Why the resolution of gas migration dispute involving RIL and ONGC may take some time

In mid-February, a division bench of the Delhi High Court overturned a ruling of an international arbitration tribunal in connection with a gas migration dispute between Reliance Industries Ltd (RIL) and ONGC. The tribunal had ruled in favour of RIL.

Following the ruling, the government has raised a demand of $2.81 billion on RIL and its partners.

The case concerns extraction of natural gas in the Krishna Godavari (KG) basin in Andhra Pradesh. ONGC claims RIL illegally extracted natural gas from its KG-D6 block between 2009 and 2013. As a result, the gas migrated from its adjacent field, causing it losses, says ONGC. RIL holds a 60% stake in the KG-D6 block. UK-based BP Plc owns 30% and Canada’s Niko Resources 10%.

It’s a story that has gone back and forth multiple times for over a decade. The allegation was first made in 2013. The oil ministry asked RIL to pay around $1.5 billion, plus another $174 million as interest, adding up to nearly $1.7 billion. This was followed by an international arbitration, which went in RIL’s favour. The panel argued that the production sharing contract did not prohibit extraction of gas accruing through migration. The government challenged the award contending that it was against public policy. A key development took place in mid-2023 when a single Bench of the Delhi High Court upheld the arbitration award. In that context, the recent ruling is interesting in terms of how the issue could now play out in terms of public policy and impact on foreign investments in India.

Ashish Kumar Singh, Managing Partner at Capstone Legal, says highly technical cases where the decision is based on specialised matters are generally decided by arbitral tribunals. “Normally, they are experts both on the subject matter and from the legal side. In this case, the tribunal has taken all views and decided based on its reasoning and understanding of the dispute.” According to him, it is an accepted international practice “to promote business certainty in case of disputes.” This is where the public policy doctrine comes in. “It is important that courts use this sparingly as it has a tendency to put off foreign businesses contemplating investments in India, since public policy is based on domestic law,” he says.

In the context of the current case, determination of what public policy entails will be a subjective assessment of the Indian law, says Singh. “In complex factual matters, the court should take a conservative view before invoking the public policy doctrine. A liberal view can lead to uncertainty among the international business fraternity about enforcement of contracts in India.”

The question now is, what will RIL do? “The endgame would be to wait for the Supreme Court’s decision. RIL is expected to approach them swiftly against the Division Bench judgement of the Delhi High Court,” says Singh.

RIL trackers are understandably keen on getting the issue resolved. Deven R. Choksey, Chairman and MD of wealth management and investment advisory firm DRChoksey Finserv, is clear that nothing is more important to the company than closure. “It has been going on for a long time. At this point, it is really left to the courts to take a decision. Obviously, time is of essence,” he says.

Given the complexity of the issue, Choksey believes that gas exploration is still an evolving subject. “That means policies around it too need to mature to eventually lead to a better understanding of the subject. At the end of it, the government should not lose money, and nothing is more important than that,” he says. By the looks of it, that could easily take a lot of time.

@krishnagopalan