Upholding the findings made by the international consultant D&M in its report, the Justice AP Shah Committeein its report has ratified the connectivity between the reservoirs in RIL’s KG-DWN-98/3 and that of ONGC’s– KG-DWN-98/2 and Godavari PML blocks.
In simpler terms, this report further proves that ONGC’s gas migrated from its two blocks in the KG basin (Godavari PML and KG-DWN-98/2) to the adjacent RIL’s block, KG-D6.
The single-member commission under former chief justice of the Delhi High Court, Ajit Prakash Shah was appointed to look into the findings of international consultant DeGolyer & MacNaughton (D&M) in the gas dispute between Reliance Industries (RIL) and the Oil and Natural Gas Corporation (ONGC). The committee submitted its report to oil minister Dharmendra Pradhan on Wednesday.
Further, as per the Shah committees report, from April 1, 2009 (when gas production commenced from RIL’s KGDWN-98/3 block) till March 31, 2015, as much as 7.009 and 4.116 BCM ( or a total of 11.125 billion cubic meters of ONGC gas had migrated from Godavari PML and D1 discovery of KG-DWN-98/2 block respectively to RIL’s KG-DWN-98/3 block. The cost of this gas at prevailing prices is close to Rs 11,000 crore.
Out of the migrated 11.125 bcm of ONGC gas, the Shah committee said that 5.968 and 3.015 BCM of gas was produced from Godavari PML and D1 discovery of KG-DWN-98/2 block respectively, through RIL’s KG-DWN-98/3.
The Committee also pulled up ONGC on its role in the Indian oil and natural gas sector and said the same “must be assessed with great scrutiny.” The committee further said that long periods of alleged inactivity on the part of ONGC in this case particularly must be examined further.
For example, ONGC had some rights to explore in the Godavari PML block in the KG basin since at least 1997, and complete control over its blocks in the area since 2003. However, even today, ONGC has hardly progressed beyond exploratory stage, and there is no commercial production in either of its blocks under consideration. The Committee believes that the MOPNG should make efforts to understand what steps may be taken to avoid a situation like this in the future.
“According to the Committee, the D&M Report appears to have been commissioned under terms agreed upon by all the stakeholders in the present dispute, crucially by RIL and ONGC. All the meetings with D&M had extensive minutes, revealing that all proceedings were as transparent as possible. The data to be shared was agreed upon in advance, and analyses, methodology and results were jointly agreed upon throughout the process of conducting the study.
For the complete report of Shah Committee, click here
Ratifying the D&M report, the committee said, “The D&M Report itself appears to be reasonable in its research, methodology and conclusions drawn, and is hard to be faulted. The D&M Report establishes connectivity and quantifies the gas that has migrated and is likely to migrate within the time period covered by the Base Case and Case 1 Scenarios.”
“In the circumstances, and with the information available at hand, it is difficult for the Committee to believe that the manner in which the D&M Report was arrived at was questionable. The Committee is unable to evaluate in any further detail the concerns expressed by RIL about data asymmetry or methodological limitations or uncertainty in the results, and the Committee has not considered these concerns in any more detail,” it added.
“The Committee accepts the D&M Report’s findings that connectivity between the reservoirs in KG-DWN-98/3, KG-DWN-98/2 and Godavari PML blocks is established. Further, as per the calculations contained in the report, from 01.04.2009 (when gas production commenced from KGDWN-98/3 block) till 31.03.2015, 7.009 and 4.116 BCM of gas had migrated from Godavari PML and D1 discovery of KG-DWN-98/2 block respectively to KG-DWN-98/3 block, of which, 5.968 and 3.015 BCM of gas was produced from Godavari PML and D1 discovery of KG-DWN-98/2 block respectively, through KG-DWN-98/3.”
Additionally, the Committee noted that the D&M Report makes two forecasts regarding gas migration.
First, as per the Base Case forecast, as on January, 1, 2017, 7.519 and 4.377 BCM of gas would have migrated from ONGC’s Godavari PML and D1 discovery of KG-DWN-98/2 block respectively to RIL’s KG-DWN-98/3 block, of which 6.549 and 3.395 BCM of gas would have been produced from Godavari PML and D1 discovery of KG-DWN-98/2 block respectively through KG-DWN-98/3 block.
Secondly, as per the Case 1 forecast, as on April 1, 2019, 8.059 and 4.650 BCM of gas would have migrated from Godavari PML and D1 discovery of KG-DWN-98/2 block respectively, of which 7.065 and 3.846 BCM of gas would have been produced from Godavari PML and D1 discovery of KG-DWN-98/2 block respectively through KG-DWN- 98/3 block.
“Further, the D&M Report as well as the statements made by the parties to the Committee point to the fact that gas production in the relevant fields is likely to cease because of pressure depletion, and the fields are expected to reach their technical limits for further gas production. Due to the fact that only meagre reserves are left in the relevant fields, there is no question of contemplating any kind of joint development, unitisation, or gas balancing,” the Shah committee said.
“The D&M Report appears to establish that there is practically no development or further production that can be carried out by ONGC in its fields in the current scenario.”
As per the Committee’s findings, RIL’s production of migrated gas and retention of the ensuing benefits “amount to unjust enrichment, since the PSC, in the absence of an order on joint development under Article 12, does not permit a contractor to produce and sell migrated gas.”
“There is also no other extra-contractual right granted to the contractor that enables it to produce gas, regardless of its source. In fact, a contractor is limited by the gas that is available in its clearly defined and demarcated contract area,” it added.
In the present case, the committee noted that Articles 10.15 and 11.2 of the PSC functioned as a prohibition on the unilateral production of migrated gas, and the only remedy (exception) available to the contractor was to approach the Government and get an order for joint development.
“Since RIL did not pursue such a step, and it had not been given the migrated gas as a gift or largesse, its actions had no lawful justification and amounted to unjust enrichment.”
On the question of knowledge, the Committee finds that it is unable to draw final conclusions regarding RIL’s and ONGC’s prior knowledge, without any evidence being led before it.
Nevertheless, the committee observed that the 2003 Appraisal Report prima facie reveals that RIL had prior knowledge about connectivity and continuity of reservoirs. It also appears that RIL did not bring the contents and findings of the 2003 Appraisal Report to the notice of DGH, which is particularly disconcerting, considering the obligations of contractors/operators to make all relevant information pertaining to their block available to the regulator.
ONGC, on its part, also had some form of prior knowledge about possible continuity in 2007, but did not act promptly or with due diligence, and took up the matter only six years after it first obtained relevant information.
The Committee believes that the allegations of prior knowledge on the part of both RIL and ONGC must be enquired into further, with particular emphasis laid upon the failure of both parties to present the information they had to the DGH at the time they allegedly obtained the information.
On the question of unjust enrichment, the Committee concludes that the Government of India, and not ONGC, is entitled to claim restitution from RIL for the unjust benefit it received and unfairly retained. ONGC has no locus standi to bring a tortious claim against RIL for trespass/conversion since it does not have any ownership rights or possessory interest in the natural gas.
The Committee also notes that the question of quantification of unfair enrichment is to be decided by the Government of India, with the principle that whatever benefit RIL received in terms of the migrated gas is liable to be returned to the Government of India.
However, the Committee said it cannot give a final value or a figure of the migrated gas produced by RIL, as it faced significant limitations due to the lack of data and the Committee’s inherent technical limitations.
While the D&M Report has to form the basis for the migration of gas up till 2015, subsequent migration of gas post-2015 has to be inquired into by the Government of India.
The Committee further noted that the present case is a useful opportunity for MOPNG and DGH to review and strengthen the disclosure system itself.
“The Committee believes that the disclosure system could be made more meaningful, to include, for example, penalties for deliberate suppression of material information. If a party is found to have deliberately not provided the DGH relevant information; or suppressed key data; or omitted to present the full picture regarding exploration or development, it must be prepared to face consequences, in the form of monetary penalties, contractual restrictions, or other similar punitive action.”
Towards this, it added that the DGH must seek to craft and employ a strict disclosure regime applicable to all supervised entities.
“Strict directives regarding disclosures can only be ensured by the DGH, and the Government must, in turn, ensure that the DGH is appropriately empowered to issue and enforce such directives,” it said, adding that the DGH must also look to become more proactive in exercising its regulatory authority, whether it is in the form of better vigilance, acquiring more incisive technical skills, or stronger enforcement powers.
“The DGH must, in particular, ensure that it has the adequate technical expertise and infrastructural wherewithal to conduct regulatory operations in unhindered fashion. The presence of a strong, empowered, vigilant and diligent regulator cannot be emphasised enough, particularly in a sensitive and vital sector like petroleum.”
The Committee also concurred with the recommendation made by RIL’s partner, BP regarding the creation of a mechanism to amicably resolve disputes among parties, as and when they arise. It noted that such a mechanism will help reduce the occurrence of disputes between parties, and allow for a smoother functioning of the energy sector, which is ultimately in the interest of the nation.
The Committee said it is strongly of the view that manner in which the present matter will be handled by the MOPNG can chart the course of the future of the Indian energy industry and market in more ways than one.
Currently, Writing a Book for Penguin India Titled Greased Pole:How Politics and Lobbying Stifled India’s Energy Dreams. The author can be reached on firstname.lastname@example.org (9810661825)
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