Reliance and Shell had through the arbitration sought raising of the limit of cost that could be recovered from sale of oil and gas before profits are shared with the government
The government has challenged before an English High Court an arbitration award over a cost recovery dispute in the western offshore Panna-Mukta and Tapti oil and gas fields of Shell and Reliance Industries Ltd.
An arbitration “tribunal gave favourable award on January 29, 2021,” Reliance said in its latest annual report.
Reliance and Shell had through the arbitration sought raising of the limit of cost that could be recovered from sale of oil and gas before profits are shared with the government. The award came this year.
Both sides filed clarification applications before the Tribunal.
“On April 9, 2021, Tribunal issued its decision on the Clarification Applications of both the parties. It granted the minor correction requested by the Claimants [Reliance and Shell] and has rejected all of the Government of India’s clarification requests,” it said without giving details.
Subsequent to that, the government of India (GoI) has challenged the award before the English High Court, it said.
Reliance and Shell-owned BG Exploration & Production India Ltd. had 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.
The government of India also raised counter claims over expenditure incurred, inflated sales, excess cost recovery, and short accounting.
The 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% and not the 50% rate that existed earlier.
It also upheld that the cost recovery in the contract is fixed at $545 million in Tapti gas field and $577.5 million in Panna-Mukta oil and gas field. The two firms wanted that cost provision be raised by $365 million in Tapti and $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 $3.85 billion (about ₹28,000 crore) in dues from Reliance and 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 Arbitral Tribunal decided in favour of the Claimants in large part vide its final partial award dated October 1, 2018. GoI and Claimants filed an appeal before the English Commercial Court against this 2018 FPA.
“The English Commercial Court rejected GoI’s challenges to 2018 Final Partial Award and upheld Claimants’ challenge that Arbitration Tribunal had jurisdiction over the limited issue and remitted the issue back to the Arbitration Tribunal,” the report said.
The final award on the issue came this year, it said.
The government had used the 2016 partial award not just to raise a $3.85 billion demand on Reliance and Shell but also sought to block Reliance’s proposed $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 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 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 comprising of ONGC (40%), Reliance (30%) and Enron Oil & Gas India Ltd. (30%).
In February 2002, British Gas Exploration and Production India Limited (BGEPIL) acquired Enron’s 30% 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 of 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.