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Law may be updated for adequate oil assets compensation
The government is considering reforming the law governing the petroleum sector to protect investors against the expropriation of their assets, a measure that would directly address a key concern raised by energy giant ExxonMobil.
The oil ministry has drawn up a proposal, which would entitle investors to reasonable compensation if the government expropriated their assets, according to people familiar with the matter.
The oil ministry has completed consultations with the law, finance and other ministries on the matter, they said, adding that the proposal may soon be presented to the Cabinet. After the Cabinet’s approval, the proposal may be introduced in Parliament.
India has introduced a slew of reforms in the past decade but has struggled to attract foreign investors to the exploration and production sector, primarily because some of the key issues have been left unaddressed creating uncertainties for oil and gas investors who already face enormous challenges due to climate change.
ExxonMobil, which has spent years studying India’s geological data and expressed willingness to invest in the country, wants policies to be made more investor friendly. “India should offer globally competitive fiscals, enable those to stay intact, provide protection against expropriation, and (permit) neutral arbitration,” Monte Dobson, lead country manager-South Asia at ExxonMobil, told ET in January.
The company wants exploration contracts to provide a legal shield against any move by the government to expropriate assets. “It’s really rooted in experience,” he said, citing the company’s experience in Venezuela where it faced expropriation after a change in government.
Expropriations are rare but companies still want protection against those rare events, a person aware of the oil ministry’s thinking said. The ministry’s proposal is aimed at assuring investors that they are not going to lose money in the event of expropriation, he said.
The windfall tax imposed on domestic oil production last year after crude prices sharply rose has also acted as a dampener for investors who see it as a government effort at making return on investment uncertain.
Windfall taxes do not work in the long run, Dobson had said in the interview. “Such steps can shift investments away from a country over the long term,” he said.
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