RIL fined $1.55 bn in ONGC gas dispute

Reliance to go for arbitration

The Union government has slapped a $1.55-billion penalty on the Mukesh Ambani-led Reliance Industries Ltd (RIL) for producing state-owned Oil and Natural Gas Corporation’s share of natural gas in the Krishna-Godavari basin, thus setting a precedent for disputes relating to energy exploration and production. The company, in return, plans to issue an arbitration notice to the government.

The company said it proposes to invoke the dispute resolution mechanism in the production sharing contract (PSC). “RIL remains convinced of being able to fully justify and vindicate its position that the government’s claim is not sustainable.” The contractor’s liability has not been established by any process known to law and the quantification of the purported claim is without any basis and arbitrary, it said.

RIL is already locked in arbitration with the government on various other issues. Senior officials in the government, however, said the directorate general of hydrocarbons (DGH) calculated the penalty amount based on the notified price of natural gas and not the $4.2 per million British thermal unit price at which RIL sells gas. “Since the gas produced was out of ONGC’s share, the price applicable was the notified rate,” said an official.

RIL was, however, allowed the concession of tax and royalty paid on the gas volumes. The DGH was issued clear instructions by the ministry of petroleum and natural gas on how to go about calculating the penalty, said a person close to the development.

The imposition of the penalty comes a month after the Dharmendra Pradhan-led ministry asked the DGH to calculate the penalty on RIL for commercially selling the migrated gas. The report submitted by the Justice AP Shah committee, that found RIL and its partners BP and Niko Resources guilty, formed the basis of the government decision.

According to sources, the government has accepted all the recommendations of the DGH. A senior government official told Business Standard a letter was sent to RIL on November 3 asking it to pay the penalty. The company has been given 30 days to respond.

RIL said it, along with partners, received a communication for block KG-DWN-98/3 (KG D6) from the petroleum ministry on Friday.

The company’s stock closed around 2 per cent lower at Rs 1,006 on Friday after touching a low of Rs 1,000.55 in the afternoon.

RIL said in carrying out petroleum operations, the contractor has worked within the boundaries of the block awarded to it and has complied with all applicable regulations and provisions of PSC. “The claim of the government is based on misreading and misinterpretation of key elements of the PSC and is without precedent in the oil and gas industry, anywhere in the world,” it said.

BP, RIL’s 30 per cent-partner in the KG block, which took a more open approach during the proceedings of AP Shah panel, had a more conciliatory response. “We believe resolution of such geological boundary disputes should be based on well-established international petroleum industry practices and in line with the PSC,” Narayani Mahil, director, corporate communications, BP Exploration (Alpha), a BP arm, said in an email response.

The Shah panel had said RIL and its partners had received “unjust” benefit through the migration of gas from ONGC’s block. Besides, it pointed to provisions in the production sharing contract that provided for unitisation, a technical term for valuing shares in case of overlapping reservoirs, of natural gas. Officials said the company did not use the PSC provisions. RIL said the government stand that the contractor was restricted to producing only that quantity of hydrocarbon as they existed at the point in time when the PSC was signed overlooks the fundamental fact that at that stage the work of exploration of the block had not even commenced. “A complete lack of data makes it impossible to estimate the quantity of hydrocarbons available in the block,” the company said. RIL’s KG-D6 block sits next to ONGC’s lease area. It made discoveries in the KG-DWN-98/3 block (KG-D6) in 2002.

An Initial Development Plan was approved in November 2004 and an addendum to the plan in December 2006. The Mukesh Ambani-led company has BP as a 30 per cent-partner and Niko as a 10 per cent-partner in the block.

RIL drilled four development wells in the block between December 2006 and November 2007, and started commercial production on April 1, 2009. ONGC has two leases — Godavari Petroleum and Mining Lease (PML) and KG-DWN-98/2 — adjoining the RIL area. In July 2013, ONGC wrote to the DGH stating there was evidence of lateral continuity of gas pools of the ONGC blocks with that of RIL. Consequently, ONGC sought data on RIL’s block. RIL and ONGC held a series of discussions and it was agreed that an independent consultant would be jointly appointed to carry out a study, but before a consultant was identified, ONGC filed a writ petition in the Delhi High Court on May 15, 2014, against the government, the DGH and RIL. Following the court order, the government set up the one-man Shah panel to make recommendations based on a report by consultant D&M. After the panel submitted its report, the DGH was asked to set the quantum of penalty.

Timeline of events:

Jul 2013: ONGC alleges that Reliance Industries intentionally extracted gas from its blocks in KG-D6

May 2014: ONGC moves Delhi HC and states that its Godavari Block and discovery block KGDWN-98/2 are contiguous to RIL-owned KG-D6

Nov 2015: Consultant D&M submits report, establishes that over 11.2 billion cubic meters of gas had migrated from ONGC’s idling KG fields

Dec 2015: A P Shah panel set up to look into legal implications

Aug 2016: Shah panel’s report confirms migration of gas from ONGC’s fields to RIL

Sept 30: Govt accepts Shah panel report in totality