In An ‘Emergency’, Govt To Have First Claim On Oil & Gas

A pre-emptive right is defined as the legal right of a party, in this case, the government, to have the first claim on the purchase of a product, asset, or natural resource before it is offered to others.

However, the draft remains silent on defining a “national emergency”. It states: “Government of India shall be the sole judge as to what constitutes a national emergency in respect of mineral oils, and its decision in this respect shall be final.”

In light of the just-concluded phase of the Indo-Pak conflict, this move of the government assumes significance. Energy experts are seeing this pre-emption proposition as an important leverage in the hands of the government, whenever the chips are down.

In an earlier conflict in 1971, two global oil marketing firms, Burmah Shell and Esso, had crossed swords with the government over war supplies. Top officials said this was a historical lesson that they took into account while drafting the regulations.

National Interest Above All

Oil and gas are practically the lifeblood of any modern economy. In a vast country like India, the supply chains of essential and non-essential items are crucially dependent on trucks that run on oil. Similarly, kitchens in the overwhelming majority of households in the country run on natural gas.

Now, imagine a situation that the government thinks is an emergency – a natural disaster, geopolitical crisis, or a war. Then, the government will have the first right to buy all oil and natural gas produced in the country, even before it hits the open market or is shipped overseas.

Therefore, the possible repercussions can be widespread. To keep the household lights on, the kitchen fire burning, and manufacturing wheels turning, oil and natural gas are a necessity.

The government has a strategic reserve of oil and gas supplies. However, officials said, "In a war-like situation, we may need far more than the strategic reserves we have. Besides, we will also need to deny the enemy oil supplies, and appropriation of exportable surpluses is one way of doing so."

Oil & Gas Players Watching Keenly

Pre-emptive rights are, however, not a new concept in resource management. But the government proposal stipulates that oil and gas companies will be compensated at the “fair market price prevailing at the time of pre-emption.”

Therefore, the government draft, in no way, intends to hurt the economic and commercial interests of players in the sector who include the likes of the Ambani group, several PSUs, and global conglomerates.

However, confusion may arise while defining the “fair market price”. If the market is in a crisis and prices are volatile, the market price can always reach rock bottom. In that case, the oil and gas producers will lose money.

Officials said that the fair market price is likely to be an average price over a period of time, which will eliminate the dangers of aberrations in volatile resource prices. 

The oil and natural gas sector, particularly the private players, will be watching this aspect quite keenly. “The government has to play an unbiased role in ensuring a level playing field in an emergency,” said Ranjan Sinha, an oil sector expert who consults for global merchant banks that invest in this sector.

Apart from bestowing the power of definition to the government, this will also bring an environment of uncertainty among the industry players. On paper, the emergency provision can kick in without prior notice, and that has the potential to make the oil and gas companies absolutely off-balance.

A Force Majeure Escape Route for Producers

Then comes the question: What will happen if the oil and gas producers are unable to sell as much as the government wants in an emergency?

Will the producers be penalised? It appears from a plain reading that there cannot be penalties as there is a force majeure clause in the draft.

The force majeure clause acknowledges that sometimes, even the best-laid plans can go haywire. By this clause, oil and gas producers are exempted from their obligations in case of natural or man-made disaster which curtail production in their bore wells or refineries.

This includes unforeseen scenarios, including earthquakes, floods, riots, insurrections, and pandemics. If there are genuine reasons and a producer cannot deliver due to circumstances beyond his control, the law will provide relief.

What Are The Policy Implications?

The pre-emption clause is being introduced close on the heels of the Indian parliament passing the Oilfields (Regulation and Development) Amendment Bill, replacing the older Oilfields (Regulation and Development) 1948 Act.

"The overall objectives of this reform are modernising the oil and gas sector, attracting investment, and aligning it with India’s energy transition roadmap. Going by these objectives, the timing of introducing the pre-emptive clause looks logical," said Sinha.

With global energy markets volatile and geopolitical tussles aggravating everywhere, the Indian Government is making necessary adjustments to act decisively if the nation’s energy security is at risk.