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The Oil and Gas Sector in India: Balancing Business Policies and Public Interest by the Supreme Court of India

Document Cited in Related
DOI10.3366/gels.2021.0045
Published date01 February 2021
Date01 February 2021
Pages1-21
Author
INTRODUCTION

One of the initial and widely accepted definitions of energy law enunciated by Adrian Bradbrook1 emphasises on the allocation of rights and duties concerning exploitation of all energy resources ‘between governments and between states’. In India, the allocation of rights and duties among various authorities is laid down under the written Constitution through a ‘three-list system’ that distributes the legislative power over natural resources among central and respective state governments, or concurrently. Irrespective of the governing authorities, the expansive interpretation of Indian constitution maintains that natural resources are owned by the citizens of India and that the government (be it central or the state) manages the natural resources, as a trustee, in ‘public interest’.2 The Supreme Court of India (hereinafter referred as the Court), through a series of judgments has clarified the scope and meaning of ‘public interest’ with an aim to strike a creative balance between the business interest and public policy issues.3 Additionally, due to overlapping legislative authorities between states and the central government, the Court's pronouncements on the constitutional aspects of Oil & Gas (hereinafter referred as O&G) sector has played a crucial role in developing the current regulatory regime governing the business policy aspects as well as public interest dynamics of O&G sector.4 These pronouncements have shaped unique system of ‘check and balance’ on India's energy decision-making with an aim to involve stakeholders at every stage of the energy cycle.5

Under Indian Constitution, legislative powers over various subject matter are distributed through three list systems- Union list (List I: subject matter on which parliament can make law), State List (List II: subject matter on which state legislature makes law), and Concurrent List (List III: subject matter on which both Parliament and State can make law). In a case of a conflict between these subject matters, any Central law is considered superior and States are denuded from legislating on matters regulated by the central government (Article 246, Indian Constitution). With respect to O&G, the central government has law making powers regarding ‘Regulation and development of oilfields and mineral oil resources; petroleum and petroleum products’ (Article 246; Entry 53, List I). Accordingly, the central government has exclusive domain over allocation of O&G blocks and operational activities covering exploration, production, transmission, refining, etc. State-governments on the other hand, have legislative powers over certain natural resources that are imperative for extracting (and doing other operations relating to) O&G blocks namely: ‘Land’,6 ‘Water’,7 and ‘Gas and Gas Work’.8 Since 1950, several states in India having O&G resources in their territorial jurisdiction enacted laws on the O&G blocks. However, on every such occasions, the Court9 was categorical that if a dispute between Centre and State, over the law-making powers on O&G sector arises, the central government's power would prevail10. Be that as may, several states enacted legislations regarding other ancillary matters concerning interactions between O&G Sector and other natural resources, resulting into overlapping jurisdictions leading to protracted disputes regarding Centre-state law making powers.

Though the legislative power relating to exploration, production (and other operations) of O&G resources is within the Central Government, this power is not absolute and is subject to public interest.11 The Supreme Court while interpreting the Article 14 of Indian Constitution, Equality Before Law,12 underlines that central government must distribute natural resource keeping the interest of people in mind and should opt for democratic methods of allocation like ‘competitive bidding’13. The Court further clarified that there are no standard allocation methods for the natural resources and thus ‘disposal of natural resources should depend on the facts and circumstances of each case…’.14

In many cases which are discussed below, the Court clarified15 that the legislative intention to place O&G sector in Union list is to ensure equitable distribution of O&G resources and to protect public interest through fostering equal access. Specifically, on private parties’ exploitation of natural resources, the Court, applying the ‘Public Trust Doctrine’16 emphasized that the government must protect natural resources for the enjoyment of general public at large rather than allowing exploitation of these resources exclusive for private companies and commercial purpose. On the issue of natural gas as well, since this form of energy came to be used much later in energy evolution, the court maintained that the distribution of natural gas should be based on the principle of equality which implies just, non-arbitrary and transparent system.17

In order to regulate the distribution of O&G resources systematically, the central government, has issued two key policies (1) the New Exploration and Licensing Policy (NELP, 1997), and (2) the Hydrocarbon Exploration and Licensing Policy (HELP 2016). The main aim of both the policies is ‘to attract more investment in oil exploration and production’.18 These policies allowed 100 percent foreign direct investment in O&G sector and have ‘investor friendly’ (such as tax holidays, enhanced recovery models, and comprehensive access over hydrocarbon resources) provisions for creating ‘an enabling environment for industrial investments’.19 With this understanding, the emerging business policies that allow private parties to exploit O&G sector needs a deeper analysis on the yardstick of ‘Public Interest’.

This article explores the dynamic judicial interpretation of O&G sector in India; it further highlights the important of such interpretation in defining contours of Centre-State relationship and their sovereign powers.20 The existing literature on energy law states ‘Energy Justice’ is the most dominating factor in the current revolution of energy law. This article asserts that through reinforcing ‘public interest’ in Indian O&G sector, the Court has strengthened the distributive energy justice21 in India.

To highlight the Court's role in balancing business and public policy aspects of O&G resources, this article covers three types of cases: (1) the matters having sovereignty over O&G resources as one of its key issues; (2) the constitutional-bench determinations that have directly affected the sovereign power of Centre or States over O&G resources, and (3) the administrative matters that have ratio impacting O&G resources in India. After analysing series of judgments, we categorize the discussion in four categories: the conflict between Central and state government; balancing act between business interest and public policies; sectorial analysis of O&G sector (upstream, midstream, and downstream), and administrative & pricing matters.

 CONFLICT OVER LAW MAKING POWER BETWEEN THE CENTRE AND STATES

By placing O&G resources in Union List, the constitution-makers ensured that no state regulates the exploration and production of O&G restricting its distribution among people at large, beyond the territorial boundaries of a particular state.

Invoking its law-making powers, the Central government enacted, The Oil Fields (Regulation and Development) Act, 1948, conferring itself with the power to (1) make rules for regulating the authorization of the contract areas, including offshore and onshore, (2) determine rates of royalty payable by the operators for both onshore and offshore blocks, and (3) provide for the regulation of oilfields and for the development of mineral oil resources in public interest. Subsequently, in 1962, a legal tussle emerged on the subject matter of interpreting the States’ power over ‘Gas and Gas Work’ (List II, Entry 25)22. In this matter, the impugned statute, Oriental Gas Company Act, 1960 passed by the West Bengal State legislative assembly transferred certain powers regarding manufacturing and sale of ‘fuel gas’23 to one of the state authorities. Subsequently, the state authority issued directions regarding manufacturing and selling of ‘fuel gas’. These directions of the state authority was challenged by a private corporation involved in selling of ‘fuel gas’ on the ground that ‘manufacture and sale of fuel gas’ is under the domain of central government asserting that state government cannot make law on ‘fuel gas’ under the ‘Gas and Gas Work’.

The Court rejected the challenge determined that since ‘Gas and Gas Works’ is included in State List, fuel gas, being gaseous in its state, is exclusively a subject matter of State. On the overlapping subject entries, the Court emphasized the subject matter conflict between Centre and State should be resolved by harmonizing the overlapping effect on the subject matter rather than declaring the legislative power of state authorities over the disputed subject matter as ultra vires. Later the same year, the Court deviated from its early observation concluding that natural gas does not fall under ‘Gas and Gas Work’, Entry 25, List-II. The Court through a reference24 (under Article 143 of Indian Constitution) made by the president of India25, assessed the constitutional validity of the state of Gujarat's ‘Gujarat Gas (Regulation of Transmission, Supply and Distribution) Act, 2001’. This Act conferred Gujarat with exclusive powers to regulate matters connecting or incidental to transmission, supply, and distribution of ‘natural gas’, in the interest of public and to promote gas sector in the State. Gujarat asserted that ‘Gas and Gas Work’ under the State List includes natural gas and that it has legislative power to regulated ‘matter in gaseous state which predominantly consists of methane’. On the other hand, the Central Government contended that ‘natural gas’ exclusively falls under O&G resources.

The Court...

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