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KG Basin Dispute: Supreme Court Appoints New Arbitrator
May 03, 2014

The Supreme Court cleared the decks for adjudication of dispute between Reliance Industries Limited (RIL) and Government of India over recovery of cost for developing the country's key natural gas field in KG Basin.

The apex court has appointed former judge of the High Court of Australia,Michael Hudson McHugh as the third arbitrator to head the board of arbitrators to solve the KG Basin dispute. The court thus allowed RIL's plea for appointing an international arbitrator so as to remove any bias. RIL had moved the SC seeking appointment of an arbitrator from a foreign country with which parties in disputes are not connected with.

The court had earlier withdrawn its order appointing Australian judge James Spigelman as an arbitrator between RIL and Centre after the latter pointed out that the appointee figured in the India's largest conglomerate list of ordered arbitrator and hence someone else should be appointed.

Petroleum ministry and RIL are locked in a dispute over the recovery of cost for developing the country's key natural gas field in KG Basin. While RIL has been blaming geological factors for lower output, the ministry has sought to penalise the company for it.

KG-D6 Block Dispute: Krishna Godavari (KG) Basin is spread across 50,000 sq. km. in the Krishna River and Godavari river basins near the coast of Andhra Pradesh. The site Dhirubhai-6 (D6) is where Reliance Industries discovered the biggest gas reserves in India. In government records, the 7,645 sq km block is known as KG-DWN-98/1. The KG basin is considered to be the largest natural gas basin in India.

Government of India opened up hydrocarbon exploration and production (E&P) in the country to private and foreign players in 1991. Small and medium sized blocks were opened up in this round which was followed up by giving out bigger blocks in 1999 as per the New Exploration and Licensing Policy (NELP). Through NELP, Reliance bagged the rights to explore the D6 block.

A CAG report released in 2011 (initiated in 2007 but delayed due to non-co-operation) on Performance Audit of Hydrocarbon Producing Sharing Contracts (PSCs) castigated the oil ministry along with Reliance to retain its entire KG-D6 block in contravention of the PSC. As per the PSC, Reliance should have relinquished 25 per cent of the total area outside the discoveries in 2004 and 2005, but the entire area was declared as a discovery area (after initial objections) and the company was allowed to retain it. Without drilling adequate wells, Reliance kept on claiming that there was potential for petroleum. In CAG’s words this was done to confuse potential/prospectivity with actual discovery of hydrocarbons. The move allowed Reliance to keep the entire area to itself without following the norms laid under the PSC.

In another report CAG has said that Reliance moved directly from discovery to commercial production, skipping the intermediate appraisal programme step required as under PSC. CAG asks, without an appraisal programme how did the government and Directorate General of Hydrocarbons (DGH) ascertain the amount of gas in the well? And if they did not know how much gas was there in the well, what is the logic and basis of blaming Reliance of hoarding gas. Further, as pointed out by CAG, how did DGH assure itself of reliability of the development plan, production rate and production costs without the appraisal report?

CAG pointed out that as per the PSC, more investments, especially in initial stages would mean more profit for the operator and less for the government. This structure gives inadequate incentive for operators to reduce capital expenditure and provides them with substantial incentives to front-end capital expenditure. Share of government profit varies from 85 per cent in a low investment scenario to 5 per cent in a high investment scenario. This explains the case of exaggerated investment made against Reliance Industries.

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