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Business News/ Companies / News/  SC appoints Australian arbitrator for RIL gas dispute with ministry
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SC appoints Australian arbitrator for RIL gas dispute with ministry

The apex court appointed former Australian supreme court judge James Spigelman as the third presiding arbitrator

Reliance Industries wanted a third arbitrator to be appointed from a country other than India, as its other contract partners—Cayman Islands-based Niko (NECO) Ltd and London-based BP Plc—are foreign companies. Photo: Pradeep Gaur/MintPremium
Reliance Industries wanted a third arbitrator to be appointed from a country other than India, as its other contract partners—Cayman Islands-based Niko (NECO) Ltd and London-based BP Plc—are foreign companies. Photo: Pradeep Gaur/Mint

Mumbai: The Supreme Court on Monday appointed former Australian supreme court judge James Spigelman as the third presiding arbitrator in the dispute between Reliance Industries Ltd (RIL) and the petroleum ministry on demands for reimbursement of the full cost of developing its KG-D6 offshore gas field.

The move is a mini-victory for RIL.

The Indian government had appointed former Supreme Court judge V.N. Khare and RIL had appointed former Supreme Court judge S.P. Bharucha as arbitrators, a company spokesperson said in a mobile phone message.

A bench headed by justice S.S. Nijjar appointed Spigelman, former chief justice of the New South Wales supreme court.

RIL wanted a third arbitrator to be appointed from a country other than India, as its other contract partners, Cayman Islands-based Niko (NECO) Ltd and London-based BP Plc, are foreign companies. BP and Niko Resources have issued supplementary notices of arbitration to the government against the $1.8-billion penalty for the fall in the KG-D6 gas output.

India’s Directorate General of Hydrocarbons (DGH) wants to penalize RIL for a shortfall in natural gas production from the KG-D6 block off India’s east coast. On 1 August, the regulator told the oil ministry to consider reducing an amount of $1.8 billion from the costs incurred by the company.

DGH had appointed international reservoir expert P. Gopalakrishnan in 2011 to review the performance at KG-D6. Gopalakrishnan in his report blamed RIL for the fall in production and said it had not drilled as many wells as it had promised in its plan.

DGH said this was responsible for the gas output falling by more than 80% from the KG-D6 block, instead of rising to the planned 80 million metric standard cubic metres per day (mmscmd). RIL produced a total of 13.28 mmscmd of gas from the D1 and D3 gas fields and the MA oil and gas field in the KG-DWN-98/3 (or KG-D6 block) in the week ended 9 March. This includes 8.17 mmscmd from D1 and D3 and 5.11 mmscmd from MA field. The output of gas from RIL’s D1 and D3 fields has fallen from a peak of 69.43 mmscmd in March 2010.

RIL has claimed that the reserves have dropped because of previously unknown geological factors and the undrilled quota of 11 wells would not increase production.

An oil and gas sector analyst, who declined to be identified, said that Indian consultants do not have the expertise to study deep-water blocks like KG-D6 as the country has little experience in producing from such terrain. The KG-D6 field is the only significant deep-water producing asset in the country.

A KG-D6 block oversight panel headed by DGH had earlier refused to take a view on appointing renowned reservoir consultants Ryder Scott, DeGolyer and MacNaughton, Gaffney, Cline and Associates or Netherland, Sewell and Associates to validate reasons for the fall in gas output.

In November 2011, RIL started arbitration proceedings in anticipation of the government’s anticipated move to restrict the cost recoverable by the firm for developing the D6 field.

In May 2012, the government first disallowed the reimbursement of $1.05 billion towards the costs associated with developing its KG-D6 offshore gas field.

Last year, the government agreed to move to a new gas price, based on the C. Rangarajan formula, effective 1 April, which would have near doubled the gas prices from the current 4.2/million metric British thermal units (mmBtu) for the April-June quarter. The formula calls for a revision in gas prices on a quarterly basis and is indexed to global liquefied natural gas hub prices. Last week, India’s Election Commission disallowed this on account of elections that are to be held between 7 April and 12 May. The commission prohibits the announcement of any significant policy measures once the elections are announced.

Separately, RIL will continue selling gas from the KG D6 basin to fertilizer units at $4.2/mmBtu till a new gas sales and purchase agreement (GSPA) is signed between the two sides, said an official who attended a meeting between RIL and fertilizer company officials on Monday. The meeting ended inconclusively without a new GSPA signed. The current 5-year GSPA, which was to expire on 31 March, has now been extended till a new GSPA is signed, people involved in the negotiations said. RIL signed GSPAs that expired on 31 March 2014 with 16 fertilizer units for sale of gas from KG D6 in 2009.

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Published: 31 Mar 2014, 02:38 PM IST
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