Reliance Industries (RIL) won a significant victory against the government in a 20-month-long gas migration dispute yesterday. The case pertained to the Indian government’s claim of a $1.55 billion penalty against RIL and its partners, UK-based BP Plc and Canada’s Niko Resources, for allegedly syphoning gas from state-owned Oil and Natural Gas Corp’s (ONGC) block in the Krishna-Godavari (KG) basin in the Bay of Bengal.
Big victory for Reliance Industries in ONGC gas dispute as tribunal rejects govt’s claim
An international arbitration tribunal, headed by Singapore-based arbitrator Lawrence Boo, rejected the government’s claim by a majority of two votes to one. “All the contentions of the Consortium [RIL, BP & Niko] have been upheld by the majority with a finding that the Consortium was entitled to produce all gas from its contract area and all claims made by the Government of India have been rejected. The Consortium is not liable to pay any amount to the Government of India,” RIL said in a regulatory filing yesterday, adding, “The Tribunal also awarded costs of $8.3 million (Rs 56.44 crore) to be paid by the Government of India to the Consortium”.
On November 4, 2016, the oil ministry had slapped a demand of $1.47 billion on the RIL-BP-Niko consortium for “unfairly” producing natural gas belonging to ONGC. The government had claimed that the consortium had produced about 338.332 million British thermal units of gas that had seeped or migrated from adjoining ONGC’s blocks into their KG-D6 block over seven years ending March 31, 2016. The Mukesh Ambani-led behemoth is the operator of the KG-D6 block with 60 per cent interest while BP holds 30 per cent and the remaining 10 per cent is with Niko.
After deducting $71.71 million royalty paid on the gas produced and charging interest at the rate of LIBOR (London Inter-bank Offered Rate) plus 2 per cent – amounting to $149.86 million – a total demand of $1.55 billion was made on the consortium.
The government’s compensation claim for “the unjust benefit received and unfairly retained” flowed from the findings of the Justice (retd) AP Shah Committee. The one-man committee had been set up to look into the issue after ONGC first sued RIL for drawing gas that seeped from its block back in May 2015. The committee’s report, submitted in August 2016, concluded that there has been “unjust enrichment” to the contractor of the block KG-DWN-98/3 (KG-D6) – i.e. RIL and its partners – due to the production of the migrated gas from ONGC’s blocks KG-DWN-98/2 (KG-D5) and Godavari PML.
RIL, in turn, disputed the government’s demand as being based on a “misreading and misinterpretation of key elements of the PSC [Production Sharing Contract “, and claimed that such a demand was without precedent in the oil and gas industry. A week later, the consortium issued an arbitration notice.
Without wasting any time, the three-member arbitration panel was constituted last February. Boo, the head of the Singapore-based Arbitration Chambers, was appointed as president of the tribunal by its two other members -former Supreme Court Judge GS Singhvi, who was the government’s arbitrator, and RIL-appointed arbitrator former English High Court Justice Bernard Eder.
While this is a major victory for RIL – and its stock has celebrated by touching a fresh lifetime high of Rs 1202.95 apiece on the BSE in intraday trade – the company may not be able to enjoy it for long. A top government functionary told Mint that the government intends to challenge the arbitration tribunal’s decision. “We will challenge it. Whatever is the process after arbitration we will follow it,” said the source. In a similar vein, a senior ONGC executive told the daily that “In all probability, the arbitration’s decision will be challenged”.
RIL’s troubles don’t end there. The government is reportedly also pressing the company to cough up $174.9 million of additional profit petroleum after certain costs were disallowed after the output from the KG-D6 block was lower than the target.
Profit petroleum refers to profits from gas production after recovering costs that is available for sharing between the contractors and the government. Significantly, disallowing cost recovery will result in the government’s profit share rising. The cost recovery issue is reportedly being arbitrated separately.