Why India’s new Petroleum and Natural Gas Rules matter

India has introduced new Petroleum and Natural Gas (PNG) Rules that could have significant implications for the oil and gas sector, and the country's economy as a whole.

To understand the need for these changes, consider the story of Ashoknagar, a small town in West Bengal. In 2018, ONGC discovered commercially viable crude oil reserves there. Test production occurred between 2020 and 2022, and further discoveries were made nearby. That said, the reality is a bit more complicated. commercial oil extraction has yet to begin.

The delay stemmed from a dispute between ONGC and the West Bengal government over the stamp duty applicable to the petroleum mining lease. The core issue was how to determine the “value of the lease” for stamp duty calculation.

Upstream oil businesses need a petroleum mining lease to explore, develop, produce, and sell oil and gas. If the oilfield is within a state, the state government grants the lease. Otherwise, the Central government does. The lease grants exclusive rights to the company. The company pays an annual lease rent, and royalty based on actual oil production and sales. The Oilfields (Regulation and Development) Act, 1948, governs this process. Stamp duty, a one-time tax paid when the lease deed is executed, is calculated as a percentage of the lease’s “value.”

In Ashoknagar, the PNG Rules of 1959 lacked a clear definition of “value of the lease.” This ambiguity caused years of delays. ONGC invested over ₹1,000 crore in exploration and appraisal, but production never commenced. The state missed out on potential revenue. The Ashoknagar field could produce oil worth around ₹45,000 crore, generating roughly ₹4,500 crore in revenue for West Bengal over its lifespan. The delay also impacted job creation and local services.

At a national level, India imports about 88% of its crude oil needs. While Ashoknagar wouldn't have eliminated this dependence, it could have reduced it. The old PNG rules held back India’s oil and gas sector for years, contributing to a decline in domestic crude oil output from 34 million metric tonnes (MMT) in 2019 to around 29 MMT in 2024. In FY25, ONGC's crude production fell by about 3%, despite capital expenditure more than doubling to ₹62,000 crore. India spent roughly $161 billion importing crude oil and petroleum products in FY25, about 3% more than the previous year. A ₹1 depreciation can add ₹8,000–10,000 crore to the annual import bill.

Furthermore, the complex regulatory environment deterred foreign investment. Although India allowed 100% foreign direct investment (FDI) in oil and gas, the need for multiple approvals often took years. The Administered Price Mechanism, which capped fuel prices, added to the problem. State-owned firms were compensated for losses, but private and foreign players were not. Temporary lease terms that could be changed by the government also discouraged long-term investment.

The original rules were created for an India that prioritized state control over strategic sectors due to historical exploitation. That said, the reality is a bit more complicated. these rules became counterproductive as India opened up to foreign investment.

Last week, the government amended the Oilfields (Regulation and Development) Act and notified the new PNG Rules, 2025, to address these issues. The new rules clarify the definition of “value of the lease,” stating that it is the total lease rent payable over the entire lease term. Royalty is treated separately. The rules also set a 180-day time limit for application approvals. If no decision is made within this period for leases under the Centre, the application is deemed approved. If the lease falls under a state, it's deemed rejected.

Additionally, a single petroleum lease now covers exploration, development, production, and related activities. Lease periods have been extended to 30 years, with extensions possible. Companies must now report unused pipeline and facility capacity annually and make it available to others on fair terms. The new rules also allow foreign investors to settle disputes through international arbitration.

Petroleum and Natural Gas Minister Hardeep Singh Puri recently stated that oil production in Ashoknagar could start within weeks. While the new PNG Rules won't solve all problems instantly, they remove significant regulatory obstacles and represent a step forward.