A basic study of the legal environment for starting an OMC in India

1. Legal aspects of business
Oil marketing
Team Members
Mayank Garg PGP05.076
Kriti Gupta PGP05.075
Karan Singh Chadha PGP05.074
Jyotsana Chadha PGP05.073
Joel Kuruvilla Daniel PGP05.072

2. OIL MARKETING SECTOR IN INDIA
 Increasing liberalization and privatization, resulting in
the participation from private entities, both domestic
and foreign
 Power to legislate in Oil and Natural Gas conferred to
the Union Government of India
 Oil and Gas Industry divided into 3 major sector
:Upstream, Midstream and Downstream
 Marketing deals with midstream and downstream
sectors
Major Players
PSUs
IOCL
BPCL
HPCL
OIL
Private Players
Essar Oil
Reliance Industries Ltd
Royal Dutch Shell
Joint Ventures
Essar Oil and RIL

3. RELEVANT RULES AND REGULATIONS
Petroleum and Natural Gas Regulatory Board Act, 2006
 PNG Act provides for the setting up of the Regulatory Board to regulate the refining,
processing, storage, transportation, distribution, marketing and sale of petroleum, petroleum
products and natural gas excluding production of crude oil and natural gas
 Protect the interest of consumers and entities engaged in specific activities relating to
petroleum, petroleum products and natural gas and to ensure uninterrupted and adequate
supply of these products in all parts of the country
 Provides for a legal framework for downstream gas sector regulation
 Adjudicate disputes between entities engaged in activities set out in the PNG Act and to
conduct inquiry into such entities as well

4. RELEVANT RULES AND REGULATIONS
Petroleum Act
 The Petroleum Act, 1934and the Petroleum and Natural Gas Rules, 1959 are key legislations for
the regulation of the O&NG sector
 Procedural requirements to be complied with by companies engaged in practically any other
activity associated with O&NG in India
 Regulates the import into India, transfers within, storage, production, refining and blending of
petroleum
 Uniformity in each of the individual states regarding the above activities
Petroleum Order 1999
 Regulation of supply and distribution of petroleum products-The Central Government for
uninterrupted and equitable distribution and availability of petroleum products may, by order,
require any oil marketing company to supply or cause to be supplied one or more petroleum
products from the stocks held by it at any place in India
 Regulation of retail supply of petroleum products-If the central Government is of the opinion
that a petroleum product may not be available at the retail outlet to meet the demand of the
general public, it may direct any OMC to deliver, till the original supplying company is able to
restore the supply.

5. RELEVANT RULES AND REGULATIONS
Competition Law
 The PNG Act empowers the Regulatory Board under Section 11 to ‘protect the interest of
consumers by fostering fair trade and competition’
 Competition Commission of India has also taken major steps in this regard
 Relevant Case: Investigation of CCI into the alleged cartelization of State-owned OMCs
Hydrocarbon Vision 2025
 Lays down the framework which would guide the policies relating to the hydrocarbons sector
for the next 25 years
 E&P, refining, marketing, external policy, oil security, tariff and pricing, and restructuring and
disinvestment are addressed by the Group, to ensure that an optimal mix of energy resources
are made available to the consumer at the right price

6. CORPORATE STRUCTURE
 Private Limited Company is a suitable option for entering into the oil marketing business
 Responsible for distribution, can lay its pipelines or use the existing network in accordance with
government regulations
 Operate its retail stations for fuel distribution
 The procurement of petroleum products would be through companies working in the upstream
sector, such as IOCL, HPCL etc
 The supply of the refined products can be availed by signing anMoU with the upstream
company.

7. THREATS TO A PRIVATE PLAYER
 The National Oil Companies hold about 86 % market share of India’s oil E&P, 77% of natural gas,
74% of oil refining capacity and 86% of marketing infrastructure. As such NOCs do have an edge
over new private sector entrants
 NOCs often incur huge losses on the sale of diesel, PDS kerosene and domestic LPG. The bailout
package by the Union Govt. every year, going out of taxes paid by the public, have actually been
subsidizing losses
 Private oil marketing companies do not have the luxury of being compensated for under-recoveries

8. CHOOSING A PRODUCT AND LOCATION
 Petrol and Diesel market dominated by PSU’s
 Products like lubricants and engine oil are profitably marketed by Private companies currently
 Even if the company is selling a different mix of fuel or lubricant, all regulations for petroleum
and natural gas products will apply
 Relevant Case: Ruling in the Satish Maganlal Vs The Union Govt of India underlines the
dominant role Petroleum Act plays in regulation of activities in relation to petroleum and
petroleum products
 Various components of cost as explained under Pricing can largely depend upon the location of
operation chosen by the company
 Situate its storage and distribution outlets in such a manner that overhead costs (mainly
transportation andpersonnel salaries) are reduced
 Proximity to the supplier refinery and cheaply available workforce would reduce the cost
incurred
 In this respect Andhra Pradesh and Assam which have a prospering petroleum market and PPP
support seem to be favourable locations

9. PRICING
 Prior to 2002, the marketing and pricing of petroleum products including transportation fuels,
namely, motor spirit (MS) and high-speed diesel (HSD), were controlled by the government
under a mechanism known as administered price mechanism (APM).
 PNGRB is to regulate anti-competitive behaviour like predatory pricing
 The price of fuel at the retail station comprises the product cost, central government excise and
taxes, State government taxes and operating costs and margin
 Petrol prices de-regularized while Diesel still continues to be subsidized
 The pricing decision is influenced by a number of factors including:
1) Cost of bringing the fuel to the retail site (product and distribution costs)
2) Cost of running the service station (e.g. salaries, rent, utilities)

10. REGISTRATION AND AUTHORIZATION
 Under PNGRB Act every entity desirous of the below activities and fulfilling the eligibility
conditions has to make an application to the Board for its registration under the PNGRB Act
 The Board makes the necessary enquiry and subject to certain terms and conditions, issues a
certificate of registration allowing the entity to start operations
 The company is registered in petroleum and natural gas register
 Authorization is required if an entity proposes to lay, build or expand the pipeline network for
petroleum products
 The transportation tariff for various petroleum products is also decided by the board

11. DISPUTE RESOLUTION
 Litigation in the O&NG sector is generally governed by rules of the relevant PSU which is
awarding a contract or in the form of representations before an authority under the Ministry of
PNG
 Contracts with PSUs generally have an arbitration clause
 Initiation of arbitration, there are generally provisions for mediation and conciliation before the
dispute resolution mechanism is invoked
 Relevant Case: Union of India v. Reliance Industries - the partial award passed by the Arbitral
Tribunal was challenged on the ground that subject-matter of the arbitration comprising of
payment of royalty, cess, service tax and audit issues involved questions of public policy and
therefore are non-arbitrable

12. MATERIAL CONTRACTS
Capacity Reservation Contract
 Buyer pays to reserve a certain level of capacity at the supplier
 A menu of prices for different capacity reservations provided by supplier
 Buyer signals true forecast by reserving a specific capacity level
Advance Purchase Contract
 Supplier charges special price before building capacity
 When demand is realized, price charged is different
 Buyer’s commitment to paying the special price reveals the buyer’s true forecast
Long Term Contract
 They are also termed as forward or fixed commitment contract
 Contracts specify a fixed amount of supply to be delivered at some point in the future
 Supplier and buyer agree on both price and quantity