RIL has been at the receiving end during the arbitration period, with the government disallowing billions of dollars of capex.
Reliance Industries (RIL) has not been and will not be unjustly enriched by any production of gas migrated from adjacent ONGC field (98/2) in the course of performing its contractual right to “produce all hydrocarbons” from the contract area (its KG Basin fields), an arbitration tribunal, headed by Singapore-based arbitrator Lawrence GS Boo, has said in a 107-page, 2:1 order.
While the award is surely a shot in the arm for RIL and partners Niko Resources and BP, it has arguably put the government and ONGC on the mat.
While an embarrassed government is likely to exercise the option of appealing against the award that rejected the government’s $1.55-billion claim against RIL — a PTI report, quoting a unnamed senior government official said on Wednesday that the oil ministry was studying the arbitration award and “would go in for an appeal” – analysts warn this could again be a misadventure.
In fact, the tribunal not only rejected the government’s claim, but also asked the government to pay RIL $8.3 million as compensation for legal costs incurred . “The claimant (RIL) is entitled to retain all benefits, including cost and profit petroleum, from the production….. in accordance with the provisions of the (production sharing contract),” the tribunal said.
The other member in the panel who went with the majority order was Bernard Eder, a former UK High court judge nominated by RIL. The government nominee, former Supreme Court justice GS Singhvi, dissented and has attached his observations with the order.
The government had claimed, quoting a report by US-based consultancy DeGolyer and MacNaughton (D&M), that 8.9 bcm of gas tapped by RIL out of the 11 bcm migrated from ONGC’s field, did not belong to the private company. It is another matter that D&M had steeply lowered reserves of gas in the RIL field to 2.9 tcf (much lower than RIL’s revised estimate of 12 tcf).
Analysts point out that had ONGC and RIL chosen to develop the fields jointly – as is mostly the case when such migration issues emerge – it could have been a win-win situation.
The tribunal shot down the government’s claim by stating that the production sharing contract “does not prohibit but permits the claimant to produce and sell gas which migrated into the sub-sea reservoir lying within the contract area from a source outside the contract area”.
RIL has been at the receiving end during the arbitration period, with the government disallowing billions of dollars of capex. The move was despite the fact that the production sharing contract (PSC) doesn’t link capex with output. The government’s argument was that RIL wasn’t producing the gas because it wanted to wait till prices rose. Now that it is clear that the reserves are much less than estimated earlier, that argument doesn’t hold either.
Regarding RIL not informing the government about a report commissioned by Niko which established connectivity between KG-D6 and neighbouring blocks of ONGC, the tribunal wrote “the alleged failure to furnish information if so proven would at best be a breach of the contractual terms of the PSC or at worst attract penal sanctions under the petroleum and natural gas rules”.
Singhvi, in his dissent note, however, argued that RIL should have sought explicit permission to produce migrated gas. “It is crystal clear that the claimant does not have any rights to the gas which has migrated from ONGC’s blocks… There can be no doubt that the retention of the benefit of migrated gas would be ‘against the fundamental principles of justice or equity and good conscience’, thereby falling squarely within the ambit of the doctrine of unjust enrichment,” Singhvi observed.