Royalty on mineral resources: State governments must have the rights in determination of the rates

Oil royalty is a glaring example of depriving Assam of its due share of revenue

"A royalty is the landowner’s share of the gross production, which is free of the costs of production. It is probably the most important part of the lease to the landowner."

Royalty on crude oil is a major source of revenue for Assam. The State Government gets royalty on crude oil extracted in Assam by Oil India Limited (OIL) and Oil and Natural Gas Corporation (ONGC). Rule 14 (1) of the Petroleum and Gas (Amended) Rules, 2003 stipulates that royalty should be paid to the State Government by the last day of every month. Assam and Gujarat had to move the court seeking payment of the royalty due to these states by the two oil majors. OIL and ONGC had to pay a total amount of Rs. 1449.92 crore due to Assam government for the period from February 1, 2014 till March 31, 2016. The royalty due to Assam by these two public sector oil majors for the period from 2008-09 financial year till February 2018 depends on the directive to be issued by the court. The pertinent question arises here is, what led to this situation. Why Assam had to move the court to get the minimum amount due to it on its own resources? Assam government should apprise the people of Assam on the entire matter. The government should be cautious enough so that the same situation as in the previous regime does not recur. Why does the Centre intervene on the issue of oil royalty due to Assam? How can the oil majors decide on their own? Even though Assam has not got the right over its resources, the state should assert its right over land, and proclaim its independent view on the issue of realisation of royalty on crude oil and other mineral resources.

The experiences of past 68 years have clearly shown that it is not possible to strengthen the national economy of the state that is dependent on Delhi. Therefore, formulation of an independent economic programme has become extremely important for the people of Assam. Keeping in mind the need the importance of increase revenue generation, the issue of right over resources has become an important issue. People of Assam have now realized that the clause “Union government’s authority” has been incorporated in the Constitution to assert the Centre’s rights over all mineral resources beneath the surface in the state solely for the interest of incessantly plundering Assam’s natural resources. A threadbare discussion on mineral resources, more particularly on crude oil, reveals the history of depriving the states.

History of determination of royalty on crude oil:

The history of first discovery of oil in Digboi in 1889 is now 128 years old. The Assam Company which extracted crude oil during British regime, paid five per cent of the crude oil price as royalty to the then provincial government in Assam. Oil producing countries elsewhere in the world during that period earned royalty at the rate of 15 per cent to 20 per cent. Following independence, oil royalty was increased to 10 per cent in Petroleum Concession Rules, 1949. It was categorically stated that the price of crude oil produced in Assam would be fixed at the same rate as in other places in the world. Till 1953, the royalty on crude oil produced in Assam was determined on the price of crude oil announced in Oklahoma in United States. Royalty was increased to 10-59 per cent. Even though crude oil produced in Naharkatia oil fields was more akin in class to crude oil produced in the Middle East, the erstwhile Assam Oil Company which later became Oil India Limited used to accept Oklahoma crude oil prices as the basis for determining oil royalty. In 1959, the Petroleum Concession Rules, 1949 was amended and replaced with Petroleum and Natural Gas Rules, 1959 and the royalty was fixed at 10 per cent. However, the authority to determine the crude oil price was delegated to the Central government and the oil companies. This was the first impairment inflicted on Assam’s economy. The Centre fixed the oil royalty at Rs. 72 on each MT of crude. In 1962, the Centre inflicted another impairment on Assam. The Central government decided jointly with Burma Oil, Assam Oil and Oil India to determine the price of crude oil produced in Assam after deducting the transportation cost involved in transporting crude oil from Kolkata to oil refineries. The price of each MT of crude oil, accordingly was reduced to Rs. 48 from Rs. 72. Assam government got royalty of a meagre Rs. 4.80 on each MT of crude oil and the state lost revenue to tune of Rs. 1.50 crore. Instead of increasing the royalty amount to compensate for the loss in revenue, the Central government decided in Third Five-year Plan to increase crude oil production from 2.50 lakh MT to 4 lakh MT. Assam government protested and urged the Centre that as OIL had earned 50 per cent profit in joint exploration with foreign companies Assam should be paid royalty of 16 per cent. Assam government had also pointed out to the Centre that it had sought royalty four per cent less than other crude oil producing countries which were earning royalty at 20 per cent.

View of ARMCO Rig at ONGC’s Tripura Asset ( Photo courtesy : https://twitter.com/ONGC_)

Why the royalty issue was dragged to the court?

On November 27, 1983, the Centre jointly decided with OIL and ONGC that Assam would get royalty of Rs. 61 for each MT of crude oil. The rate was revised after ten years in 1993 and increased from Rs. 61 to Rs. 539.20. On April 1, 1996 the royalty on each MT of crude was increased to Rs 609.95 and it was decided that Assam would get 20 per royalty on crude oil price. In 2002, there was move by the Centre to reduce oil royalty to 12.5 per cent but a Union Cabinet meeting taken by then Prime Minister Atal Behari Vajpayee on February 4, 2003 decided to keep the royalty rate unchanged at 20 per cent.

On August 20, 2007, a decision taken by the Centre aggrieved the two oil producing states Assam and Gujarat. The Centre decided that oil royalty to be paid to Assam and Gujarat would be calculated on the price of crude oil to be determined after deducting Rs 1251 from the price of each MT of crude fixed at the time of production. It may be mentioned that that the Centre had provided subsidies to the oil refineries for production of petrol, diesel, kerosene and to recover the subsidy amount the Central government introduced the rule on August 20, 2007 of deducting Rs. 1251 to determine the price of crude for calculating oil royalty. As a result, the profit of oil refineries increased while the two oil producing states incurred losses. On May 23, 2008, the Central government decided to stick to its August 20, 2007 decision. Again, on December 22, 2009, the Centre upheld its decision. Gujarat government challenged the Centre’s decision taken in 2008, in Gujarat High Court. In the petition filed by then Gujarat Chief Minister Narendra Modi it was alleged that because of this decision by the Centre, Gujarat suffered a loss of revenue to the tune of Rs. 9,000 -Rs. 10,000 crore. Gujarat High Court issued a directive in favour of Gujarat government. In November 2013, the ONGC moved Supreme Court challenging the directive of the Gujarat High Court. Because of the Centre’s decision, Assam also suffered revenue loss. However, Gujarat government managed to get its due at the directive of Gujarat High Court. Even though Assam government failed to secure payment of the royalty amount due by the oil majors to the state because of its weak stand on the issue, based on an interim order passed by the Supreme Court in 2014, the Central government directed the two oil majors to pay the due royalty amount to Assam government. While Assam got royalty for the period from February 1, 2014 to March31, 2016, the issue of payment of royalty to Assam for the period from 2008-09 till February 2014 will depend on Supreme Court’s directive. OIL Chairman and Managing Director Utpal Bora handed over a cheque of Rs. 1149.28 crore and then ONGC CMD Dinesh K. Sarraf handed over a cheque of Rs. 300.64 crore to Assam Chief Minister Sarbananda Sonowal in presence of Union Petroleum Minister Dharmendra Pradhan in New Delhi on August 4, 2016. The most important issue for Assam is that payment of royalty by OIL and ONGC to the tune of Rs. 13,041 crores were pending for the period from April 2008 till July 2013. Following payment of Rs. 1449.88 Crore by the oil majors to the state government, arrear oil royalty for the period to the tune of Rs. 11591.71 Crore is now due to Assam, payment of which will now depend on the verdict to be given by the Supreme Court.

For the 1st time since inception (1964) ONGC DS-Jorhat spuds 8th well of the Year by Q3 ( 2017-18); creates History ( Photo courtesy : http://https://twitter.com/ONGC )

We propose that Assam government should take a consistent decision in the matter of royalty on crude oil and other mineral resources. Steps should be taken to ensure that in addition to the Central government and oil establishments, Assam government also has the authority in determination of royalty. It should be ensured that the central government cannot take any decision on royalty without the consent of the Assam government as it is the state government which possess the rights over land. The state government must have the right in determining the royalty rates.

Adip Kumar Phukan

( Adip Kumar Phukan is a veteran journalist, political commentator, economic analyst, columnist and a writer based in Guwahati. This article was first published in December, 2017 issue of Notun Samay, a monthly news magazine on economy published from Guwahati of which Mr Phukan is the Chief Editor. He can be contacted at 9707024612. Views expressed are the author’s own. )