This could go on for years .. lots can change fast The government has imposed a compensation of $ 1.55 billion on Reliance Industries Ltd (RIL), the operator of the KG-D6 block in the Krishna-Godavari basin, and its partners NIKO and BP for illegally sucking out gas from two adjacent blocks belonging to ONGC. Predictably, RIL and its partners have announced their decision to invoke the arbitration clause under the Production Sharing Contract (PSC) – a move that is bound to invite the wrath of the Narendra Modi government.
There is a tendency among E&P operators and industry circles in general to view such a development as just another instance of a legal slugfest between RIL and the government. Arbitration cases are not new in Indian industry – and RIL has been embroiled in several cases in the past.
But we beg to differ. This is not going to be another run-of-the-mill legal battle. While it will not snowball into the mother of all legal battles, it could re-define the Modi government’s approach to the irksome impediments that it perceives as a fundamental flaw in India’s dispute resolution system.
ONGC had raised the gas migration issue at the end of the UPA regime but all the tortuous twists and turns in this rivetting battle has played out in the public domain with the Modi government playing an active role in guiding it to its logical conclusion.
After the international consultant DeGolyer & McNaughton (D&M) did an excellent job of establishing migration and the quantity of gas that had been sucked out, it was the duty of the government to seek compensation. The appointment of Justice A.P. Shah Committee could not have happened without the guidance from the Prime Minister.
The question whether the gas was sucked out deliberately or migrated naturally into RIL’s reservoir or whether RIL and ONGC management had prior knowledge about the interconnectivity of reservoir is not relevant here.
While dealing with an issue like this, what matters is the conviction of the parties involved and their resolve to fight for what they think is right. The Modi government doesn’t believe in wasting time and money over arbitration suits. Nor does it believe in the institution of a Committee to make recommendations. In the present case, the one-man Justice A.P. Shah committee was appointed with a clear time frame and mandate but without adjudicatory powers as the matter had already been unequivocally decided by D&M. The Modi government seems to have a clear perception about the merits of the issue; it wants RIL and its partners to pay the compensation amount that the directorate general for hydrocarbons (DGH) has determined on the basis of the guidelines contained in the D&M report, which was finalised in association with all the contending parties.
RIL had, however, questioned ONGC’s contentions before the Shah Committee and asserted that it had no option but to go ahead with gas production as ONGC had failed to develop its block. The lackadaisical attitude of the ONGC management is the basic issue. Was it deliberate? There are several people both within and outside ONGC who believe that this was a deliberate act and designed to help RIL. In the absence of documentary evidence, we do not subscribe to this theory. At the same time, we cannot ignore the issue either as the Shah Committee itself had asked the government to probe the charge that both RIL and ONGC had prior knowledge about the interconnectivity of the reservoir. He too found prima facie merit in the charge. The Ministry of Petroleum and Natural Gas, which accepted the Shah Committee report in toto, has not ordered any probe so far.
Some of the arguments marshalled by RIL before the Shah Committee were quite forceful and sounded convincing but were not accepted when examined in totality. Justice Shah could sift through the contentious arguments from the warring sides and arrive at a conclusion because of his keen judicial mind. But judges can – and often do -- differ in their perceptions. This can happen in the arbitration tribunals as well.
Once the issue is referred for arbitration, it can take a few years to get a verdict. There is the possibility that a new ONGC management may not pursue the matter as vigorously as the current administration under D. K. Sarraf has. The director (exploration) can be competent and honest but may not have the guts and conviction to pursue the matter. Such a situation is not peculiar to ONGC; this is the case with almost all public sector units. They are all vulnerable in numerous ways.
RIL and its partners are well within their rights to invoke the dispute resolution mechanism spelt out in the PSC. However, the fact remains that in the E&P industry, an issue like gas migration is settled amicably through a mechanism like the Gas Balancing Agreement (GBA). Even in India, two such cases involving Niko Resources were settled through the GBA. The Modi government also knows about this reality.
What happens if RIL goes ahead with its threat to take the matter before arbitration? There are definite indications that the government will not take kindly to such a course of action. It is difficult to predict precisely how the government will react to such a development. Relations between the two will certainly get strained. The Prime Minister has the option to tighten screws on those who he believes are trying to defy the system.
RIL is not a tiny company that will cower at the prospect of a face-off with the Modi government. It knows all the intricate tricks of the legal process to frustrate efforts to pin it down on the mat. But its big problem is that it has not reckoned with a man like Modi in Delhi before. RIL has always been comfortable with the governments headed by the Congress party. In fact, RIL achieved its phenomenal growth during the days of Mrs Indira Gandhi. It was also comfortable with the NDA government headed by Atal Behari Vajpayee though it had problems with L.K. Advani. However, the political scene is quite confusing. Even a formidable entity like RIL will find it hard to negotiate its way through the labyrinth although it has friends in all political parties. There is no immediate challenge to Mr Modi. RIL cannot ignore this reality.
It may be argued that even if a dispute is referred for arbitration, it need not trigger a confrontation with the ruling party. But I reckon that such an argument amounts to an insufficient reading of the situation. The entire development over the gas migration issue is within the knowledge of Prime Minister Modi. He applies certain yardsticks to measure the importance of issues and the gas migration involving RIL falls in the category that demands a quick resolution.
A confrontation between RIL and the government will terribly embarrass BP which is RIL’s 30 per cent partner. BP’s leadership has a good equation with Mr Modi. Will BP intervene? There is a perception that RIL cannot ignore the advice of BP over this matter. The interregnum between the notice for compensation and the formal arbitration notice is going to be crucial. There could be some hard bargaining. RIL knows the art of bargaining. Both Modi and Mukesh hail from the state of Gujarat where bargaining is an intrinsic art embedded in the mercantile system.