by R. Sasankan

Mukesh Ambani-controlled Reliance Industries Ltd (RIL), the operator of KG- D6 gas block and its partners BP and Niko, has served an arbitration notice on the Indian government over the $ 1.55 billion compensation claim slapped on the conglomerate for the gas that had migrated from ONGC’s adjacent blocks. The notice did not come as a surprise either to the government or the oil industry as RIL had already indicated that it would adopt such a course of action. In such a seemingly normal situation, the arbitration ought to proceed to its logical conclusion with the contending parties respecting the award when it is delivered in a few years’ time.

This raises two important questions: What explains the sound and fury over an issue that will possibly have to be resolved through an excruciatingly slow arbitration process? And how will the Modi government react to the arbitration notice? There are definite indications that the government will reject the arbitration notice and will try and persuade RIL and its partners to abandon the process and accept the fact that the issue ought not to be resolved through a judicial process. Both sides have already tapped the best available legal brains on the subject.

We see the entire controversy differently from others in the media. The issue is being perceived and treated differently by the Modi government: it has willy-nilly become a test case that will assess the government’s moral fibre and its ability to hunker down for a tough battle ahead.

Reliance and its partners will be attempting to prove that they have not done anything wrong and are being penalised for operating within the provisions of the Production Sharing Contract (PSC). RIL has already slapped quite a few arbitration notices on the government; some of them will have to be withdrawn if the company is to benefit from the new gas pricing formula announced for production from difficult areas. RIL is not afraid of legal battles and is ranked as one of the top corporate spenders on legal matters. The issue will inevitably head for a confrontation. Will either of the two warring sides back off? Will there be an out-of-court settlement?

Gas migration from one block to another is not a new phenomenon. It has been happening over the years in many parts of the world and rarely do such developments lead to a legal confrontation like the present case. India’s problem is that it did not have an independent regulator for the upstream sector. In Indian conditions, even independent regulators could be compromised, either by industrial houses or politicians.

The government, through ONGC, has already collected several instances of gas migration in different basins mostly involving oil giants. Almost all cases have been resolved amicably through well-accepted systems like Gas Balancing Agreements (GBS). Niko, a partner in the KG-D6 basin, itself settled two such issues with ONGC in the Cambay basin through GBAs. ONGC is now looking for gas migration cases that BP has settled the world over. These companies cannot apply a different yardstick for India. This strategy could work to some extent if confronted with relevant instances.

True, reputed international consultant D&M has given a fool-proof report on the subject which could have paved the way for settlement as RIL was a party to the deliberations that led to the formation of the Report. The PSC provides for joint development of fields with inter-connected reservoirs. Being an aggressive private sector company, RIL went ahead with the development of the field while ONGC, with a leadership of highly questionable integrity and loyalty to the organisation, chose to be lax in monitoring the situation which, in reality, was worse than collusion. The regulators acted as wheeler-dealers.

The Modi government showed remarkable determination and dexterity in taking the gas migration issue to its logical conclusion but flawed in exposing the colluders when it shied away from ordering a proper investigation, as recommended by the A.P.  Shah Committee ,  to determine whether the ONGC and RIL leadership had prior knowledge of the gas migration.

A probe by the ministry is as good as a cover-up. In a similar situation about seven years ago, when a very serious violation was detected in the contract between RasGas and Petronet LNG, the ministry ordered an inquiry by the additional secretary of the ministry against Petronet LNG headed by the secretary of the same ministry. Nothing has been heard about the report except that it was submitted.

What happens if RIL and its partners refuse to fall in line and insist on arbitration? What are the options before the Modi government to counter such a move? There is a significant difference between the previous UPA government and the present one led by Modi in their approach to such basic corporate issues.

We picked up the gas migration issue for this column again because of our perception that Prime Minister Narendra Modi is treating the issue as a test case to treat a malady ailing the Indian system for a very long time. Modi is irked by the corporate strategy of bullying the government by dragging it into protracted legal battles and is keen to put an end to the practice. Right or wrong, he is credited with the view that that a few corporates are past masters in the artful practice of using the legal system and the bureaucratic method of forming committees at the drop of a hat to undermine the dispute resolution methods in the country.

Here, Modi faces a problem. The PSC provides for arbitration but whether it covers an issue like gas migration is unclear. RIL can take the matter even to the Supreme Court to assert its right to exercise its legal options. But an extremely shrewd businessman like Mukesh Ambani knows the limitations of legal options. A strong-willed government can make things difficult for any corporate entity. So far, Narendra Modi is in an unassailable position politically.  Mukesh knows that and must have already assessed the risks of infuriating a domineering leader like Modi.