RIL’s partners consider joining arbitration in $1.55 billion gas row

Reliance Industries said the claim of the government is based on misreading and misinterpretation of key elements of the production sharing contract


Reliance said that the claim of the government is without precedent in the oil and gas industry, anywhere in the world. Photo: AFP
Reliance said that the claim of the government is without precedent in the oil and gas industry, anywhere in the world. Photo: AFP

New Delhi: Reliance Industries Ltd’s partners are considering joining the arbitration that the Mukesh Ambani-run firm is planning to initiate against the government for slapping a $1.55 billion demand for “unfairly enriching” by producing natural gas belonging to Oil and Natural Gas Corp. Ltd (ONGC).

Calgary-based Niko Resources Ltd, which holds 10% interest in RIL-operated KG-DWN-98/3 or KG-D6 block, said the partners believe they are “not liable for the amount claimed by the government of India.”

In an emailed statement, it said it “is considering joining RIL in invoking the dispute resolution mechanism in the production sharing contract (PSC).”

The oil ministry had on 3 November issued a notice to RIL, Niko and UK’s BP plc seeking $1.47 billion for producing in the seven years ended 31 March 2016 about 338.332 million British thermal units of gas that had seeped or migrated from state-owned Oil and Natural Gas Corp.’s (ONGC) blocks into adjoining KG-D6 in Bay of Bengal.

After deducting $71.71 million royalty paid on the gas produced and adding an interest at the rate of Libor plus 2%, totalling $149.86 million, a total demand of $1.55 billion was made on RIL, BP and Niko.

RIL had on Friday stated that it “proposes to invoke the dispute resolution mechanism in the PSC and issue a notice of arbitration to the government.” “RIL remains convinced of being able to fully justify and vindicate its position that the government’s claim is not sustainable,” the company had said, adding it has worked within the boundaries of the KG-D6 block awarded to it and has complied with all applicable regulations and provisions of the PSC.

“The claim of the government is based on misreading and misinterpretation of key elements of the PSC and is without precedent in the oil and gas industry, anywhere in the world,” it had said.

BP, which holds the remaining 30% interest, said it is evaluating its options. “BP believes that the action taken is neither in line with well-established global practices nor is it in line with the PSC. We are aligned and working with our partners to evaluate our options to achieve an effective resolution,” a BP India spokesperson said.

Originally, ONGC had sued RIL for producing gas that had migrated from its blocks KG-DWN-98/2 (KG-D5) and Godavari PML in the KG basin to adjoining KG-D6 block of RIL.

Under direction of the Delhi High Court, the government had appointed a one-man committee under retired justice A P Shah to go into the issue. The panel in its report on 29 August felt that the government and not ONGC is entitled to compensation.

Subsequently, the ministry asked its upstream technical arm DGH to calculate the amount of compensation and a demand notice was slapped on RIL-BP-Niko. “The committee has concluded that the contractor’s (RIL- BP-Niko) production of migrated gas and retention of ensuing benefits amounts to unjust enrichment, since the production sharing contract (PSC)... does not permit a contractor to produce and sell migrated gas,” the 3 November demand note said.

The ministry said it had accepted the Shah committee report and consequently “it has been decided by the government to claim restitution from the contractor of the block KG-DWN- 98/3 for the unjust benefit received and unfairly retained by them”.

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