The Background of the Case
The long-standing gas migration dispute between Reliance Industries Limited (RIL) and the state-owned Oil and Natural Gas Corporation (ONGC) has taken a new turn after the Delhi High Court ruled in favor of the government. The case revolves around allegations that RIL illegally extracted natural gas from ONGC’s adjacent hydrocarbon blocks in the Krishna-Godavari (KG) basin, leading to “unjust enrichment.” This verdict, which overturned a previous international arbitration ruling, has significant implications for India’s oil and gas sector, particularly in terms of contractual obligations and revenue-sharing arrangements.
The Gas Migration Dispute
The dispute originates from a production-sharing contract (PSC) signed by a Reliance-led consortium with the Indian government in 2000. This contract granted RIL exploration and extraction rights in the KG-D6 block of the KG basin, off the coast of Andhra Pradesh. Commercial production commenced in 2009, with Reliance holding a 60% stake, BP Plc owning 30%, and Niko Resources having the remaining 10%.
However, in 2013, ONGC accused RIL of extracting gas from its adjacent blocks by drilling wells close to its hydrocarbon reservoirs. The state-run firm alleged that between 2009 and 2013, gas migrated from ONGC’s blocks to RIL’s KG-D6 block, resulting in significant financial losses.
What Triggered the Government’s Demand?
The petroleum and natural gas ministry raised a demand of $2.81 billion from the RIL-led consortium after the Delhi High Court overturned a 2018 international arbitration ruling that had previously favored RIL. The dispute first reached the Delhi High Court in 2013 when ONGC sought compensation for the alleged extraction of gas from its blocks. The court ordered an independent study by global consultant DeGolyer and MacNaughton (D&M), which confirmed reservoir connectivity between the two blocks.
Following the study, the government initially demanded $1.55 billion in 2016 from RIL and its partners for selling gas that allegedly migrated from ONGC’s block. RIL challenged this demand before an international arbitration tribunal, which ruled in its favor in July 2018. However, after a legal battle, the Delhi High Court recently overturned this arbitration ruling, allowing the government to raise a fresh demand of $2.81 billion.
Delhi High Court’s Verdict
A division bench of the Delhi High Court, comprising Justice Rekha Palli and Justice Saurabh Banerjee, set aside both the May 2023 single-bench ruling and the 2018 arbitration award. The bench ruled that the arbitration award suffered from “patent illegality” and violated India’s public policy and the public trust doctrine.
The court further emphasized that since RIL is an Indian entity and the case involves the Indian government, the arbitration should be treated as a domestic matter rather than an international dispute. It also criticized the non-disclosure of critical reports from 2003-2005, which could have impacted the arbitration’s findings.
Can Arbitration Awards Be Set Aside?
In India, the Supreme Court has limited the scope for setting aside arbitration awards under Section 34 and Section 37 of the Arbitration and Conciliation Act, 1996. However, courts can overturn awards if they violate public policy or fail to consider material evidence.
Legal experts believe that the Delhi High Court’s decision was influenced by the concealment of crucial reports by RIL. The government argued that these reports contained evidence proving gas migration from ONGC’s blocks, which the arbitration tribunal allegedly ignored.
What Does This Mean for RIL?
Reliance Industries has denied the allegations and insists that it operated within the contractual framework. The company maintains that the High Court’s decision and the fresh demand are “unsustainable.” In a stock exchange filing, RIL announced its intention to challenge the verdict before the Supreme Court.
If the Supreme Court upholds the High Court ruling, the government will be able to enforce its $2.81 billion claim against RIL and its foreign partners. The case could set a precedent for future disputes involving shared hydrocarbon reservoirs and impact the investment climate in India’s oil and gas sector.
Impact on Future Oil and Gas Exploration
The verdict could have broader implications for India’s energy sector. Shared reservoirs are a complex issue in hydrocarbon exploration, and companies may now be more cautious in investing in such blocks due to the risk of legal disputes. The ruling also underscores the importance of transparency in contractual obligations and reservoir connectivity studies.
Interestingly, despite the ongoing legal battle, Reliance and BP have recently partnered with ONGC to bid for exploration blocks under the Open Acreage Licensing Policy. This development suggests that collaboration between private and state-owned firms in India’s energy sector remains a possibility despite legal conflicts.
The Outcome and the Road Ahead
The Delhi High Court’s decision marks a significant victory for the Indian government in its bid to hold private companies accountable for resource extraction disputes. However, RIL is expected to challenge the ruling in the Supreme Court, prolonging the legal battle.
If the government’s demand is upheld, it will set a crucial precedent for future cases involving gas migration and contractual disputes in the energy sector. As the legal proceedings continue, the outcome of this case will likely shape policy decisions and investment strategies in India’s oil and gas industry for years to come.
(With inputs from agencies)
