Supreme Court gives Reliance Industries a third arbitrator, 28 months after it first filed case

Written by fe Bureau | New Delhi | Updated: Apr 1 2014, 18:21pm hrs
RILA bench headed by justice SS Nijjar appointed the third arbitrator 'to avoid any confusion'. Reuters
Nearly three years after the upstream oil regulator cast doubts on Reliance Industries' (RIL) KG-D6 production pattern and about two-and-half years after the company pre-emptively initiated arbitration against the government for contemplating penalties on it for alleged underproduction, the company got some relief on Monday with the SC naming former Australian apex court chief justice James Spigelman as presiding foreign arbitrator.

A bench headed by justice SS Nijjar appointed the third arbitrator to avoid any confusion. The dispute is over denial of full cost of KG-D6 development to the company. RIL attributes the output fall to geological reasons.

The company had, in August 2013, moved SC, seeking an order to name an umpire arbitrator.

This is in addition to the two arbitrators appointed earlier one by RIL and another by the government.

At a time the promised gas price hike is mired in uncertainty (an over-eager Election Commission has deferred the hike that was due to be effective from Tuesday) and with penalty notices amounting to $1.8 billion having already been slapped on RIL, Monday's court order is expected to impart momentum to the dispute resolution, crucial for not only the country's energy sector but for the nation and its people, going by the government's own admission.

Even by the Cabinet decision approving the formula that would have nearly doubled the gas price from $4.2/mmBtu now benefiting public sector ONGC along with others, RIL was required to furnish bank guarantees equivalent to the incremental revenue from the price increase, given the pendency of the dispute. As for RIL's two partners in KGD6 venture, BP and Niko Resources, there remains the extra ambiguity over their eligibility to benefit from the proposed price increase, for their being parties to the arbitration (both the foreign companies last week issued supplementary notices of arbitration to the government).

RIL wanted the third presiding arbitrator to be appointed from a country other than India, UK or Canada, as its contract partners are foreign companies. It had requested the apex court to appoint the umpire arbitrator as the two arbitrators former chief justices SP Bharucha, (nominated by RIL in November 2011) and VN Khare (nominated by the oil ministry in June 2012) failed to agree on a third and presiding arbitrator.

Senior counsel Harish Salve, appearing for RIL, had contended that considering that its consortium partners are foreign companies, who are directly affected by any determination in the present case, it would be appropriate if a third arbitrator is appointed from a country other than India, UK or Canada. It is submitted that there is no paucity of names of eminent arbitrators from other jurisdictions from countries such as the USA, Singapore and Australia, which names are available from the various reputed international arbitration institutions... One way of doing this is to follow the list procedure as set out in the UNCITRAL Rules.

RIL's problems are, however, far from over as the Supreme Court is also hearing a public interest litigation by parliamentarian Gurudas Dasgupta and a non-government organisation led by Prashant Bhushan seeking scrapping of the licence for KG D6 and status quo in gas price.

Spigelman, 68, is a former chief justice of New South Wales Supreme Court and currently chairman of the Australian Broadcasting Commission (ABC).

While RIL holds 60% interest in KGD6, BP holds 30% and Niko holds the remaining 10%. However, the petroleum ministry had opposed the plea for appointing a presiding arbitrator from a foreign country, saying that the matter is within the exclusive domain of the arbitral tribunal in India.

It had sought appointment of a former Supreme Court judge as the umpire arbitrator.

Before slapping penalty notices of $1.005 billion on RIL for under-production in May 2012, former petroleum minister Jaipal Reddy himself visited KGD6 to ascertain the veracity of the claim of geological complexities as the reason for fall in output. M Veerappa Moily, who took over the reins from Reddy in October 2012, slapped a second penalty notice of $800 million for production suppression in 2012-13.

On November 29, 2011, after initiating the arbitration process, RIL said the production sharing contract contains no provision which entitles the government to restrict the costs recovered by the company by reference to factors such as the level of production or the extent to which field facilities are utilised.

In 2006, the explorers and government decided a plan that projected gas output of 80 mmscmd by April 2012. However, output started dwindling after 2010 and currently hovering around 13 mmscmd. RIL has created infrastructure to handle gas output of 80 mmscmd, part of which is idle now. Also, there is difference of opinion over escalation of increase in expenditure in D1 and D3 fields to $8.8 billion from initial $2.4 billion.

The timelines required by the arbitrators to solve the dispute is not immediately known.