Govt softens stand in case against Reliance Industries

Move set to signal certainty of the regulatory regime governing resolution of disputes in the natural resources sector

Photo: Reuters
Photo: Reuters

The oil ministry has decided not to take any coercive action to recover the $1.55 billion it has demanded from Reliance Industries Ltd (RIL) as compensation for producing gas allegedly at the expense of state-owned Oil and Natural Gas Corp. (ONGC) from a shared offshore reservoir while the dispute remains under arbitration, an official aware of the development said.

Keeping the demand, raised on 4 November, in abeyance is a departure from the approach the government had taken in several past disputes that have gone into arbitration, including with RIL and Cairn India Ltd. The development will avert an immediate financial impact on RIL, one of the largest private investors in the oil and gas sector.

The move is also set to signal certainty of the regulatory regime governing resolution of disputes in the natural resources sector, and is in line with the Modi administration’s intent to improve the country’s track record on enforcing commercial contracts, an indicator in World Bank’s ease of doing business ranking.

The oil ministry has been campaigning for investments into hydrocarbon exploration and has set a target for reducing oil and gas import dependence by 10 percentage points to 67% by 2022.

The ministry raised the demand after the Justice A.P. Shah panel, which looked into ONGC’s claim of gas flow between the neighbouring fields of the two companies, recommended on 31 August that RIL should compensate for the “unfair enrichment” it had by way of retaining the gains of gas flow into its block KG-DWN-98/3 (KG D6).

“Recovery of the compensation will be kept in abeyance. There is little sanctity in arbitration if coercive measures are taken simultaneously,” a person briefed about the oil ministry’s position said on condition of anonymity.

An email sent to RIL on Thursday remained unanswered at the time of publishing.

This contrasts with the approach the government had taken earlier. When gas price was raised by 33% to $5.61 per million British thermal unit on 18 October 2014, the government insisted that since an arbitration with Reliance was pending since November 2011 on recovery of cost of gas production, the incremental revenue from price hike should be kept in an account maintained by GAIL (India) Ltd till legal proceedings are over. That arbitration is still on.

Also, the government had in May 2014 attached the residual stake of 10% that UK’s Cairn Energy Plc holds in Cairn India Ltd in relation to a tax dispute arising from the controversial 2012 retrospective amendment to the Income Tax Act. That dispute too is in arbitration.

Dispute resolution is one area the government is working on to improve investor interest in the country’s sedimentary basins, the entire unexplored part of which will be opened up for bids next year under a new open acreage policy. Director General of Hydrocarbons Atanu Chakraborty told Mint in an interview published on 13 October that the upstream regulator was planning to set up a portal to facilitate communication among stakeholders in the industry that will help in reducing disputes. At the moment, there is no such mechanism for companies operating different blocks which are adjacent to one another.

According to Kalpana Jain, senior director, Deloitte in India, prolonged disputes do not augur well for the natural resources sector considering the high risk and capital-intensive nature of the industry.

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