Royalty on gas & rights of AP

The Central government which promised to support the new State of Andhra Pradesh is not only procrastinating on key commitments like special status , but is also refusing to concede the genuine demands of the State. Latest on this front is the Union Minister for Petroleum and Natural Gas, Dharmendra Pradhan, remaining non-committal on the plea by the State Chief Minister, N Chandrababu Naidu, for a share in the royalty from offshore exploration of oil and gas reserves from the Krishna Godavari basin .

The Chief Minister has already made a request to the Government of India for sharing this royalty. The Centre’s positive response would mean a huge relief to the financially constrained State of Andhra Pradesh. In fact, even the united Andhra Pradesh State government made such requests many a time, but the Centre failed to accede to the same. Late Chief Minister Y S Rajasekhara Reddy wrote several letters to the then Prime Minister Manmohan Singh, making similar such requests.

The united Andhra Pradesh State Legislative Council had also unanimously passed a resolution, urging the Centre to consider the request of the State on whose offshore abundant gas reserves exist. This resolution was proposed by the government itself and the author of this article had the privilege of drafting it. The renewed request by the Chief Minister of the residuary State of Andhra Pradesh has assumed significance in the wake of the Centre promising more than what the special status can offer.

It is rather surprising that the Centre promised to make Andhra Pradesh one of the leading hubs in the energy sector, but refuses to grant the due share for the State in the gas reserves located off its shores. The Chief Minister has made a right demand for such a share in the royalty on the lines of coal blocks to the State, from where reserves were explored. In fact, the parliamentary panel on petroleum and natural gas has also recommended that share in the royalty be given to the States.

Earlier, the Parliamentary Standing Committee on Petroleum and Natural Gas felt that Andhra Pradesh gained insignificantly from such a large gas reserve. Royalty in the oil and gas sector is referred to as share in profit petroleum. The share in profit petroleum is in the nature of non-tax revenue receivable by the Central government out of the profit generated on account of production of crude oil and natural gas from the fields awarded by the government under a production sharing contract (PSC).

The Central government becomes entitled to a share in profit if, in the event of commercial production, a project generates profit. The “regulation and development of oil fields and mineral oil resources; petroleum and petroleum products; other liquids and substances declared by Parliament by law to be dangerously inflammable” is included as entry 53 in the Union List of the Seventh Schedule to the Constitution of India.

In terms of the Articles 294-296 of the Constitution, the ownership rights on all land and mineral resources located within the territory of the State rest with the State. A licence or lease in respect of any land vested in a State government shall be granted by the State government, albeit with the prior approval of the Central government. Therefore, the royalty is payable to the State for onshore areas, and to the Centre for off-shore areas.

The demand for share in profit petroleum for the States is as old as the New Exploration and Licensing Policy (NELP) which began in 1990s. In fact, Prime Minister’s own State, Gujarat, was the first to make such a demand. The Gujarat government argued that the Central government should share at least 50 per cent of the profit petroleum under the production sharing agreements with the state government.

The 12th Finance Commission has recommended that the States have to get appropriate share in profit petroleum. But, the thinking of the Central government is that there is a distinction between the Articles 296 and 297 of the Constitution of India. As per the Article 296 of the Constitution, the States have ownership rights on all lands and minerals located within the territory of the state.

Under the Article 297, all lands, minerals and other things of value underlying the ocean within the territorial water or the continental shelf or exclusive economic zone of India vest in the Union and are held for the purpose of Union. The States like Andhra Pradesh will be losing due to the distinction between onshore and offshore resources. Even the offshore exploration and development would impose an enormous stress on the infrastructure and environment of the basin State.

The Constitution does not prohibit the Centre from sharing the royalty or profit petroleum with the States concerned even if it is offshore. Andhra Pradesh, therefore, has every right in expecting a share in profit petroleum accrued to the States. Chief Minister Chandrababu Naidu has done a right thing by placing this demand before the Centre once again. But, the Union Minister remained non-committal stating that the law of the land would be followed. But, the law can be interpreted to deny the right to Andhra Pradesh.

Therefore, the law or the regulations can be amended to accord a share in profit petroleum to the States irrespective of whether resources lie onshore or offshore. The NDA government has accepted the 14th Finance Commission’s recommendation and substantially enhanced the share of central taxes transferred to the states in the spirit of cooperative federalism. The number of centrally sponsored schemes has also been slashed.

This gives states flexibility in resource spending . In the same spirit of cooperative federalism, Narendra Modi government should agree to the plea by the NDA government and its chief minister in Andhra Pradesh. Quoting the recommendations of the 14 th finance commission, union finance minister Arun Jaitley expressed difficulty in granting special category status to the residuary state of Andhra Pradesh as per the then prime minister’s assurance to Rajyasabha during the debate over the State Reorganization Act .

Therefore finance minister has even promised to explore the alternatives that would do better for the state. Granting a share in the royalty of gas reserves would be part of such an alternative . Such a measure would not just benefit the cash starved state of Andhra Pradesh in the post bifurcation period, but even strengthen the finances of other states too. The grant of share in profit petroleum to states both in the on shore and offshore would be an initiative towards a healthy restructuring of centre – state relations.