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The principal law governing petroleum operations in Nepal is the Nepal Petroleum Act, 2040, supplemented by the Petroleum Regulation, 2041 with its 5 amendments in 2046, 2051, 2062, 2070, and 2074. This act allows the Government of Nepal to enter into agreements with international oil companies for petroleum exploration and production. The current Petroleum Act declares that all petroleum beneath the subsurface of Nepalese territory is the property of the government of Nepal. The government holds exclusive right for petroleum exploration, development, and production, either independently or through contractors.

The act grants rights and obligations to contractors involved in petroleum agreements, including:

• The right to export petroleum entitlements
• Exemption from all taxes and fees except a royalty of not less than 12.5%, an income tax of 50% of net income, annual surface rentals, and miscellaneous fee of general application
• Exemption from customs duties on imported goods
• Foreign currency facilities and the right to repatriate funds without restrictions
• The right to employ foreign nationals
• The right to use land

The Petroleum Regulation, 2041 includes a provision for a “Model Petroleum Agreement,” which covers all aspects of petroleum operations. This model agreement takes the form of a production-sharing contract with royalty. It outlines the size of exploration blocks, an exploration period of eight years divided into three phases, specifies provisions for relinquishment, work obligations, cost recovery, a production period of 30 years, crude oil valuation, petroleum allocation, non-mandatory government participation, taxation, etc. (Refer to Appendix 2).

A separate regulation, the Petroleum Industry (Income Tax) Regulation, 2041, provides for exploration, capital and operating costs, expenses, income of the petroleum industry, and income tax.

The second amendment of the Petroleum Regulations  introduces seismic options, eliminates ring-fencing of blocks, designates the Secretary of the Ministry of Industry as a signatory to the contract, and delegates the Project Chief of petroleum exploration projects as the central point for all petroleum operations in Nepal.