The Indian government has undertaken a series of progressive measures in the last decade to attract private sector investment in the core sectors of the economy, including mining, oil and gas, and infrastructure. This has led to more private companies entering the industry, contributing capital, advanced and sustainable exploration techniques, and expertise that have unlocked the potential of India’s vast natural resources.
Recently, the government has carried out amendments to MMDR Act and launched National Critical Mineral Mission in a bid to further raise domestic production of metals and minerals. However, a lot more is needed to be done in the coming years to liberalise the natural resources sector to cut down India’s import dependence. India’s import bill for FY25 was pegged at a staggering USD$ 915 billion with natural resources alone accounting for USD$ 360 billion.
Besides big-ticket reforms, there is a pressing need to ensure policy stability and continuity. Abrupt changes in policy direction end up hurting investment commitments that typically run into billions of dollars. The KG-D6/Krishna-Godavari gas dispute involving Reliance Industries, British Petroleum, and the Government of India, various litigations by Tata Steel over mining dues and government demands and Korea’s Posco Steel’s decision to scrap setting up steel plant in India are some such examples.
A recent development concerns the government’s move to not accept the extension proposal regarding the production sharing contract (PSC) involving the CB-OS2 block.
The CB-OS/2 Block is an offshore block in the west coast of India and consists of Lakhsmi and Gauri fields. These fields are currently producing 3,400 barrels of oil per day and 340,000 SCMD of gas. The government recently conveyed that application for extension of PSC filed by state-owned ONGC, Vedanta Cairn and Invenire has not been accepted. While ONGC owns 50% stake in the block, Vedanta and Invenire hold 40% and 10%, respectively. ONGC has now been directed to operate the block.
The PSC for CB-OS/2 block was signed on August 30, 1998, and the contract expired on June 30, 2023. The Vedanta-led consortium continued to operate the block during the pendency of its application for extension of the PSC. The move is also surprising since the government had extended the contracts for Vedanta Cairn’s two other blocks – a 10-year PSC extension was approved for the Rajasthan block RJ-ON-90/1 till May 14, 2030, and a similar period was given for the PKGM-1 block, more commonly known as the Ravva field, till October 27, 2029.
While the block contributes less than 0.3 percent to the overall EBITDA of Vedanta and thus has no material impact on the company’s earnings, it does signal unexpected changes in the government’s stance that is unwarranted and may end up hurting future investment flows in India’s energy sector.
This again risks reversing the reform speed, especially when the proposed PNG Rules 2025 promise stability clauses to protect investors from adverse legal or fiscal changes. Private players may question whether the government will honour future lease extensions, especially because in this case, the lease has been given back to a PSU. Questions may also arise on stabilization protections, or whether these could be overridden in practice.
Companies facing protracted litigation, retrospective demands, or abrupt policy shifts may hesitate to commit large capital, which can slow project execution and technological infusion. This, in turn, impacts domestic resource development, weakening India’s competitiveness, and increasing dependence on imports.
This (rejection of extension of PSC) should not be seen in isolation. Such events are closely tracked by global exploration majors and other key investors, who are looking at India as a potential investment destination. Such decisions may force a re-think, particularly at a time when India urgently needs big oil and gas finds to press the pedal on self-reliance.
It is thus critical for the government and policy makers to plug such aberrations and address industry and investor concerns in a swift and comprehensive manner.
