ONGC may not get much compensation in gas dispute with RIL

Contract does not provide for retrospective penalty for 'such' acts

State-owned ONGC may not get much compensation even if it is established that natural gas from its idlying fields in Bay of Bengal had migrated to adjoining KG-D6 block of Reliance Industries as the contract does not provide for retrospective penalty for such acts.

Oil and Natural Gas Corp (ONGC) had in 2013 claimed that RIL had deliberately drilled wells close to the boundary that its Krishna Godavari basin KG-DWN-98/3 (KG-D6) block shares with the state-owned firm's Godavari Block (G-4) and that some of its gas may have been pumped out from the adjoining block.

US-based consultant DeGolyer and MacNaughton (D&M) has been appointed by the two firms to study if the two blocks are contiguous and have a common gas reservoir from which gas can be produced from either side.

HSBC Global Research in a note said the underlying contract -- production sharing contract (PSC), provides for the resolution of such a dispute. A full chapter on resolution of such a dispute through unit development has been devoted in the PSC.

"As per the terms of the contract, if a reservoir is situated partly within a contract area belonging to a party and partly in a different contract area, any of the parties could write to the government, and the government then will ask the two contractors to collaborate and agree on a joint development of reservoir within a stipulated time period.

"If parties fail to agree to do so, the government can force the parties to prepare and execute such a joint plan," it said.

RIL began gas production from KG-D6 block in April 2009 while ONGC is yet to begin development work on gas fields in G-4 that were discovered more than 12 years back.

"PSC does not provide for an explicit retrospective penalty on any of the parties that produced from its approved contract area (mining lease area) as per an approved field development plan, if the other party to the dispute failed to seek such a unit development," HSBC said.

ONGC had sought compensation for the gas belonging to it that RIL had produced.

Sources said D&M has in its preliminary comments stated that the reservoir in the two neighbouring blocks are connected and there is no unconnected area in G-4.

ONGC claims that 11.9 billion cubic meters (bcm) of its gas may have been produced from RIL's KG-D6 field. This at a gas price of USD 4.2 per mmBtu, will be worth less than USD 180 million.

Even this it can get only after field expenses as well as taxes and royalty paid by RIL is deducted, they said.

D&M is likely to submit its report on the issue by next month. And as per Supreme Court order the Oil Ministry will have six months from the date the report is submitted to decide if ONGC is entitled to any compensation from RIL.