BP, Niko set to join RIL arbitration over KG gas

New Delhi | Updated: Mar 21 2014, 05:37am hrs
BP and Canadas Niko Resources are likely to issue supplementary notices of arbitration (NoAs) to the government soon against the $1.8-billion penalty for the fall in KG D6 gas output. This follows legal advices received by the two foreign energy companies that they could otherwise be denied the higher gas price to be effective from April 1.

Reliance Industries, the lead partner in the consortium, had issued an NoA to the government two years ago and is therefore in a position to raise the gas price as per the Rangarajan formula, provided the company gives bank sureties equivalent to the resultant incremental revenue.

BP and Niko which are also partners in the consortium that operates the once-prolific gas block, however, have been left high and dry, as the government has refused to recognise them as parties to the ongoing arbitration.

Sources from the two foreign companies confirmed to FE that the supplementary NoAs could be issued in a few days. This marks a departure from their earlier stand 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. Our position has been that we are part of the notice of arbitration (NoA), since RIL has filed it on behalf of the contractor group, said an official with one of the foreign explorers, adding that with the government adamant in not recognising their stakes in the arbitration, they would now consider issuing NoAs, supplementing the one by RIL, to the government.

The explorers are in continuous dialogue with the ministry of petroleum and natural gas to ensure that the benefit of higher gas price effective April 1 is made available to all three partners.

Another option before BP and Niko is to deposit amounts equivalent to the incremental revenue from the higher gas price (if the Rangarajan formula is applied, given the current benchmark rates, the price could nearly double from $4.2/mmBtu at present) in an escrow account.

Meanwhile, the ministry has asked BP and Niko to formally communicate their stand on the issue. What is it that they (BP and Niko) want As per the government, they are not party to the arbitration. They may be examining with their lawyers. We expect them to submit a letter shortly, a senior ministry official told FE.

The government has been consistent in its view that the NoA it received was from the contractor and not parties to the PSC. Meanwhile, the Supreme Court is likely to deliver a verdict on whether to appoint a third-party arbitrator (as demanded by RIL) in addition to the arbitrators of the government and RIL.

On December 19, 2013, the Cabinet Committee on Economic Affairs approved the hike in domestic gas price but said for KGD6 gas, the revised price would be allowed, subject to the condition that RIL submit a bank guarantee. The bank guarantee would be encashed by the government in case if it is proven that RIL suppressed production. If it is found that the decline in gas output was due to geological reasons as claimed by the company, the surety would be returned to it.

Siddhartha P Saikia