The Delhi high court has rejected a government challenge to an arbitration panel award that had ruled in favour of Reliance Industries Ltd in a dispute over gas migration from fields operated by state-owned ONGC in the KG basin.
The government had slapped a provisional penalty of $1.55 billion on Reliance for "unjust enrichment" from gas migrating from the ONGC-operated KG-D5 block to the private firm's adjoining KG-D6 area.
It had sought $175 million in additional profit petroleum from Reliance and its UK partner BP Plc.
Reliance-BP challenged the penalty before an arbitration panel, which ruled that the two firms had produced gas from their contract area and there was no question of "unjust enrichment".
The government challenged the arbitration award before the Delhi high court, which in an order on Tuesday upheld the ruling of the arbitration panel, favouring Reliance.
The court said "factual conclusions arrived at by the arbitral tribunal" on the issue "cannot be second-guessed by this court".
Also, "the factual conclusions are perfectly rational, coherent and logical, especially considering what was comprised in the production sharing contract (PSC) was a purely commercial transaction entered into by two contracting parties," it added.
The order went on to state that it is not persuaded to hold the conclusions drawn by the arbitral tribunal were unreasonable.
"Suffice it to say that the view taken by the arbitral tribunal is most certainly a 'possible view', which calls for no interference," it said.
Dismissing the government petition, the order said the "court finds no ground to interfere with the majority arbitral award, which is accordingly upheld".
Disputes arose when in 2013, Oil and Natural Gas Corporation (ONGC) by a letter dated July 22, 2013, addressed to the Directorate General of Hydrocarbons (DGH) informed the latter that there was "evidence of lateral continuity of gas pools" as between the KG-DEN-98/3 (KG-D6) block of Reliance and the adjacent blocks allocated to the state-owned firm.
In simple terms, this meant that the gas pools of the Reliance block and the ONGC blocks appeared to be connected with possible migration of gas between the two blocks.
ONGC filed a writ petition before the Delhi High Court. The petition was disposed of by the court, by directing the Ministry of Petroleum and Natural Gas to consider the report produced by the expert agency DeGolyer & MacNaughton (D&M), which was to undertake an independent third-party study to verify the claimed continuity and migration of gas from the ONGC blocks to the Reliance block.
In its final report dated November 19, 2015, D&M concluded that "the integrated analyses indicated connectivity and continuity of the reservoirs across the blocks operated by ONGC and Reliance".
The ministry in the following month appointed a one-man committee of Justice AP Shah, former Chief Justice of the Delhi High Court, to consider the D&M report and to recommend a future course of action.
Based on the Shah committee report, the ministry imposed a $1.55 billion penalty on Reliance along with interest up to March 31, 2016.
It also sought $175 million towards revised additional cumulative profit petroleum from disgorgement of "unjust enrichment".
Reliance challenged the penalty before an arbitration tribunal, which held that the production sharing contract (PSC) does not prohibit but permits the company to produce and sell gas, which migrated into the sub-sea reservoir lying within its contract area from a source outside.
It went on to state that "there was no question of unjust enrichment that requires further determination".
