A consortium of Reliance Industries Ltd-Shell India and Oil and Natural Gas Corp. (ONGC), producing oil and gas from the Panna-Mukta-Tapti fields, has disputed a collective demand of $3 billion by the oil ministry as shortfall in its share of profit.
The companies will not pay up till a tribunal in the UK gives its final award in an ongoing arbitration case, including the method of quantifying the alleged shortfall. In addition, the two private companies have also moved a court in the UK against the tribunal’s partial award favouring the government of India.
The ministry’s demand for profit petroleum follows the tribunal’s partial arbitral award dated October 2016.
Profit petroleum is the quantum of profits that the developer of a field and the government share after excluding all costs.
In an emailed response to a questionnaire from Mint, RIL described the oil ministry’s demand notice sent in May as “premature”. Reliance and Shell India have a 30% stake each in the field, while ONGC holds the remaining 40%.
RIL and British Gas Exploration and Production India Ltd (BGEPIL) filed for arbitration in December 2010, in the wake of differences with the government over issues such as cost recovery and profit-sharing. ONGC was not party to the case. BGEPIL’s stake in the field was taken over by Shell in a deal that followed one between the parent groups BG Group Plc and Royal Dutch Shell Plc in February 2016.
The government claims that the companies should have included the marketing margin they charge from consumers in the profit petroleum to be shared with it. It also claims that only the actual taxes paid by the contractors can be allowed as a cost and not any notional tax rate mentioned in the contract signed in 1994.
The partial arbitral award, which covered these two aspects, found in favour of the government. It is now under appeal. A third aspect of the dispute, pertaining to cost recovery, awaits a ruling soon.
RIL’s response said the firm, as a part contractor in the field, has been notified by the government of the “purported share of the government’s profit petroleum and royalty alleged to be payable by the contractor pursuant to the government’s interpretation of the arbitration tribunal’s final partial award of 12 October 2016”.
It said the quantification of liability, if any, of the parties arising out of the partial award will have to be determined by the tribunal after the parties have made their submissions. The tribunal is yet to schedule the timeline for the quantification, the firm said, adding that certain outstanding issues will have to be resolved before the quantification process can begin.
“Reliance has already responded to the government’s demand notice appropriately. Further, Reliance has already challenged the partial award before the English courts and the matters are, as such, sub judice,” the firm said.
A person privy to the position of the other two companies—ONGC and Shell India—said on condition of anonymity that it is not fair to call the ministry’s claim a penalty, as it is what the director general of hydrocarbons considers the shortfall in payment of the government’s share of profits.
A second person with direct knowledge of the dispute, who also spoke on condition of anonymity, said that the eventual profit petroleum dues could only add up to a few hundred million dollars.
Emails sent to ONGC remain unanswered at the time of going to press.
“Any view on the outcome of this arbitration is premature at this stage as further proceedings, including quantification, are still to be carried out,” Shell India said.
“The government computed the shortfall in profit petroleum clubbing all the three disputed aspects, not just the two on which partial award has been given. Even these two issues are under appeal,” said the first person cited above.
Disputes are common in the high-risk and capital-intensive hydrocarbon industry and often firms which are locked in dispute on certain contracts are seen working together on other fields.
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