Reliance, govt headed for a long battle in KG D6 dispute

Oil ministry is seeking opinion on whether it should proceed to recover the $1.55 billion fine in the Reliance-ONGC row while an arbitration remains pending


ONGC wants Reliance Industries to compensate for the ‘unfair enrichment’ of KG D6 block due to gas flow from its gas field in the neighbourhood.
ONGC wants Reliance Industries to compensate for the ‘unfair enrichment’ of KG D6 block due to gas flow from its gas field in the neighbourhood.

New Delhi: The dispute between the government and Reliance Industries Ltd (RIL) over the latter’s alleged production of gas from a Krishna Godavari basin reservoir it shares with state-owned Oil and Natural Gas Corp. Ltd (ONGC) seems headed for a protracted battle. The oil ministry has asked for views from Directorate General of Hydrocarbons (DGH), the law ministry and in-house legal experts on whether it should proceed to recover the $1.55 billion compensation demanded from RIL while an arbitration remains pending.

The oil ministry has also sought their views on the measures that could be taken to ensure that production of gas does not decline further from RIL’s KG D6 block so that any move to recover the compensation from the sales revenue of gas from the KG DWN 98/3 (KG D6) block does not suffer, a person with direct knowledge of the development said on condition of anonymity. RIL reported production of 139.1 billion cubic feet of gas from the block in 2015-16.

An email sent to RIL on Tuesday remained unanswered at the time of going to press.

The person quoted above said that the government was merely addressing all aspects of the dispute as per the law and was not being vengeful to an investor.

“We are only taking steps to protect government’s revenue interest in an objective manner as any government of the day will do in any given dispute. The provisions of the law will take its course,” said the person.

After the oil ministry raised the compensation claim on 4 November, Reliance proposed an arbitration to resolve the issue. Accordingly, the government nominated G.S. Singhvi, a former Supreme Court judge and former Competition Appellate Tribunal (Compat) chairman, as its arbitrator, Mint reported on 26 December. Singhvi, along with RIL’s nominee on the arbitration panel, Bernard Eder, a former high court judge in the UK, are now in the process of finalizing a third neutral umpire arbitrator for the panel.

The ministry raised the compensation 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 D6. The panel was appointed after the Delhi high court, on a petition from ONGC, asked the government to resolve the issue in a transparent way, keeping in mind provisions of the law and applying principles of natural justice.

The panel, which lacked technical expertise on determining whether gas flowed from ONGC’s block to RIL’s, relied upon a report by consultant DeGolyer and MacNaughton, jointly hired by the companies, to say that between 1 April 2009 and 31 March 2015, about 11 billion cubic metres (bcm) of gas migrated to KG D6 from adjacent fields, of which RIL benefited from 8.9 bcm. RIL in a 4 November statement said that its liability to pay compensation had not been established by any process known to law. “The claim of the government is based on misreading and misinterpretation of key elements of the production sharing contract and is without precedent in the oil and gas industry, anywhere in the world… 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 then.

Experts said disputes often arise on account of volatility in the energy sector as well as from multiple interpretations of the contract.

“The government has to ensure that investors get a reasonable return on their investments in the oil and gas sector compared to what they would get from other markets or from other industries. The interests of the government which owns natural resources on behalf of the people and that of investors who help the state commercialize and realise the value of it have to be balanced,” said Kalpana Jain, senior director, Deloitte in India.

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