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Gas Regulations

Gas Regulations. Presented by Mohit Saraf Partner Luthra & Luthra Law Offices November 20, 2001. AGENDA. INTRODUCTION EXISTING LEGAL FRAMEWORK EXISTING REGULATORY STRUCTURE & DOMINANT PLAYERS EXISTING POLICY FRAMEWORK: UPSTREAM EXISTING POLICY FRAMEWORK: DOWNSTREAM MISSING LINKS

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Gas Regulations

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  1. Gas Regulations Presented by Mohit Saraf Partner Luthra & Luthra Law Offices November 20, 2001 L&L

  2. AGENDA • INTRODUCTION • EXISTING LEGAL FRAMEWORK • EXISTING REGULATORY STRUCTURE & DOMINANT PLAYERS • EXISTING POLICY FRAMEWORK: UPSTREAM • EXISTING POLICY FRAMEWORK: DOWNSTREAM • MISSING LINKS • CENTRAL OR STATE GAS ACT? • GUJARAT GAS ACT • INTERNATIONAL EXPERIENCE • INDEPENDENT REGULATORY AUTHORITY • LNG SHIPPING POLICY • CONCLUSION L&L

  3. INTRODUCTION • Fuel Risk/Disinvestment of Fertilizer Industry • Natural Gas contributes 23% in energy consumption globally v/s 7% in India • Gap can be bridged. • Exploration of Indian Reserves • Trans-border Pipeline: Oman, Iran & Bangladesh • LNG L&L

  4. EXISTING LEGAL FRAMEWORK • Indian Petroleum Act, 1934 – Rules for import by Central Government • Oilfield (Regulatory & Development) Act, 1948 – Oilfield and development of mineral & oil resources • Petroleum and Natural Gas Rules, 1959 – Petroleum Exploration License and Mining Lease • Petroleum & Mineral, Pipelines (Acquisition of Right of User in Land) Act, 1962 – Right of User • Oil Industry (Development) Act, 1974 – Levy duty of excise on natural gas • Petroleum Rules, 1976 – Importation, Transportation and Handling L&L

  5. EXISTING REGULATORY STRUCTURE & DOMINANT PLAYERS Ministry of Petroleum & Natural Gas Directorate General of Hydrocarbon (DGH) Upstream Exploration, Conservation & Development of HC Gas Linkages Committee Allocation of Natural Gas to various Industries. Oil Industry Development Board Levies Cess, Duties on the production of Natural Gas UPSTREAM Exploration & Production - ONGC, Oil India Ltd - Pvt players • DOWNSTREAM • Gas Marketing & Transportation • - GAIL L&L

  6. EXISTING POLICY FRAMEWORK: UPSTREAM A. NEW EXPLORATION LICENSING POLICY, 1997-98 • “Level Playing Field” • All players including Government Companies would compete on equal terms for production and exploration license • Natural Gas from new discoveries would fetch market related prices. • Model production, sharing contract by MoP & NG • Infrastructure Status • Royalty: 10% on-shore & off-shore, 5% Deep Sea • A certain percentage of production allocated towards cost recovery. L&L

  7. EXISTING POLICY FRAMEWORK: UPSTREAM (Contd….) • LNG TERMINALS • Open General License (OGL) • Foreign Investment Promotion Board (FIPB) approval L&L

  8. EXISTING POLICY FRAMEWORK: DOWNSTREAM • Transmission charges • HBJ – postage stamp – Fixed charge & Inflation Indexed. 1% increase for every 10% increase in the consumer price index, with October, 1997 as the base. • Non HBJ- IRR 12% on investment. • Gas Linkage Committee • Inter-ministerial Committee – Petroleum & Natural Gas, Power, Steel, Agriculture • Function: Allocation of natural gas to end users. L&L

  9. MISSING LINKS • The present legal framework: • does not cater to ensuring “level playing field”. • Domestic Natural Gas Pricing V/s Imported Gas Pricing • 75% of the “ref. price” which is based on pre-determined basket of international fuel oil price (Ceiling & floor level); expected 2002-03 – 100% • No third party access rights (Common Carrier Principle) • a regime providing for an obligation, • to the extent that there is capacity available, • to offer the use of the grid • on non-discriminatory basis • in return for payment. L&L

  10. MISSING LINKS (Contd...) • Can a monopolistic transporter be a marketer as well? Can a monopolistic transporter be an equity investor in LNG terminals? • Era of unbundling of vertically integrated utility. • GAIL transports 92% of Natural Gas : Cross holding • In time to come, gas required to transport would be more than the space available in the existing pipeline. • Electricity Bill, 2000 – No cross holding of Transmission Companies. L&L

  11. CENTRAL OR STATE GAS ACT? Constitutional Position A.Seventh Schedule – Union List – Entry 53 Regulation & Development of “Petroleum & Petroleum Products B. Seventh Schedule – State List – Entry 25 Gas & Gas works • Inter State Pipelines (HBJ) : various Acts, & Regulators, duplication • Comparison with Electricity Sector – unified Electricity Law, Central Regulator & State Regulator • Gujarat has enacted its own Gas Act. • Reference to SC under Article 143 of the Indian Constitution L&L

  12. GUJARAT GAS ACT • Regulate the transmission of gas through pipelines in the state of Gujarat. • Provides for setting up of a regulatory authority to monitor transmission, distribution and licensing for retail distribution. • Creation of common carrier transmission facility for gas available in Cambay and Tapti basin. • Provides for formation of a nodal agency “Gujarat State Petronet Ltd. (GSPL)” as the sole ‘Operator’ of the gas network within the state. L&L

  13. INTERNATIONAL EXPERIENCE USA • When US decided to deregulate its gas industry, it went through almost a decade of intense “re-regulation” in order to establish free market. • Natural Gas prices kept artificially low by the government, were artificially raised nearly 800% in an efforts to stimulate domestic production. • Increase in prices resulted in (i) decrease in demand; (ii) addition of capacity • Reduction in demand led to: (i) Crash in prices; (ii) halted upstream investment, development and exploration • Only now, after 20 years, the US finally been able to balance supply and demand. L&L

  14. INDEPENDENT REGULATORY AUTHORITY Likely functions: • assisting Government of India in policy formulation – International Telephony • Issue: Open Access V/s Closed Access V/s Negotiated Access. • encourage private investment by providing transparent and investor friendly regulatory framework • check misuse of monopolistic power especially because this sector has characteristic of “natural monopoly • encourage expansion of gas transportation and distribution network • Ensure reliability of supply at affordable prices to consumers • promote competition and enhances efficiency • Facilitate dispute resolution L&L

  15. SHIPPING • Draft LNG Policy in place • Controversy over FOB and CIF issue • Converting vessels from foreign flag to Indian flag within one year of introduction of tonnage tax • Transfer of technology/O&M by Indian crew within 5 years of registration of vessel. L&L

  16. CONCLUSION • Not like Electricity Bill, 2000 • Urgent need for legal framework before the first LNG consignment • Needs flexible laws • Independent Regulator • TRAI L&L

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