India's upstream policy overhaul, windfall tax removal likely to draw in global oil companies

India's move to broaden the scope of its exploration policy beyond petroleum and natural gas while abolishing a windfall tax on domestically produced crude oil will likely draw in private and foreign entities to the upstream sector, which has witnessed an uneven growth trajectory over the past decade.

Analysts and industry sources told S&P Global Commodity Insights that the two key policy changes mirror India's intent to accelerate efforts to tap both conventional and non-conventional energy opportunities to feed growing demand.

The Parliament's upper house Rajya Sabha passed Dec. 3 a bill seeking to amend the Oil Fields (Regulation and Development) Act of 1948 by expanding its scope to include shale oil, shale gas and coal bed methane, in addition to oil and gas, while proposing a series of other changes to the decades-old act -- such as freedom to pursue international arbitration in the event of disputes, as well as offering a longer lease period.

The amendment still needs to be passed in the lower house of the Parliament, the Lok Sabha, to become law.

"The amendments will be historic and will provide much-needed impetus to accelerate E&P activity in India," Ranjit Rath, the chairman and managing director at state-run Oil India Ltd., told Commodity Insights.

"Given the fact that ease of doing business is the cornerstone of these amendments, it should give a lot more confidence to international and national oil companies of the world to invest in the sector and look for collaboration opportunities," said Rath, as Oil India seeks partnerships with international oil companies to push growth.

Amendment provides clarity

For exploration leases, the amendment seeks to use the phrase "petroleum lease" instead of "mining lease," which was part of the original act. That had created ambiguity and confusion for IOCs seeking to invest in the upstream sector, sources said.

"We needed to bring this legislation here to provide a win-win confidence not only to our own operators but also to foreign investors so that they can come and do business here with a view to benefit everyone," Petroleum Minister Hardeep Singh Puri said.

"As unconventional hydrocarbon resources have been discovered and developed, the definition needed to be updated to reflect the modern understanding of the term. The proposal also seeks to assure investors that the terms of the lease shall remain stable for the entire duration of the lease and will not be altered to its disadvantage," he added.

Upstream output in India has been declining at an average annual rate of 1.1% over the past 10 years due to a natural drop in mature fields of state-run producers, delays in monetizing existing discoveries, as well as reduced number of new discoveries, analysts at Commodity Insights said, adding that overseas interest in exploration bidding rounds still remained elusive.

Efforts to revive growth

"The objective of the changes to the Oilfields Act is to create a more investor-friendly environment and enhance the global competitiveness of future oilfield contracts by addressing long-standing concerns of exploration companies," said Rahul Chauhan, upstream technical research country lead at Commodity Insights.

India in recent years has undertaken a series of upstream reforms, such as greater marketing freedom to producers. Previously, the operator of a field could not directly sell locally produced crude into the market and needed government permission to sell crude and condensates within the country. Under the new policy, the government ceased its function of allocating domestic crude and condensate output.

Upstream companies can now carve out areas for oil and gas exploration under the Open Acreage Licensing Policy that allows explorers to place an expression of interest for any area throughout the year and the areas earmarked are then put on auction.

Some of the amendments should help with various aspects of upstream activity in the country, senior industry leaders said.

"Amendments to a legacy act are aimed to create a real difference for investors, including transitioning to a simplified self-regulating regime, preference to production maximization, fiscal incentives for early and enhanced production, opening up no-go areas, marketing and pricing freedom, as well as investment in cross country pipeline infrastructure," Mannish Mahesshwari, executive chairman of Invenire Energy, said.

Windfall tax a deterrent

The government also decided to abolish a windfall tax on domestically produced crude that was in effect since July 2022. It was introduced to boost revenues at a time when crude oil prices remained at elevated levels. The tax rates were being reviewed every two weeks based on average oil prices of the immediate past fortnight.

"The windfall tax was extremely unhelpful for the oil producers that were just emerging from a difficult period of low or barely remunerable prices. In an ideal scenario, India should pursue the opposite of windfall taxes, that is aggressively expanding and incentivizing production growth by all means necessary, because in an energy transition world, the risk of stranded assets is rising," said Rajeev Lala, director for upstream companies and transactions at Commodity Insights.

Invenire's Mahesshwari added that the move to remove the windfall tax would help unlock investments in the country's untapped oil and gas reserves, most of which lie in deep waters.