Ministry loses clause in draft oil rules to gain foreign investors

The oil ministry has revised its draft rules for oil and gas exploration, scrapping a provision that allowed the government to claim additional economic gains made by oil companies due to changes in law. The move accommodates an industry demand and seeks to attract foreign majors that have largely stayed away from India, where falling output and surging demand have pushed import dependence to 90% of consumption.

However, the government has retained the provision that allows companies to compensate themselves - by reducing their payout to the government - if a change in law diminishes their economic benefits.

In the previous draft, circulated in May, companies could seek compensation for reduction in economic benefits due to a change in law only if the impact exceeded $5 million. The ministry has now removed this threshold as well, following demands from a few companies. "Upon such a change in law, the lessee may with a prior written notice of at least 90 days, deduct such amounts which places the lessee in the same financial condition had there been no such change in law from dues payable by it to the relevant government," the revised rules draft states.

The earlier draft had also allowed the government to raise its levies or increase its share of revenue or profits to prevent companies from making additional economic gains as a result of a change in law.

The government is seeking to revamp the rules to attract foreign investors wary of India's unpredictable regulatory environment, which affects earnings in a sector already exposed to traditional geological and market risks, as well as emerging climate-related uncertainties. Global energy major ExxonMobil has been demanding protection against expropriation, neutral arbitration, and globally competitive returns that remain intact throughout the contract term. The revised rules address the issue of return stability for the industry, which was rattled by the imposition of a windfall tax on oil producers ONGC, Oil India, and Vedanta after the Ukraine war began in 2022.

The draft also permits neutral arbitration for foreign companies. For firms incorporated in India, however, the seat of arbitration will have to be New Delhi.

For global oil and gas majors, Indian basins are not among the most geologically attractive destinations. As a result, they are willing to invest in the country only if the fiscal terms are especially favourable. Some industry executives, however, argue that the revenue-sharing model adopted by India seven years ago remains unattractive to foreign majors, who prefer the profit-sharing model as it allows faster cost recovery.

The revised draft defines "change in law" as a change in taxes, duties, levies, cesses, fees, royalties, rent, charges or impositions under an Indian law payable by the lessee after the start of the petroleum lease.