Compensation for oil companies if changes in law shave off $5 mn in earnings a year

The government plans to compensate oil and gas explorers in new contracts if a future change in the law reduces their economic benefits by more than $5 million per year by adjusting its royalties, fees or revenue share from an oilfield.
The proposed rule is expected to protect explorers from government action such as windfall or retrospective tax and allow for stable economic returns as the Centre seeks to boost investments in exploration.
"In the event of a change in law subsequent to the grant of license or lease which results in an increase in costs, or reduction in net after-tax return, or otherwise reduces the economic benefit accruing to the licensee or lessee...such affected licensee or lessee shall be entitled to be placed in the same financial condition had there been no such change in law," the Directorate General of Hydrocarbons (DGH) said in its proposed petroleum and natural gas rules for the upstream sector.
Similarly, if a new law reduces costs or increases returns for the explorer, the government shall increase its levies or revenue or profit share to ensure explorers do not make extra economic gains, it said.
The new rules have been proposed following the recent amendment of the Oilfields (Regulation and Development) Act.
If a state government changes the law affecting an explorer's return, it will have to increase or decrease its levies to deal with the explorer, as per the proposed rule. But if a law passed by the Parliament affects return, the Centre will adjust its levies or revenue share to stabilise the explorer's economic benefit.
Oil and gas explorers, who already face great geological and market risks, have been demanding policy stability to prevent any government move that could end up curbing their returns on investment.
India had imposed windfall tax on producers such as
ONGC
,
Oil India
and
Vedanta
after oil prices soared following the Russian invasion of Ukraine in early 2022.

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