RIL serves arbitration notice to government on ONGC gas dispute

New Delhi: Reliance Industries Ltd (RIL) has served a notice to the government for arbitration after the Petroleum Ministry asked it to pay $1.55 billion for allegedly producing gas from a well in the eastern offshore KG Basin connected to a field of state-run Oil and Natural Gas Corp. Ltd (ONGC).

The government raised the demand on November 4, giving the Mukesh Ambani-led RIL one month to pay, on the basis of the recommendation of the Justice A.P. Shah committee, constituted to examine the dispute over gas in the Krishna-Godavari basin. 

RIL filed the notice demanding arbitration last week. 

Reacting to the demand, RIL has said that it had no basis on how the figure was calculated.

"The liability of the contractor has not been established by any process known to law and the quantification of the purported claim is without any basis and arbitrary," the company said in a statement after the government raised its demand.

"Reliance Industries proposes to invoke the dispute resolution mechanism in the production sharing contract, and issue a notice of arbitration to the government. Reliance Industries remains convinced of being able to fully justify and vindicate its position that the Government`s claim is not sustainable."

The panel`s constitution also followed reports on the migrating of gas by American consultants DeGolyer and MacNaughton which concluded that 11.122 billion cubic meters of ONGC gas had migrated to the blocks of Reliance Industries.

They also said of the 58.68 billion cubic meters produced from there since 2009, some 49.69 billion cubic meters belonged to the private company and 8.981 billion cubic meters could have come from the ONGC side.

At the then gas price of $4.2 per million British thermal unit and the prevailing exchange rate, the volume of gas claimed as belonging to ONGC, which the private player produced, was estimated to be worth around $1.7 billion (Rs 11,055 crore).

Interestingly, the Justice Shah panel itself had called for further probe into the subject. In one of the paras of its report, the committee said it was not able to ascertain in clear terms if the two companies, indeed, had prior knowledge of migrating gas.

"I wanted this to be probed further," the single-member panel said.

Reliance Industries said in carrying out petroleum operations, the contractor worked within the boundaries of the block awarded to it and had complied with all the applicable regulations and provisions of the production sharing contract.

"The claim of the government is based on misreading and misinterpretation of key elements and the production sharing contract and is without precedent in the oil and gas industry, anywhere in the world."