India is considering policy level changes to allow domestic oil companies to sell products to affiliates

The Indian oil ministry is mulling over a policy amendment to allow energy companies sell oil and gas to their affiliates, Indian daily Economic Times reported, citing sources close to the ministry.

The amendment was prompted by the Directorate General of Hydrocarbons (DGH) – the country’s energy market watchdog – which wrote to the ministry noting that the definition of “arm’s length”, the principle treating oil and gas contracts in India and prescribing that the buyer and the seller must be entities independent of each other, contradicts a stipulation in the new Indian revenue sharing contract.

The contract, recently approved, allows for the sale of oil and gas between a parent company and an affiliate. This is the part that prompted the DGH to alert the ministry to the contradiction.

Now, the Economic Times newspaper reports, the ministry is seeking a way to redefine the universal arm’s length principle in such a way as to accommodate the contradictory part of the new revenue sharing contract.

The issue is topical as India seeks to boost its local oil and gas production to reduce its reliance on imports. Over the past few months, rising oil prices and a weakening Indian currency have already created a perfect storm for India, where oil demand growth has been surging, but the higher oil prices are increasing the country’s spending on crude oil imports, which account for 80 per cent of consumption.

Two years ago, the Indian government approved a new Hydrocarbon Exploration and Licensing Policy aimed at doubling the import-reliant country’s oil and gas production over the next five years.

Last month, the DGH awarded 55 undeveloped oil and gas exploration blocks to local companies. These represented the first round of the Open Acreage Licensing Policy that sought to open undeveloped deposits to explorers.

India produces very small quantities of its own oil and gas, importing moe than 80 percent of its needs, opening itself to the vagaries of sudden changes in international energy prices.

Shekhar Ghosh is consulting editor, Indoasiancommodities.com. He has edited and written for publications like Business India, Business Standard, Business Today, Outlook and many other international publications. He can be reached at shekhar.ghosh@indoasiancommodities.in.

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