The government loses its appeal of a $111 million arbitration verdict in a dispute with RIL and Shell

13 Jun 2022 , 03:46 PM

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

According to two persons familiar with the situation, High Court judge Ross Cranston ruled on June 9, 2022, that the government should have raised its objections to the arbitration panel not passing the statutory criteria when giving the 2021 judgment earlier.

The court rejected the government’s claims, stating that the objections are precluded by an English law principle that states that a party cannot bring issues that have already been presented in previous proceedings.

On December 16, 2010, the government was taken to arbitration by Reliance and Shell-owned BG Exploration & Production India over cost recovery provisions, profit owed to the state, and the number of statutory dues including royalty payable. They aimed to enhance the maximum cost that could be recovered from oil and gas sales before profits were distributed to the government.

In addition, the Indian government asserted counterclaims for incurred expenses, inflated sales, excess cost recovery, and short accounting. On October 12, 2016, a three-member arbitration panel led by Singapore-based lawyer Christopher Lau granted a final partial award (FPA) by a majority vote. It upheld the government’s position that the profit from the fields should be computed after deducting the current tax rate of 33%, rather than the previous 50% rate.

The contract’s cost recovery is set at $545 million in the Tapti gas field and $577.5 million in the Panna-Mukta oil and gas field, according to the court. The two companies requested an increase in cost provision of $365 million in Tapti and $62.5 million in Panna-Mukta.
The shallow-water fields Panna-Mukta (mainly an oil field) and Mid & South Tapti (primarily a gas field) are located in the offshore Bombay basin. They were discovered by the state-owned Oil and Natural Gas Corporation (ONGC) and sold in 1994 to a consortium consisting of ONGC (40%), Reliance (30%), and Enron Oil & Gas India Ltd. (30%).

Enron’s 30% investment in the joint venture was acquired by BGEPIL in February 2002. Shell acquired BGEPIL in the following years.
Before sharing earnings with the government, the production sharing contract (PSC) for the fields mandated subtracting costs expended on-field operations from oil and gas sold. Allowing certain components to be excluded from the cost would result in the government making more money from petroleum.