NEW DELHI: Persisting with its strategy to pre-emptively contest a likely government move to restrict the cost recovery at the KG-D6 offshore gas field, the Mukesh Ambani-run Reliance Industries (RIL) along with one of its consortium partners on Wednesday moved the Supreme Court, seeking direction to the government to appoint an arbitrator to resolve the “dispute”.
RIL and Niko (NECO) have requested the Chief Justice of India to appoint the second arbitrator under Article 33 of the production sharing contract (PSC) entered into between them and the petroleum ministry in April 2000 and under Section 11(6) of the Arbitration and Conciliation Act.
Last November, RIL had slapped an arbitration notice on the ministry in which it proposed to appoint former chief justice of India SP Bharucha as its arbitrator and had asked the ministry to appoint the second arbitrator within 30 days. However, the ministry had asked RIL to withdraw the notice, saying that there was no dispute that warranted arbitration.
The company’s move was in the wake of the government’s reported plan to disallow the desired level of cost-recovery by the RIL-led consortium at the KG-D6 block after flagging production led to utilisation of less than half of the 80 million metric standard cubic metres per day (mmscmd) of infrastructure the consortium had built. The output from the field has now declined to about 35 mmscmd from the target of 69.8 mmscmd target set by the government most recently and a far cry from 80 mmscmd the company had envisaged.
Reduced cost recovery means a gain for the government as its share of profit petroleum would go up correspondingly.
As per the profit-sharing formula discovered through bidding, the contractor and the government agree on the cost to be recovered from the project’s turnover and the ratio of profit sharing.
Reacting to RIL’s move, former petroleum secretary TNR Rao said that in a production sharing contract, all contingencies cannot be foreseen. “Therefore, if cost recovery is disproportionate to related production, the government is entitled to ask the contractor to refund part of the recovered cost as it comes out of the government’s share of profit petroleum.”
However, RS Pandey, another former petroleum secretary, refused to comment, saying, “I have no comments to offer on the issue as grounds of RIL moving the apex court needs to be studied.”
RIL, the world’s second largest oil major (excluding national oil companies), however, said that serious disagreements with the government have cropped up on technical and factual issues including the state of the hydrocarbon reservoir and the need to carry out certain activities.
The arbitration notice was issued by RIL after it learnt that the ministry’s technical advisor, the Directorate General of Hydrocarbons (DGH), had recommended that as much as $1.24 billion of the $5.7 billion estimate submitted by RIL for recovering costs should not be cleared. RIL had drilled only 18 wells out of the 31 they agreed on, resulting in a decline in the gas output from KG-D6 fields to 34.5 units, the DGH said.
But RIL has sought to refute the government’s claims saying that it could not drill the committed number of wells because the reservoir has not behaved as previously predicted and output dipped due to a fall in pressure and water and sand ingress in the wells. Besides, RIL and its partners contended they were entitled under the PSC to recover their full costs from the revenues generated by production from the block.
While Reliance holds a 60% interest in KG-D6, the UK’s BP holds 30% and Niko – which was party to the PSC – holds the remaining 10%. RIL had last year offloaded 30% of its stake in 21 hydrocarbon blocks, including D6, to London-based BP for $7.2 billion.
Stating that dispute resolution in a complex matter is best undertaken through arbitration, corporate lawyer Mahesh Agarwal said: “It (arbitration) is the most expeditious way of resolution. Such matters take enormous time in courts. Besides, arbitration is the only legitimate way to resolve when the opposite party is not agreeing.”
Ajay Bhargava, partner, Khaitan and Co, said that if the apex court finds that an arbitral dispute has arisen in the case, it can direct the appointment of an arbitrator under the terms of the contract.
RIL in its petition filed through Parekh and Co said: “The disputes have reached a point that the respondent (ministry) has refused to approve the revised work program and budgets for 2010-11 [RE] and 2011-12 [BE] until such time as the petitioners agree, as it were, to a schedule to drill, complete and connect more development wells as per Addendum to Initial Development Plan. The petitioners have repeatedly contended that the data now available establishes that the drilling of more wells will not improve the performance – on the contrary it may prove deleterious to the same.”
According to the Ambani firm, these disagreements “will inevitably lead to serious problems in the working of the PSC, including but not limited to problems with operations in the absence of work programs and sanctioned budgets, and may also lead to a situation where the respondent (government) may deny the right of the contractors to recover the actual costs incurred by it…”
The ministry had earlier referred the arbitration notice to the law ministry, which was of the opinion that as on date, there was no cause of action for RIL to raise a dispute under the provision of the PSC that entitles the company to move for arbitration.
Even solicitor general R Nariman, in his opinion dated January 19, said, “The fact (is) that the recovery of cost petroleum is a continuous and an ongoing process and has to be effected in the manner contemplated in Article 15 of the PSC. To the extent the parties disagree on the contractor’s right to recover cost petroleum, it would give rise to a dispute…until and unless a party is aggrieved by the process of recovery of cost petroleum (under Article 15), it cannot be said that a ‘dispute’ that is to be referred to arbitration has arisen.”
The KG D6 block is at the centre of the controversy that erupted after the Comptroller and Auditor General ofIndiasaid in its report that RIL had breached some terms of its contract with the government.
While RIL had envisaged a gas output of 80 mmscmd by 2012 with an investment of $8.8 billion, the current output is about half of the target and the company has so far invested only $5.8 billion.