RIL fails to name arbitrator in KG-D6 dispute

RIL and its partner Niko Resources had in Feb 2015 challenged govt's decision to take away 814 sq km of its eastern offshore KG-D6 area

Reliance Industries' arbitration notice against the Oil Ministry's decision to take away five of its KG-D6 block discoveries has become invalid after the company failed to name arbitrators within the stipulated time.

RIL and its partner Niko Resources had in February last year challenged the ministry's decision to take away 814 sq km of its eastern offshore KG-D6 area that contained five gas discoveries.

As per the dispute resolution mechanism set out in the Production Sharing Contract (PSC), an arbitration notice over a dispute has to be followed up within six months by naming arbitrators.

RIL and Niko did not name its arbitrator for the dispute, a senior government official said. "So, technically the notice became invalid. If the company wants to pursue the dispute, it will have to give a fresh notice and name an arbitrator," the official added.

Interestingly, BP Plc, which holds 30 per cent interest in KG-D6 block, had not signed on the arbitration notice.

As per the dispute resolution mechanism, both parties -- RIL-Niko and government -- have to name an arbitrator each and the two judges then mutually decide on a neutral, presiding arbitrator of the three-member arbitration panel.

RIL did not offer any comments.

As per norm of giving up non-discovery area, RIL had in 2013 offered to give up 5,385 sq km out of a total 7,645 sq km area in Krishna Godavari basin KG-D6 block. But the ministry on October 30, 2013 ordered 6,198.88 sq km of total area to be taken away as the time allocated for producing from them had expired.

RIL on January 14 challenged this order as the 814 sq km of additional area that the ministry had taken away contained five gas discoveries holding close to 1 trillion cubic feet of reserves.

Sources said the company in the notice demanded that the dispute on taking away the area be referred to arbitration, the relinquishment order be withdrawn and compensation be paid for breach of contract by the government.

As per norm, a contractor is allowed to retain only that area where discoveries have been made. But in case of KG-D6, the Directorate General of Hydrocarbons (DGH) ordered larger area to be taken away as RIL had allegedly failed to develop the finds within the stipulated timeframe.

RIL in the notice has said that the October 2013 order breached its right to retain the fields and the time period for approving these discoveries 'never expired' as the block oversight panel, called the Management Committee, had agreed to a phased approach for their development.

The firm claimed that the order was based on the "erroneous premise" that it had failed to submit a development plan for these fields.

"In fact, the contractor had submitted the field development plan for all nine satellite discoveries (including the Second Phase Satellite Fields), and it had never withdrawn the FDP," RIL wrote to the ministry.

The ministry, however, believes that RIL passed the timelines for submitting appraisal and field development plans and there was no provision in the PSC to extend the appraisal period.

Sources said the ministry plans to reject the arbitration notice as the timelines for developing the five discoveries -- D4, D7, D8, D16 and D23, had lapsed and no development plan was submitted.

Also, RIL did not submit declaration of commerciality for D-5 and D-18 discoveries, the period for which has also expired, they said.

RIL and government are locked in two arbitration cases over the KG-D6 block -- one pertains to USD 1.8 billion in cost being disallowed for gas production for not meeting targets and the other over government deferring gas pricing guidelines.