germane parameters.

Meaning of Oil and Gas Industry

Petroleum is a naturally occurring yellow-to-black liquid found in geological/rock formations beneath the Earth’s surface. It is then commonly refined into various types of fuels such as petrol, gasoline, kerosene, asphalt, natural gas and chemical regents necessary for the manufacture of plastic and pharmaceutical products.

The Oil and Gas industry involves the process of exploration, extraction, refining, transporting and marketing of products extracted from petroleum. Fuel Oil and gasoline (petrol) are the most crucial products extracted from petroleum. The world’s economy and sustenance for fuel are dependent on the world reserves of petroleum.

The oil and gas industry is typically divided into three major sectors which are enumerated herein:

  • Upstream:  This sector includes searching for potential underground or underwater crude oil and natural gas fields, drilling exploratory wells, and subsequently operating the wells that help recover and bring the crude oil and/or raw natural gas to the surface. It is commonly known as the exploration and production sector (“E&P”).
  •  Midstream:  The midstream sector involves storage, transport and wholesale marketing of crude or refined petroleum products. Pipelines and other transport systems such as rail, barge oil tanker or trucks can be used to move crude oil from production sites to refineries and deliver the various refined products to downstream distributors, such as local utilities.
  •  Downstream: The downstream sector entails in the refining of petroleum crude oil and gas and includes the marketing as well as the distribution of products derived from crude oil and natural gas. The downstream sector gives consumers the end products such as gasoline, petrol, kerosene, jet fuel, diesel oil, heating oil, fuel oils, lubricants, waxes, asphalt, natural gas, and liquefied petroleum gas (LPG) as well as several other petrochemicals.
    Midstream operations are often included in the downstream category and are considered to be a part of the downstream sector.

History of the Oil and Gas Industry in India

In the 18th century during the Industrial revolution, oil deposits were first discovered in Assam near a small town called Digboi and during the World War II the oil fields were producing a considerable amount of oil.[1]

After India won independence in 1947, the new government moved to a Communist system which in terms of economic policy meant a larger role for the government.[2]

At that juncture, the Government played a vital role in the industry, be it by establishing Government owned companies or regulating the price of oil.

  • The Government founded the Oil and Natural Gas Commission (ONGC) in 1954 [3].
  • India Oil Corporation Limited (IOC) was incorporated five years later in 1959.[4]
  • GAIL (India) Ltd. (GAIL) was incorporated in August 1984 as a Central Public Sector Undertaking (PSU) under the Ministry of Petroleum & Natural Gas, with the mission of accelerating and optimizing the effective and economic use of Natural Gas and its fractions for the benefit of the national economy.[5]

In 1977, the Oil Pricing Committee (OPC) set up by the government had devised a pricing mechanism for petroleum called the Administered Pricing Mechanism (APM), which inadvertently ultimately rendered the manufacture of petroleum products commercially unviable.[6]

The process of economic liberalization in India began in 1991 when India faced near crisis situation and defaulted on repayment of her loans and asked for a bailout from the IMF.[7] The bailout was done on the condition that the government initiates further reforms, thus paving the way for India’s emergence as a free market economy. For ONGC this meant being reorganized into a public limited company (it is now called Oil and Natural Gas Corporation).

In 1997, the Government announced the deregulation of the oil & gas sector and the dismantling of the APM in a phased manner over a five-year period. After the new Industrial Policy of 1991, the government for the first time opened this industry for private participation.

The decision to move from a controlled industry to a market driven petroleum sector was the most important decision which finally resulted in the Government completely phasing out the APM on April 1, 2002, when it relinquished control over kerosene and gasoline prices.

With India progressively liberalizing its economy and with the deregulation policy announced in 1997, the oil & gas sector became an interesting prospect for several private sectors and foreign players.This system continued till mid-2004 when it was effectively abandoned, with the Central Government once again centrally controlling upward price revisions. [8]

The Ministry of Petroleum & Natural Gas (Petroleum Ministry) of the Government of India now regulates this Industry. The Petroleum Ministry is responsible for exploration, excavation, supply, distribution, marketing and pricing of petroleum including natural gas and petroleum products, setting up of oil refineries including lube plants, regulation of additives for petroleum and petroleum products, lube blending and greases, planning, development and regulation of oilfield services etc and also for the monitoring of the various entities to ensure that they conform to the applicable laws.

The regulatory regime specific to the oil & gas industry constitutes primarily the-

  • Petroleum Act, 1934,
  • The Petroleum Rules, 1974,
  • The Petroleum & Natural Gas Rules, 1959,
  • The Oilfields (Regulation and Development) Act, 1948,
  • The Petroleum pipelines (Acquisition of Right of User in the land) Act, 1962 and a few more[9].

These statutes and rules lay down the substantive and procedural requirements to be complied with in order for a party to engage in E&P, refining, import and distribution activities relating to petroleum products. In addition, the Petroleum Ministry, from time to time, announces various notifications and regulations which govern the procedural and policy norms for the sector[10].

Also Read: End of an Era:What did we actually achieve?

Global Trends

It is quite evident that the industry is going through a transformative period in its history. The reason for this transformation lies in the depleting resources and the unfortunate impact the industry has on the environmental we live in.

The sensational drop in oil prices — below the US $40 per barrel at the end of 2015, down more than 60 percent from their high in the summer of 2014 — reflects rampant supply and weak global demand amid concerns over slowing economic growth around the world, especially in China.

This imbalance is only going to worsen this year. Saudi Arabia continues to pump at full tilt, less concerned about propping up oil prices and more intent on securing market share. They are hoping to drive out marginal producers, particularly in the United States.

As early as the second quarter of 2016, the flow of Iranian oil is likely to increase, adding to the glut. Even Middle East instability, such as the tension that erupted between Russia and Turkey in Syria towards the end of 2015, has not budged crude prices. Consequently, we expect oil prices to remain low for the near future, although it would not surprise us if volatility returns[11].

Surprisingly Crude oil prices have risen to $49.85 a barrel today, being as much as 7.5 percent rise since  the biggest gain since February due to the growing optimism of the meeting to be held in Vienna by the Organization of the Petroleum Exporting Countries(OPEC) who is speculated to deliver a production cut deal later in the day. The OPEC deal would be aimed at cutting into a global oversupply of oil that has severely depressed prices since 2014 [12].  This may bring some good news as there have been jobs cuts in the oil industry in the past 2 years till date due to low prices [13].

For now, nothing remains certain in the industry except that the industry shall ultimately surface with a different avatar from the one we know now.

Bonus Read: Oil Price & its Impact.

Scenario in India Today and the Way Forward

  • India is the third largest consumer of crude oil and petroleum products in the world and second largest refiner in Asia. India’s 60% of the prognosticated reserves of 28,000 MMT are yet to be harnessed. Oil imports constitute about 81% of India’s total domestic oil consumption in 2015-16. [14]
  • Maximum profit with minimum costs has been the global tendency. In India, Government owned enterprises (PSUs) have been strategically mandated to invest in CapEx. The Oil and Natural Gas Corporation of India (ONGC) is rolling out mega redevelopment projects off the aging western offshore fields, as well as the ambitious integrated development plans for eastern offshore deepwater fields.
  • Implementing these high-value projects within the limited window is critical. The acquisition of Vadinar Refinery and connected assets by Rosneft along with Private Equity (PE) Investors is a prominent development.[15]
  • Newer technologies have realized which shall result in lowering costs and increase production. It would be interesting to observe whether this gives rise to heightened PE Investor confidence in Indian oil and gas space. The make in India intuitive of the present Government has introduced new initiatives, such as the Hydrocarbon Exploration Licensing Policy (HELP) and the Discovered Small Fields Bidding Round (DSFBR).
  • The Ministry of Petroleum and Natural gas is aggressively promoting the DSFBR through roadshows in India and abroad to attract global E&P players. The Ministry of Petroleum and Natural gas has also announced that more blocks will be auctioned under HELP next year.
  • A number of policy reforms have been taken up by the Government to remove obstacles on investment in the oil and gas sector on the lines of ease of doing business by minimizing government interference and maximizing governance in order to promote the ‘Make in India’ initiative.

Despite being a net importer of crude oil, India has become a net exporter of petroleum products by investing in refineries designed for export, particularly in Gujarat. The initiative promotes Investment opportunities in upstream, gas pipeline, City Gas Distribution (CGD) network, LNG Terminal, Petrochemical and Refineries.[16]

FDIs in Oil and Gas Sector of India

  • The Foreign Direct Investment (FDI) in the industry is 100% through the automatic route for undertakings’ exploration activities of oil and natural gas fields, infrastructure related to marketing of petroleum products and natural gas, marketing of natural gas and petroleum products, petroleum products’ pipelines, natural gas pipelines, LNG regasification infrastructure, market study, formulation and petroleum refining in private sector, subject to the existing sectoral policy and regulatory framework in the oil marketing sector and the policy of the government or private participation in exploration of oil and the discovered fields of natural oil companies.

However, FDI up to 49% through the automatic route is permissible for Petroleum refining by PSU, without disinvestment or dilution of domestic equity in existing PSUs.

  • It is predicted that many deep-water and ultra-deep water oil and gas resources hold the key to substantially increasing domestic production. This creates a plethora of opportunities for strategic investors having a relevant technical expertise and financial muscle.[17]

Future Growth and Demand of Oil and Gas in India

“India’s oil demand is expected to grow at a CAGR of 3.6 percent to 458 Million Tonnes of Oil Equivalent (MTOE) by 2040, while demand for energy will more than double by 2040 as economy will grow to more than five times its current size”.

– Stated by Mr. Dharmendra Pradhan, Minister of State for Petroleum and Natural Gas[18].

  • It is foreseen that gas production will likely touch 90 Billion Cubic Metres (BCM) by 2040, subject to adjustment to the current formula that determines the price paid to domestic producers.
  • While demand for natural gas will grow at a CAGR of 4.6 per cent to touch 149 MTOE [19].

Conclusion

J. Paul Getty’s Formula for success: Rise early, Work hard, Strike oil.

Lawyers and law firms are constantly looking for different areas representing new avenues or markets, the aim being to establish an advantageous position before the competition catches up.

Quite obviously, the new niche practice areas’ call for a different mindset and unique skills set. With the introduction of the new incentives introduced by the Indian government and petroleum, being a big business and an inextricable part of relationships between nations and governments, the industry offers diverse opportunities for lawyers and other professionals.

Cross-border activities in this industry require comprehensive due diligence, tough negotiation, multi-jurisdictional execution etc. All this is invariably done by legal professionals and advisers drawn from different jurisdictions, sometimes, with the different set of laws.

Another important area of work for legal professionals in this sector is the dispute resolution through mediation/conciliation/arbitration and in courts. Thus, it is only natural that the demand for specialized legal professionals who appreciate the functional aspects of the business is acutely felt by the companies. This has created fresh opportunities for lawyers in India and abroad in the private sector as well as the public sector.[20]

Hence, it is certain that lawyers have a very bright future in the industry and their demand is only going to increase in the near future.

What are your thoughts on this emerging sector? Do you think this industry can become a top attraction for the aspirants? Comment Below and don’t forget to Share.

 

References –

[1] “Digboi: The First Oil Well in India”. EduGreen. The Energy and Resources Initiative. Retrieved 23 July 2012.
[2]  Panagariya, Arvind (2008). India: The Emerging Giant. Oxford University Press. p. 514. ISBN 978-0-19-531503-5
[3]http://www.ongcindia.com/wps/wcm/connect/ongcindia/Home/Company/History/
[4] https://www.iocl.com/HistoryofIndianOil/OurHistory.html#p=3
[5] http://www.gailonline.com/final_site/successstory.html
[6] http://www.gktoday.in/blog/administered-price-mechanism/
[7] Arunabha Ghosh (2006) Pathways Through Financial Crisis: India. Global Governance: A Review of Multilateralism and International Organizations: October 2006, Vol. 12, No. 4, pp. 413-429.
[8] http://www.gktoday.in/blog/administered-price-mechanism/
[9] Kerosene (Restriction on use and fixation of price) Order, 1993, Kerosene (Fixation of Ceiling prices) Order, 1970, Paraffin Wax (supply, Distribution and Price Fixation) Order, 1972, Light Diesel Oil (Fixation of Ceiling Price) Order, 1973, The ESSO (Acquisition of Undertaking in India) Act, 1974 ,The Oil Industry (Development) Act, 1974 and Rules 1975,Furnace Oil (Fixation of Ceiling Price and Distribution) Order, 1974, The Burmah-Shell (Acquisition of Undertaking in India) Act, 1976, The Caltex Acquisition of shares of Caltex Oil Refining (India) Limited and of the Undertakings in India Caltex (India) Limited Act, 1977, Domestic Gas Pvt, Limited and parcel Investment private Limited takeover of Management Act, 1979,Kosan Gas Acquisition Act. 1979, Lubricating Oils & Greases (Processing, Supply and Distribution) Regulation Order 1987, Liquified Petroleum Gas (Regulation of supply and Distribution) Order, 1993,Motor Spirit and High Speed Diesel (Prevention of Malpractices in Supply and Distribution) Order, 1990.
[10]http://www.petroleum.nic.in/orgacti.htm
[11]Article published by the Strategy &in 2016 titled  “2016 Oil and Gas Trends” http://www.strategyand.pwc.com/perspectives/2016-oil-and-gas-trends
[12]Article published by the Wall Street Journal dated 30th November,2016 titled  “Oil Soars on Optimism Over OPEC Deal” http://www.wsj.com/articles/opec-deal-to-curb-production-in-doubt-oil-prices-rebound-1480481281
[13]Article published by City AM dated 29th November,2016 titled  “Two-thirds of oil and gas firms in the UK have had to cut jobs as low prices continue to haunt industry” http://www.cityam.com/254550/two-thirds-oil-and-gas-firms-uk-have-had-cut-jobs-low#
[14]http://www.makeinindia.com/sector/oil-and-gas
[15]Article published on October 26, 2016in a blog called  Indian corporate law A Cyril Amarchand Blogwith the title ”Opportunities for India in Current Downtrend of Oil Prices”on the author Jatinder cheema

Opportunities for India in Current Downtrend of Oil Prices


[16]http://www.makeinindia.com/sector/oil-and-gas
[17]FDI policy issued by The Ministry of Petroleum & Natural Gas http://petroleum.nic.in/fdi.pdf
[18]http://economictimes.indiatimes.com/industry/energy/oil-gas/indias-energy-demand-will-be-double-by-2040-dharmendra-pradhan/articleshow/50266627.cms
[19]http://indiainbusiness.nic.in/newdesign/index.php?param=industryservices_landing/345/1
[20]http://www.livelaw.in/business-of-oil-an-emerging-practice-area-for-lawyers/

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1 COMMENT

  1. Yes..This is a very good area for practice. Arbitration will certainly play a crucial role in this area. Very good article.
    We are having our own Law firm of Advocates & Solicitors, Lexstreet Advisors LLP, Mumbai & Gujarat and we do look for new areas of practice. We have decided to go for GST too.

    Thanks & Regards,

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