Reliance gets relief on gas arbitration

A bench of justices S S Nijjar and A K Sikri set aside the Delhi High Court order

The Supreme Court today set aside the judgment of the Delhi high court and allowed the appeal of Reliance Industries holding that the disputes between it and the Union Government over the Panna, Mukta Tapti gas fields will be arbitrated in London.

The apex court also stated that the arbitration will be according to substantive laws of India. However, the appeals if any will also be heard in English courts.

Mukesh Ambani's Reliance Industries had argued that the parties had agreed that the venue for arbitration would be London and Uncitral Rules 1976 will be followed. The central government had objected to arbitration in London and insisted that it should be in India. The high court accepted the view of the Ministry of Petroleum and Natural Gas in its decision last year, which has now been overruled.

There are some eight disputes over the production sharing contract relating to the gas fields on the western coast, discovered in 1992. They involve royalty and taxes, cost recovery limit and removal of arbitrator. Some awards have already been passed by the arbitrator in England.

The judgment delivered by a bench consisting of Justice S S Nijjar and Justice A K Sikri ruled that the high court had no jurisdiction to entertain the petition of the government and it was not maintainable there according to the Arbitration and Conciliation Act. Thus they have accepted most of the important contentions of Reliance Industries.

The oil ministry had entered into two production sharing contracts with Reliance, BG Exploration & Production India and ONGC. The contracts were to be operative for 25 years.

An international arbitrator had directed the government in 2012 to reimburse Reliance and BG Exploration to the tune of $ 11, 413,172 apart from additional cess recovered from them.

RIL, BG and ONGC jointly operate the western offshore fields. In 2011, Reliance Industries and UK's BG Group dragged the oil ministry to arbitration on dispute over cost recovery limit of $545 million on certain development costs in Tapti gas field and $577.5 million in respect of Panna-Mukta oil and gas field.

The operators had in June 2008 applied for increase in the cost recovery limit for Tapti field which was rejected by the Management Committee.

Directorate General of Hydrocarbon, the downstream regulator, made a case for decrease in the cost recovery limit. Reliance and BG disputed this taking the matter to the court.

In addition to this, there was a dispute over the price at which 10 per cent royalty is payable to the government. As per the production sharing contract royalty is payable at wellhead price of the gas.

The companies calculated the same by deducting the capital and operating costs relating to the transportation and processing of the gas. This methodology was later disallowed by the government.

DGH on April 23, 2008 stated that a deduction for the amortised value of post wellhead capital expenditure is not a permissible deduction when calculating the value at wellhead, forcing RIL and BG to take the legal route.