Govt Loses Challenge To $111 Million Arbitration Award In Dispute With Reliance/Shell

The government has lost its appeal in the English High Court against a USD 111 million arbitration award in favour of Reliance Industries Ltd and Shell in a cost recovery dispute in the western offshore Panna-Mukta and Tapti oil and gas fields.

High Court judge Ross Cranston on June 9, 2022 ruled that the government should have brought its objections over the arbitration tribunal not meeting the required thresholds, when issuing the 2021 award earlier, two sources with knowledge of the matter said.

Rejecting the government's arguments, the court said the objections are barred by an English law principle whereby a party cannot raise matters in new proceedings that could have been raised in earlier proceedings.

While an email sent to the Ministry of Petroleum and Natural Gas for comments remained unanswered, officials said the government will study the court order and look for appropriate forums for remedy.

A separate email sent to Reliance for comments too remained unanswered.

Reliance and Shell-owned BG Exploration & Production India on December 16, 2010, dragged the government to arbitration over cost recovery provisions, profit due to the State and amount of statutory dues including royalty payable. They wanted to raise the limit of cost that could be recovered from sale of oil and gas before profits are shared with the government.

The government of India also raised counter claims over expenditure incurred, inflated sales, excess cost recovery, and short accounting.

A three-member arbitration panel headed by Singapore-based lawyer Christopher Lau by majority issued a final partial award (FPA) on October 12, 2016. It upheld the government view that the profit from the fields should be calculated after deducting the prevailing tax of 33 per cent and not the 50 per cent rate that existed earlier.

It also upheld that the cost recovery in the contract is fixed at USD 545 million in Tapti gas field and USD 577.5 million in Panna-Mukta oil and gas field. The two firms wanted that cost provision be raised by USD 365 million in Tapti and USD 62.5 million in Panna-Mukta.

Royalty, it said, had to be calculated after inclusion of marketing margin charged over and above the wellhead price of natural gas.

The government used this award to seek USD 3.85 billion in dues from Reliance and  BG Exploration & Production India Ltd (BGEPIL).

The two firms challenged the 2016 FPA before the English High Court, which on April 16, 2018, remitted one of the challenged issues back to the Arbitral Tribunal for reconsideration.

The arbitration tribunal ruled in favour of the two in a January 29, 2021 award.

"The Arbitral Tribunal decided in favour of the Claimants (Reliance and BGEPIL) in large part vide its final partial award dated October 1, 2018. Government of India and Claimants filed an appeal before the English Commercial Court against this 2018 FPA," Reliance had said in its annual report last year.

"The English Commercial Court rejected GoI's challenges to the 2018 Final Partial Award and upheld Claimants' challenge that the Arbitration Tribunal had jurisdiction over the limited issue and remitted the issue back to the Arbitration Tribunal," it added.

The final award on the issue came in January 2021, it had stated.

Subsequently, both sides filed clarification applications before the tribunal, which on April 9, 2021 granted minor corrections requested by Reliance and Shell and rejected all of the government's clarification requests.

Thereafter, the government challenged the award before the English High Court.

The court gave its ruling on June 9, 2022, they said.

The government had used the 2016 partial award not just to raise a USD 3.85 billion demand on Reliance and Shell but also sought to block Reliance's proposed USD 15 billion deal with Saudi Aramco on grounds that the company owed money to it.

Following this, the court asked company directors to file affidavits listing assets.

Reliance and Shell had countered the government petition in the Delhi High Court saying the petition is an abuse of process as no arbitration award has fixed any final liability of dues on the company.

"GoI has also filed an execution petition before the Delhi High Court... seeking enforcement and execution of the 2016 FPA," the annual report had said. "The Claimants contend that GoI's Execution Petition is not maintainable."

The government's Execution Petition is currently sub judice.

"Claimants have also filed an application for recall /modification, challenging the Orders of Delhi High Court wherein directors were directed to file affidavits of assets. The matter is listed on July 13, 2021, for hearing," it had said.

The Panna-Mukta (primarily an oil field) and Mid & South Tapti (gas field) are shallow-water fields located in the offshore Bombay basin. Discovered by state-owned Oil and Natural Gas Corp (ONGC), they were bid out in 1994 to a consortium of ONGC (40 per cent), Reliance (30 per cent) and Enron Oil & Gas India Ltd (30 per cent).

In February 2002, BGEPIL acquired Enron's 30 per cent stake in the joint venture. BGEPIL was subsequently taken over by Shell.

The production sharing contract (PSC) for the fields stipulated deducting costs incurred on field operations from oil and gas sold before sharing profit with the government. Disallowing certain items in the cost would result in higher profit petroleum for the government.

Reliance and BGEPIL sought raising of cost recovery limit through arbitration.