BP & Niko cannot be party to arbitration

Written by Siddhartha P Saikia | New Delhi | Updated: Aug 4 2014, 05:53am hrs
Stung by Reliance Industries alleged bid to influence the foreign third arbitrator appointed by the Supreme Court in the KG-D6 block case, the government is set to approach the court with a plea that the relevant arbitration be done strictly within the country sans a foreign umpire.

Armed with a law ministry opinion conveyed to it recently, the petroleum ministry will also take the firm stand that RILs foreign partners, BP and Niko, should not be made a party to the arbitration, which was initiated by the Indian company, sources familiar with the matter told FE.

The governments move would escalate the conflict between it and RIL over the alleged suppression of gas production at the once-prolific KG-D6 block by the company, leader of the consortium operating the asset. RIL has long said the decline in output was for geological reasons and has pitched for a hike in domestic gas price.

The government, on the other hand, slapped penalty notices of $2.3 billion on RIL for the production being below what was promised in the field development plan.

As for the two foreign oil majors, the development would add to the uncertainty over whether they would be eligible for the new gas price which the government is likely to come up with after an ongoing review of entire aspects of domestic gas pricing is over.

The sources said that the petroleum ministry is preparing a strong case to show that RIL has tried to persuade the former justice of the High Court of Australia, Michael McHugh, who the apex court had appointed as third arbitrator on April 29, to continue with the case, even after McHugh declined to assume the role. They added that this private company breached norms by directly communicating with the third arbitrator.

On May 29, McHugh declined to be the presiding arbitrator as directed by the Supreme Court, citing prior commitments. However, on the same day, King & Spalding, London-based legal firm representing RIL, wrote to McHugh to reconsider his decision. It appears that McHugh has been persuaded by RIL lawyer to continue as the presiding arbitrator, not just by the request of King & Spalding, but perhaps also through other informal communications, which government or its lawyers have not been intimated about, a source said.

Finally on July 10, McHugh had informed Indias apex court about his withdrawal from the case.

According to the government, Article 33.6 of the production sharing contract (PSC) does not provide for appointment of foreign national as a third arbitrator. Also, Article 33.9 of the PSC provides that the arbitration is governed by the Indian law and the seat of the arbitration ought to be New Delhi, and therefore, even the procedural law would also be the Indian law.

However, it may be recalled that the Supreme Court while appointing a foreign arbitrator in the case, had rejected the governments plea with regard to the neutrality, impartiality and independence of the

third arbitrator. Justice S S Nijjar in his March 31 judgment had rejected the petroleum ministrys plea that only an Indian National can be appointed as the third arbitrator.

It remains to be seen if the Supreme Court would allow the petroleum ministrys new plea for appointing an Indian as umpire arbitrator. RIL had named former Chief Justice S P Bharucha as its arbitrator while the government appointed former Chief Justice V N Khare as its arbitrator.

On July 25, RIL moved Supreme Court for appointment of an arbitrator in place of former Australian judge. Seeking modification of the apex courts earlier order, RIL in its fresh application stated that the conduct of the government was in brazen violation of the spirit of an arbitration. The fact that the government is acting in this fashion can only be considered to be unfortunate. It further blamed the oil ministry for provoking McHugh not to accept the appointment.

The law ministry has now opined that BP and Niko cannot be party to the arbitration for various reasons, including the arbitration notice having been sent originally by RIL alone. UK-based BP and Canada-based Niko did not issue the arbitration notice in which Section 11 application before the Supreme Court was moved, but subsequently, in March, the duo too sent notices. The foreign companies were left high and dry when the previous UPA government had refused to recognise them as parties to the ongoing arbitration. BP and Niko have since maintained that the arbitration initiated by RIL was as the contractor for KG-D6 block and as partners to the Indian company in the production-sharing contract, they were ipso facto represented by RIL.

The government wants RIL to deposit the difference between the proceeds of gas sales at the current price of $4.2/mmBtu and the likely new (higher) price into an escrow account, supported by bank guarantee, till the arbitration award is finalised. The idea is that if RIL wins the arbitration, it can realise this fund and if it loses, the proceeds go to the government.