The Delhi High Court has dealt a huge blow to Reliance Industries Limited (RIL) by supporting the government’s position in a pending case of gas migration against state-run Oil and Natural Gas Corporation (ONGC).
This landmark judgment could force RIL and its co-partners to shell out $2.81 billion for allegedly having produced gas that migrated from ONGC’s adjacent blocks in the Krishna Godavari (KG) basin.
A division bench of Justices Rekha Palli and Saurabh Banerjee overturned both a May 2023 single-bench ruling and a 2018 international arbitration tribunal ruling earlier in RIL’s favor.
The court held these earlier rulings “contrary to the settled position of law,” holding that the arbitral award was plagued by “patent illegality” and was contrary to India’s public policy and the public trust doctrine.
The controversy goes back to 2013 when ONGC initially accused RIL of illegally producing natural gas from its blocks bordering RIL’s in the KG basin. RIL was accused by the state-owned company of drilling wells along the edges of their hydrocarbon blocks, allowing gas to flow from ONGC’s fields to RIL’s KG-D6 block between 2009 and 2013, leading to “unjust enrichment” for the private company.
KG Basin Gas Dispute: RIL, ONGC, and the Battle Over Migrated Gas
A 2000 production-sharing agreement (PSC) between the government and the RIL-led consortium is the core of the controversy. The agreement granted rights to the consortium for the production and exploration of natural gas in the KG basin off the coast of Andhra Pradesh, stipulating different entitlements, obligations, and revenue-sharing terms.
The RIL-BP partnership, wherein RIL had 60% equity with 30% holding by BP Plc and 10% by Niko Resources, began commercial production from acreages in close proximity to ONGC’s Godavari oil and mining lease and KG-DWN-98/2 block in April 2009.
Following ONGC’s initial complaint to Delhi High Court in 2013, the court requested the government to make a decision after a third-party study to be carried out by international consultant DeGolyer and MacNaughton (D&M).
The research supported reservoir connection between the two blocks, and the government raised a demand of $1.55 billion from RIL and its partners in 2016 for the sale of gas which was reported to have migrated from ONGC’s block.
RIL struck back by filing the case before an international arbitration court, which ruled in its favor in July 2018. The court rejected the government’s plea, holding that the PSC did not preclude contractors from producing and marketing gas that had migrated from an external source.
One of the judges of the Delhi High Court rejected the government’s appeal against this award in May 2023. But the government had again appealed to the Division Bench, which it has now succeeded in getting.
The recent court ruling also emphasized that since RIL is an Indian company and the respondent party is the Indian government, the arbitration must be treated as a domestic case and not an international case.
Legal authors observe that although the Supreme Court has restricted the scope of interference in arbitration awards under the Arbitration and Conciliation Act, of 1996, there are certain reasons on account of which awards may be set aside. One of these reasons is when the award is against public policy.
RIL Faces $2.81B Demand After Court Ruling on Destroyed Reports
Nilava Bandhopadhya of the law firm S&A Law Offices believes that the court viewed RIL’s alleged destruction of a chain of DeGolyer and MacNaughton Reports published for the years 2003, 2004, and 2005, and supporting papers, to be “so fatal that it goes to the root of the matter and the Award cannot sustain.”
Reliance Industries, on its part, has consistently denied all the charges, stating that it was operating within the terms of the agreement.
In a stock exchange filing, the firm said that it is “legally advised that the Division Bench judgment and this provisional demand are ‘unsustainable'” and is “taking steps to challenge the judgment.” RIL doesn’t see any liability on this count and will appeal the decision in the Supreme Court.
If the order holds, the oil ministry can impose its demand of $2.81 billion on RIL and its foreign partners. The ruling will have a ripple effect in India’s oil and gas sector and pave the way for future contractual commitments on reservoirs common to the two players.
Notably, even as this legal fight continues, Reliance and partner BP recently partnered with ONGC to make a joint bid for exploring a block in Gujarat-Saurashtra basin in the ninth round of oil and gas assets auction under the Open Acreage Licensing Policy.
