The government has slapped a notice on Reliance Industries, Royal Dutch Shell and ONGC, seeking $3 billion in a seven-year old dispute over cost recovery in Panna/Mukta and Tapti (PMT) oil and gas fields in the Arabian Sea, which it had partly won last year. The Directorate General of Hydrocarbons (DGH) sent the notice to the three companies in May-end, PTI reported citing government sources. Reliance Industries shares fell on the news, tumbling 2.03% to Rs 1,519.9 on BSE at today’s close.
Reliance Industries holds 30% equity stake in Panna/Mukta and Tapti oil and gas fields, in which Royal Dutch Shell of the UK is the operator with another 30% stake, which it took over after acquiring BG Group last year. India’s state-run Oil and Natural Gas Corp holds the remaining 40% stake in the field.
Reliance Industries and BG Group had in December 2010 initiated arbitration over a dispute about recovery of cost of operations.ONGC had not joined the arbitration. Meanwhile, the government was of the view that the profit from the fields should be calculated after deducting the prevailing tax of 33% and not the 50% rate that existed earlier.
A three-member arbitration panel headed by Singapore-based lawyer Christopher Lau upheld the government view in October last year, effectively significantly increasing the government’s share in profit petroleum from the oil produced at the PMT fields. RIL and Shell had last November challenged the award in an English court.
The government’s demand notice included interest and certain other charges over a gross amount it calculated following the October 2016 final partial award (FPA), sources in the government and the PMT joint venture said. The notice does not contain any date for making the payment or the consequences that would follow if the payment is not made, they said. Besides, they added, it was issued without waiting for the arbitration panel to give its final award after hearing rejoinders from the parties to the dispute and, in the last stage, quantifying the amount payable.
The arbitration panel last year had also upheld that the cost recovery in the contract is fixed at USD 545 million in Tapti gas field and USD 577.5 million in Panna-Mukta oil and gas field. Reliance Industries and Shell wanted that cost provision be raised by USD 365 million in Tapti and USD 62.5 million in Panna-Mukta.
Sources said the government has joined the appeal in the English court, rendering infructuous the process of the arbitration panel giving the final award and quantifying the amount payable. “The way arbitration works is that the panel first gives a FPA. It then gives time to parties to dispute to file appeals and hears them. The final award is then given. In the final stage, the amount payable is quantified,” a source said.
Since the judicial seat of the arbitration is at London and that the arbitration agreement is governed by the English law, any challenge to the partial award in effect puts on hold the arbitration tribunal’s process. So, only after the court disposes of the appeal can the arbitration tribunal work on final award and quantification of the amount payable, the source said. He further added that if the court was to rule that the partial award was not good in law, the panel may decide not to scrap its earlier award and may even be wound-up.
Neither of the companies responded to emails and calls made for comments. “Its a partial award based on which DGH has sent demand notices,” a source said. The three-member London-based arbitration panel, to which India had named former Supreme Court judge B Sundershan Reddy as its nominee, ruled in favour of the government in some of the 69 clauses of dispute that were listed by RIL-BG combine.
A few of the clauses went in favour of RIL-BG, another source said. The big-ticket issue of inclusion of certain items in the cost recovery went in favour of the government with the arbitration panel holding that RIL-BG cannot include such items. Operators are allowed to deduct all costs incurred on field operations from oil and gas produced before sharing profit with the government. Disallowing of certain items in the cost would result in higher profit petroleum for the government, he said.
The official said the government also won its case for RIL-BG applying exact tax rates and not notional rates for computing statutory dues like royalty etc. Also, it had its way on inclusion of marketing margin charged over and above the wellhead price of natural gas for calculation of royalty.