by R. Sasankan
Mukesh
Ambani-controlled Reliance Industries Ltd (RIL), the operator of KG- D6
gas block and its partners BP and Niko, has served an arbitration
notice on the Indian government over the $ 1.55 billion compensation
claim slapped on the conglomerate for the gas that had migrated from
ONGC’s adjacent blocks. The notice did not come as a surprise either to
the government or the oil industry as RIL had already indicated that it
would adopt such a course of action. In such a seemingly normal
situation, the arbitration ought to proceed to its logical conclusion
with the contending parties respecting the award when it is delivered in
a few years’ time.
This raises two important questions: What explains the sound and fury
over an issue that will possibly have to be resolved through an
excruciatingly slow arbitration process? And how will the Modi
government react to the arbitration notice? There are definite
indications that the government will reject the arbitration notice and
will try and persuade RIL and its partners to abandon the process and
accept the fact that the issue ought not to be resolved through a
judicial process. Both sides have already tapped the best available
legal brains on the subject.
We
see the entire controversy differently from others in the media. The
issue is being perceived and treated differently by the Modi government:
it has willy-nilly become a test case that will assess the government’s
moral fibre and its ability to hunker down for a tough battle ahead.
Reliance and its partners will be attempting to prove that they have not
done anything wrong and are being penalised for operating within the
provisions of the Production Sharing Contract (PSC). RIL has already
slapped quite a few arbitration notices on the government; some of them
will have to be withdrawn if the company is to benefit from the new gas
pricing formula announced for production from difficult areas. RIL is
not afraid of legal battles and is ranked as one of the top corporate
spenders on legal matters. The issue will inevitably head for a
confrontation. Will either of the two warring sides back off? Will there
be an out-of-court settlement?
Gas migration from one block to another is not a new phenomenon. It has
been happening over the years in many parts of the world and rarely do
such developments lead to a legal confrontation like the present case.
India’s problem is that it did not have an independent regulator for the
upstream sector. In Indian conditions, even independent regulators
could be compromised, either by industrial houses or politicians.
The
government, through ONGC, has already collected several instances of
gas migration in different basins mostly involving oil giants. Almost
all cases have been resolved amicably through well-accepted systems like
Gas Balancing Agreements (GBS). Niko, a partner in the KG-D6 basin,
itself settled two such issues with ONGC in the Cambay basin through
GBAs. ONGC is now looking for gas migration cases that BP has settled
the world over. These companies cannot apply a different yardstick for
India. This strategy could work to some extent if confronted with
relevant instances.
True, reputed international consultant D&M has given a fool-proof
report on the subject which could have paved the way for settlement as
RIL was a party to the deliberations that led to the formation of the
Report. The PSC provides for joint development of fields with
inter-connected reservoirs. Being an aggressive private sector company,
RIL went ahead with the development of the field while ONGC, with a
leadership of highly questionable integrity and loyalty to the
organisation, chose to be lax in monitoring the situation which, in
reality, was worse than collusion. The regulators acted as
wheeler-dealers.
The
Modi government showed remarkable determination and dexterity in taking
the gas migration issue to its logical conclusion but flawed in
exposing the colluders when it shied away from ordering a proper
investigation, as recommended by the A.P. Shah Committee , to
determine whether the ONGC and RIL leadership had prior knowledge of the
gas migration.
A probe by the ministry is as good as a cover-up. In a similar situation
about seven years ago, when a very serious violation was detected in
the contract between RasGas and Petronet LNG, the ministry ordered an
inquiry by the additional secretary of the ministry against Petronet LNG
headed by the secretary of the same ministry. Nothing has been heard
about the report except that it was submitted.
What happens if RIL and its partners refuse to fall in line and insist
on arbitration? What are the options before the Modi government to
counter such a move? There is a significant difference between the
previous UPA government and the present one led by Modi in their
approach to such basic corporate issues.
We picked up the gas migration issue for this column again because of
our perception that Prime Minister Narendra Modi is treating the issue
as a test case to treat a malady ailing the Indian system for a very
long time. Modi is irked by the corporate strategy of bullying the
government by dragging it into protracted legal battles and is keen to
put an end to the practice. Right or wrong, he is credited with the view
that that a few corporates are past masters in the artful practice of
using the legal system and the bureaucratic method of forming committees
at the drop of a hat to undermine the dispute resolution methods in the
country.
Here, Modi faces a problem. The PSC provides for arbitration but whether
it covers an issue like gas migration is unclear. RIL can take the
matter even to the Supreme Court to assert its right to exercise its
legal options. But an extremely shrewd businessman like Mukesh Ambani
knows the limitations of legal options. A strong-willed government can
make things difficult for any corporate entity. So far, Narendra Modi is
in an unassailable position politically. Mukesh knows that and must
have already assessed the risks of infuriating a domineering leader like
Modi.
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