$600 million at stake as govt resurrects old dispute with oil biggies
New Delhi: The government is considering referring to a panel of experts an old dispute with Reliance Industries, ONGCNSE -1.27 % and half a dozen other oil firms over how much penalty explorers must pay for unfinished minimum work programme in blocks awarded in previous exploration rounds.
The government has claimed about $600 million in penalty from companies, including $380 million from Reliance and a little more than $100 million from ONGC, people aware of the matter said.
Companies have contested these claims that would easily double if interest is added.
Hence the move to refer the matter to the experts’ panel — comprising former petroleum secretary G C Chaturvedi, former Oil India chairman Bikash C Bora and Hindalco IndustriesNSE 0.83 % managing director Satish Pai — set up in December.
However, the panel can consider the matter only if companies also agree to such mediation.
Oil ministry officials have discussed the idea with the panel and now they need to persuade companies to join the mediation process, people aware of the matter said.
The experts’ panel was set up to resolve any dispute or difference arising out of a contract relating to exploration blocks if both parties to the contract agree to mediation while committing that they wouldn’t invoke arbitration proceedings thereafter.
The government had recently referred the dispute with ONGC and other state-run companies to a committee of secretaries, where the matter hasn’t made much progress.
Now, if private companies agree to mediation by the experts’ panel, then the state-run companies’ matter would also be referred to that panel, people cited earlier said.
The expert panel is expected to resolve a dispute in three months.
Reliance Industries said it isn’t aware that this matter is being planned to be referred to the experts' panel. “RIL is in discussion with the government of India to resolve any outstanding issues related to unfinished minimum work program in NELP blocks,” a company spokesperson told ET. “The amounts payable, if any, are still under discussion and we expect a resolution in due course.”
Reliance Industries has always complied with the production sharing contracts and the law, the spokesperson said.
At the heart of the dispute is the method used to calculate the penalty for not completing the work programme explorers were expected to in the blocks they won in the first six bidding rounds of the New Exploration Licensing Policy (NELP).
The dispute is more than a decade old. The government has avoided invoking arbitration as it thinks it would lead to acrimony between the state and contractors, and also start a process that’s too lengthy and expensive, people aware of the matter said.
Contracts provide for liquidated damages for unfinished work programmes to deter speculative bidding. But if penalties are low, bidders adjust their bids to include these penalties, neutralising the main objective behind introducing penalties in the contract. Too high penalties discourage wider participation.
While relinquishing their blocks, some companies paid penalties as per their own calculations based on certain cost assumptions, to which the government didn’t agree.
The Economic Times 13-02-2020