India: Sovereign Rights over Natural Resources

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In natural gas sector in India, the government is promoting exploration and usage of natural gas to meet the growing energy demands of the country. Government formulated NELP in 1999 to provide a level playing field to all to compete on same fiscal and contract terms as applicable to National Oil Companies (NOCs). The main objective was to attract significant risk capital from Indian and Foreign companies, state-of-the-art technologies, new geological concepts and best management practices to explore and produce oil and gas resources in the country to meet the increasing demand for oil and gas.

Under the product sharing contracts, the government allowed the contractors the freedom to market natural gas subject to approval from the Government. It also recognizes the government’s role in directing usage. In this role, the government formulated the Gas Utilization Policy where it envisaged priorities for various sectors with existing consumers (with latent demand) getting preference over greenfield projects.

The Government guidelines over the rights of national asset were completely disregarded at the time of demerger of RNRL from RIL. Ambani brothers, without gaining Government approval, appropriated the national property i.e. natural gas, to solve family disputes. The MOU, which was signed by brothers in 2005, carries the contentious agreement between brothers to divide the KGD6 Basin gas of the country between them.

Indian private players’ intentions to share national property raise a question who owns the mineral in a country. The issue of ownership and control of the resource has been a sore point in many counties. Countries such as China and Brazil, where minerals and hydrocarbons are of paramount importance due to their limited availability, have retained the ownership of their resources with the Government and do not allow individuals or companies to claim on resources. To govern the exploration and usage of resources, these countries have created legislation which devolve ownership of these resources from the hands of citizens and place them in the care of the government. This has been beneficial for international business purposes, especially in the petroleum sector and has ensured stable revenue which is then distributed amongst the individual states in the country.

On the other hand, states like the USA recognize both state and individual ownership. Even United Nations General Assembly (UNGA) Resolution1803 of 1962 to the Rio Declaration on environment and development of 1992; has ownership of resources as a sovereign right of a nation. UNGA 1803 of 1962 in Article 1 provides that “the right of the peoples and nations to the permanent sovereignty over their natural wealth and resources must be exercised in the interest of their national development and of the well being of the people of the state concerned”. What is important to note is that these conventions did not specify the prohibition of ownership of resources by individuals/citizens; rather they stressed the protection of the individual’s interest.

It is therefore left to the national laws of each country to develop its own system of ownership. In the USA, there are 3 main theories on ownership of oil; the absolute ownership theory (Texas Theory), the qualified interest theory (Pennsylvanian theory) and the Oklahoma theory. Countries like Nigeria, however, have only one system which is the National ownership theory, since they do not recognize ownership by citizens or individuals.

United State Minerals Ownership Theory

  • The Absolute Ownership Theory

This theory was established in Texas, which is the largest oil producing state in the USA. Under the Absolute Ownership Theory, owner of a piece of land owns the oil beneath it.

The flaws of this theory is that an individual can not claim ownership on hydro carbon as it has a fugacious and vagrant nature and straddles between different lands zones. This is why in recent days, states and international oil companies have developed agreements such as the joint development and unitization to put to rest the issue ownership where such hydrocarbon straddles between zones. Another flaw of the theory is that it did not take into consideration that a reasonable percentage of the world’s petroleum deposit is found in the continental shelves or Exclusive Economic Zones (EEZ) of states. Whoever then owns such deposit as an individual can not lay claim ownership of these areas other than the states as contained in the 1982 United Nations Convention of the Law of the Sea (UNCLOS)5. One can only say the theory is politically convenient, particularly in the administration of petroleum revenue.

  • The Qualified Ownership Theory

This Pennsylvanian theory states that the interest of the individual is a qualified one and subject to his ability to reduce hydrocarbon to captivity. The flaw here is that the vibrant nature of hydrocarbon is equated with wildness.

  • The Non-Ownership Theory (Oklahoma Theory)

This theory originated from Oklahoma. It contends that petroleum is incapable of ownership either absolutely or in a qualified manner. It will be too naïve to conclude that petroleum is incapable of ownership because it occurs in a fugacious nature. The reality is that presently, oil is capable of ownership; what is in contention in this paper is if ownership by the government of a nation is more efficient than individual ownership, considering the adverse consequence of the latter.

The National Ownership Theory

This is widely present theory in countries such as Nigeria, South Africa, Bolivia, Venezuela and China. It advocates the vesting of complete and total ownership of petroleum resources in the government of the state. It is an effective theory in terms of attracting foreign direct investment for countries.

The South African mineral law provides that “Mineral resources are the common heritage of all the peoples of South Africa and the State is the custodian thereof for the benefit of all South Africans”. While the Chinese mineral law provides “Mineral resources shall be owned by the State. The State’s ownership shall be exercised by the State Council…” They all reflect that control of the minerals is solely in the hands of the government.

Practice Followed in India

Product Sharing Contract in India was designed considering national ownership theory. The special agreement need to be signed between the Government of India and contractors mainly for petroleum exploration and development in the country.

According to Article 297 stated in Indian Constitution, the Union Government has full control over mineral and oil resources underlying the ocean within the territorial waters, or the continental shelf, or the exclusive economic zone of the country.

Further, the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976 (80 of 1976) also provides for the grant of a license by the Government to explore and exploit the resources of the continental shelf and exclusive economic zone. According to the act, any petroleum operation should be carried out only under the license granted by the Central Government The Government has the power to cancel or modify the terms of conditions of prospecting licenses, mining leases and similar agreements. On behalf of the Government, Directorate of General of Hydrocarbons exercises the rights and powers to explore, develop, process, market petroleum and also to enter into petroleum agreements with company for these purposes.

Conclusion

It is important to note that all the emerging economics which have abundant resources (like Brazil and China) have adopted National Ownership Theory for the larger interest of the nation and carries out petroleum exploration and development based on the national laws of each country. Also role of the government is to guide market development and work towards with a view to balance interests of consumers and producers to foster investment, develop infrastructure and promote market penetration.

The MOU which was signed between Ambani brothers in 2005 carries the contentious agreement between brothers to divide the KG D-6 gas of the country between them without following PSC guidelines. At the time of MOU they also overlook the Government guidelines as if these private players are operating in pure market capitalism where Government doesn’t set rules and regulations for business owners; this would make the economy driven by individuals profit motives resulting in exploitation of resources for individuals gains.

Therefore, the Government should not allow any private players to appropriate the gas for their gains. It should protect its rights in the interest of the nation.

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