Govt to appeal against panel rejecting its USD 1.5 bn claim against Reliance

New Delhi: The Law Ministry has held that an international arbitration panel's ruling rejecting the government's demand for USD 1.5 billion from Reliance Industries and its partners for allegedly siphoning gas from fields of ONGC is a fit case for appeal, sources in know of the development said.

The Oil Ministry had sought an opinion of the Law Ministry on the July arbitration award going against the government. Sources said the Law Ministry was of the opinion that the majority arbitration award was in violation of the terms and conditions of the production sharing contract (PSC), lacked required reason and was against the public good and public interest.

A three-member international arbitration tribunal by a majority vote in July held that Reliance could contractually produce and sell any gas that might have migrated from adjoining fields of state-owned Oil and Natural Gas Corp (ONGC) into its area and that it was not obligated to seek prior permission of the government for doing so.

Sources said the Law Ministry was of the opinion that the tribunal had ignored the contractual obligation and statutory duty on part of operators to furnish information to the government about any migration of gas. It felt the award is a fit case for a challenge in the High Court, they said.

With one member dissenting, the arbitration panel had held that the production sharing contract for eastern offshore KG-D6 fields "does not prohibit but permits" Reliance "to produce and sell gas which migrated into the sub-sea reservoir lying within (its) Contract Area from a source outside the Contract Area".

And so "there is no question of 'unjust enrichment'," it had held. Reliance "has not been and will not be unjustly enriched by any production of migrated gas as a result of Petroleum Operations conducted within its Contract Area". In his dissent note, G S Singhvi said that the PSC prohibits Reliance and its partners from producing and selling gas which migrated into their sub-sea reservoir from the contract area of ONGC.

He held that Reliance "unjustly enriched itself by the sale of migrated gas, which did not belong to it and, therefore, it is bound to restore those benefits to the Government".

In the 107-page order, the arbitration tribunal headed by Singapore-based arbitrator Lawrence G S Boo stated that although Reliance had always accepted that there could be channel continuity between its KG-D6 block and ONGC's adjoining KG-D5 and IG block, its conduct is consistent with its position that 'reservoir connectivity' has not been proven.

Bernard Eder, a former UK High court judge nominated by Reliance, was the other judge who concurred with Boo. Singhvi, a former Supreme Court judge and the government nominee on the panel, wrote a long dissent note. "The Claimant (Reliance) requires no further express permission to produce and sell any migrated gas that could have come into (its) Contract Area," the majority judgment held.

On the company not informing the government of a report commissioned by its partner Niko Resources indicating connectivity between KG-D6 and neighbouring blocks of ONGC, the tribunal said "the alleged failure to furnish information if so proven would at best be a breach of the contractual terms of the PSC or at worst attract penal sanctions under the Petroleum and Natural Gas (PNG) Rules".

"There is no logical nexus between such breach or non-compliance with the claimant's right to extract gas which might include gas which could have migrated from an area outside the Contract Area. These are distinct and discreet issues," it said.

The tribunal had said though Reliance's "production of gas would have included gas which had migrated into the reservoir from a source outside the Contract Area", it is "entitled to all rights granted to it under the PSC and shall be entitled to retain and recover cost petroleum and profit petroleum from the gas so extracted, produced and sold". The panel also awarded USD 8.3 million compensation to the three partners.

Reliance is the operator of KG-D6 block with 60 per cent interest, while BP plc of UK holds 30 per cent and Niko Resources of Canada the remaining 10 per cent. In his dissent note, Singhvi said Reliance was required to obtain explicit permission to produce migrated gas. "It is crystal clear that the claimant (Reliance) does not have any rights to the gas which has migrated from ONGC's blocks," he wrote.

"There can be no doubt that the retention of the benefit of migrated gas would be 'against the fundamental principles of justice or equity and good conscience' thereby falling squarely within the ambit of the doctrine of unjust enrichment". He also held that quantification of migrated gas determined in D&M report of 2015 was conclusive.

Stating that Reliance should have disclosed the 2003 report of its partner Niko Resources, he said it may not have conclusively established reservoir connectivity, but it strongly suggested the same. "It is held that the claimant's failure to comply with its obligation to disclose November 2003 D&M report to the Government constitute a breach of the terms of the PSC and the 1959 Rules," he wrote.

"Under the PSC, if a reservoir extends beyond block boundaries, the contractor may either seek permission to enlarge its Development Area, or jointly develop the area with the contractor of the adjoining block, or relinquish its rights to such reservoir," he said. "There can be no effective lease or enjoyment of an area covered by a reservoir, if such reservoir is being drained by a different person on its block boundary."

The ministry had on November 4, 2016, slapped a demand notice on Reliance-BP-Niko combine for producing in seven years ending March 31, 2016 about 338.332 million British thermal units of gas that had seeped or migrated from ONGC's blocks into their adjoining KG-D6 in the Bay of Bengal. Reliance on November 11, 2016, slapped an arbitration notice disputing the claim.