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Gas migration case: What exactly is the dispute between Reliance and ONGC?


A division bench of the Delhi High Court on Thursday sought a response from Reliance Industries Ltd. (RIL) and its partners on the government’s appeal that accused the Mukesh Ambani-owned conglomerate and its partners of committing an “insidious fraud” and “unjust enrichment of over $1.729 billion” by siphoning gas from deposits they had no right to exploit.

The dispute over the gas migrating from ONGC’s block to the adjacent block of RIL and its partners dates back to 2014, and has been through several judicial and arbitration processes.

How it all started

In 2014, state-run ONGC approached the court, complaining that gas from its blocks was being produced by RIL. ONGC claimed that RIL had deliberately drilled wells close to the common boundary of the blocks and that some gas it pumped out was from its adjoining block. RIL is the operator of the said KG-D6 block with 60 per cent interest while BP holds 30 per cent. The remaining 10 per cent is with Niko Resources.

ONGC claims that RIL has benefited from gas flow between their adjacent fields during the 2009-2013 period and took RIL to court over the matter. RIL maintained that it had followed the Production Sharing Contract in letter and spirit and done no wrong. It has drilled all wells within its boundary walls.
The two companies appointed US-based consulting agency DeGolyer and MacNaughton (D&M), to examine the issue. D&M said that natural gas worth over Rs 11,000 crore had migrated from idling KG fields of the state-owned firm to the adjoining KG-D6 block of RIL.

The Justice Shah committee report

After the consultant’s report, a committee was set up under Justice A.P. Shah in 2015 to quantify unfair enrichment, if any, by RIL and to recommend ways to compensate ONGC and the government.The Justice Shah Committee opined that RIL should pay the government for the natural gas it has drawn from an adjacent block of ONGC in the KG basin of the Bay of Bengal in the past seven years.

The arbitration panel rejects govt contention

The Oil Ministry in November 2015 issued a notice to RIL, Niko and UK’s BP Plc seeking $1.47 billion for producing in the seven years ended March 31, 2016 about 338.332 million British thermal units of gas that had seeped or migrated from the state-owned ONGC blocks into their adjoining KG-D6 in the 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 per cent, totalling $149.86 million, a total demand of $1.55 billion was made on RIL, BP and Niko.

In 2016, RIL-BP-Niko sent an arbitration notice, thereby showing intent of quickly resolving the sticky issue. Next year, a three- member arbitration panel was set up to judge the validity of the government’s demand of $1.55 billion compensation from Reliance Industries for “unfairly” producing ONGC’s gas.

Favouring RIL-led consortium in the so-called gas migration dispute case, the three-member tribunal headed by Singapore-based arbitrator Lawrence Boo in its 2:1 award in 2018 rejected the government’s contention. It said that the production sharing contract (PSC) doesn’t prohibit the contractor from producing gas—irrespective of its source—as long as the producing wells were located inside the contract area. It also had held that the consortium was not liable to pay any amount to the government and had also directed the latter to pay $8.3 million as the cost of arbitration to the consortium.

The government moves court

Soon after, the government moved the court, seeking setting aside of the arbitration award on the grounds that “the award strikes at the heart of the public policy and has given a premium to a contractor (RIL) that has amassed vast wealth by committing an insidious fraud as well as criminal offence …”

“The unjust enrichment amassed by the contractor had already reached more than $1.729 billion today (at the time of filing petition), and is since increasing as the production of migrated gas is still continuing,” it had stated in its petition.

On Thursday, September 14, Delhi High Court’s division bench sought a response from Reliance Industries and others on the government’s appeal. Attorney General R Venkentaramani and former AG KK Venugopal, appearing for the government, argued that RIL in 2003 knew about the connectivity of its block with that of the adjoining ONGC block. They also accused RIL of ‘consciously and deliberately’ extracting and selling the adjoining ONGC gas without the government’s knowledge. The senior lawyers also argued that RIL had earlier taken a categorical stand that “there is no connectivity and continuity” between RIL’s and ONGC’s block. And the impugned arbitral award is in conflict with the public policy of India, they added.

RIL through counsel Sameer Parekh opposed the government’s appeal, arguing that these issues cannot be reopened under Section 37 of the Arb Act. Public trust doctrine and other points raised by the govt have been looked into both by the arbitral tribunal as well as the single judge. Citing the director general of hydrocarbons report, the lawyer argued that the study of migration of gas could have been done by the ministry in 2009 itself, much before the gas block was given to RIL, but the ministry chose not to do so.

The adjoining ONGC gas block was underdeveloped when RIL started extracting gas and it would have been “infeasible” to extract gas from the ONGC’s block which was at a different stage of development then, it said.


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