Crude crisis: Why India’s upstream oil dream never took off

In the midst of boiling crude prices—Brent crude hovering above $90 a barrel—the old question returns: why has the country failed to build a robust hydrocarbon exploration and production (E&P) industry? One obvious reason is the limited availability of sizeable assets beyond Bombay High, the KG Basin, and Barmer. But the issue does not end there.

India has long aspired to build a strong domestic oil and gas exploration industry to reduce its heavy dependence on imports, which currently account for nearly 85% of its crude consumption. Over the past two to three decades, successive governments have tried to attract private and foreign investment into the upstream exploration and production (E&P) sector. However, despite policy reforms and multiple licensing rounds, the industry has struggled to gain sustained momentum. Policy uncertainty, prolonged legal disputes, shifting tax structures and restrictions on pricing freedom have combined to keep investments far below potential, say company executives.

Why has policy inconsistency been a key deterrent to India's oil and gas exploration

One of the biggest deterrents has been an inconsistent policy framework. India launched the New Exploration Licensing Policy (NELP) in 1999 with the objective of opening the country’s sedimentary basins to global oil companies. The policy did manage to attract companies such as Reliance Industries , BP, Cairn Oil & Gas (now part of Vedanta Ltd ), ENI, and BHP Billiton into exploration activities. Yet the programme did not lead to a steady stream of major discoveries.

Exploration remains an inherently risky business—industry estimates suggest that only about one in five exploration blocks ultimately yields commercially viable hydrocarbon reserves. Companies often spend billions of dollars on seismic surveys, geological studies and drilling before confirming the presence of oil or gas.

Given these risks, global explorers typically seek long-term policy stability of at least 15–20 years before committing large capital investments. In India, however, the terms on return on investments and contractual frameworks have changed several times. Under NELP, the government followed a production sharing contract (PSC) model, where companies were allowed to recover their costs before sharing profits with the government. Disputes over the interpretation of cost recovery provisions soon surfaced, leading to disagreements between operators and the government.

In 2016, the government replaced the PSC framework with the Hydrocarbon Exploration and Licensing Policy (HELP), shifting to a revenue-sharing regime. While the move was intended to simplify the system and reduce disputes over cost recovery, it added another change in the contractual structure. “For investors who had committed capital under earlier rules, such shifts added to concerns about long-term policy predictability,” said a Mumbai-based executive.

What is Rangarajan formula

Pricing has been another major source of uncertainty. Domestic natural gas prices have been revised several times over the past decade. The Rangarajan formula introduced in 2014 attempted to link prices to global benchmarks, but the mechanism was modified again in 2023, when the government introduced a system linking administered gas prices to crude oil benchmarks within a floor and ceiling band. Frequent changes in pricing mechanisms make it difficult for companies to estimate long-term returns on exploration projects that typically span decades. In some cases, companies have had to take financial hits—for instance, BP wrote off substantial investments in India in 2020 after delays and regulatory uncertainties affected project economics.

Legal disputes have further dampened investor sentiment. Although most upstream contracts provide for arbitration in case of disagreements, several high-profile disputes have ended up in Indian courts, dragging on for years. One of the most prominent cases involved Reliance Industries and the government over gas production from the KG-D6 block in the Krishna-Godavari basin. Another prolonged dispute involved ONGC and Reliance over alleged migration of gas from adjoining fields. Such extended litigation has reinforced concerns among global investors about regulatory unpredictability.

Operational economics have also been affected by tax changes impacting upstream service providers. Exploration and production activities rely heavily on specialised equipment and logistics, including offshore drilling rigs, supply vessels and helicopter services. From September 2025, the GST rate on professional, technical and business services related to the exploration, mining or drilling of petroleum crude or natural gas was increased from 12% to 18%. The increase covers offshore works contracts, support vessels and drilling rig operations. Industry executives say that higher taxes on such specialised services have raised operating costs and reduced the competitiveness of exploration projects in India.

At the same time, upstream producers operate with limited marketing and pricing freedom. Oil and gas produced from certain domestic fields must be supplied to priority sectors such as fertiliser manufacturers and city gas distribution companies at administered or regulated prices. The government also retains control over the allocation of “administered price mechanism” (APM) gas and gas from smaller fields through structured auctions or fixed pricing formulas. While these mechanisms are designed to support downstream industries and ensure affordable energy supply, they limit the upside for companies that take on the high risks associated with exploration.

It is not that large corporates ignored the sector. The government sought to attract private capital, and at one point the Tata Group entered the business but failed to make a breakthrough and eventually exited by selling Tata Petrodyne. Reliance Industries entered the sector early but faced several headwinds, including pricing constraints and geological complexities in its KG Basin assets. The company later brought in BP as a partner, offering a 30% stake in the business. Vedanta entered the space through the acquisition of Cairn India, which operates the onshore oilfields in Barmer, Rajasthan.

Roadshows conducted overseas to attract foreign players initially generated interest from companies such as ExxonMobil, Shell, and Chevron. However, many of them eventually pulled back, citing regulatory complexity and uncertainties in the operating environment.

External factors are now adding fresh uncertainty to the sector. Rising geopolitical tensions in West Asia, particularly the escalating confrontation involving the US and Israel with Iran, have pushed global crude oil prices higher. Soaring crude prices increase India’s import bill and highlight the country’s vulnerability to external supply shocks. Such volatility underscores the importance of strengthening domestic exploration.