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Thursday, 19 April 2012 00:00
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Govt refuses to arbitrate, forcing RIL to go to SC
Given the petroleum ministry asked solicitor general Rohinton Nariman for his view on Reliance Industries Limited’s (RIL) costs in the KG Basin and Nariman suggested some part of the charges be reversed, its refusal to even arbitrate the matter is unfair. Even if you assume RIL has gold-plated its expenses, it cannot be denied the chance to argue its case before an arbitration panel. The fact that RIL has now approached the Chief Justice of India to nominate an arbitrator just two days before it declares its results may be a coincidence, but is symbolic of the fact that the standoff between the government and RIL is beginning to hurt—under the agreement between the government and RIL, if one party refuses to nominate an arbitrator (RIL has nominated former CJI Justice SP Bharucha while the government says there is no cause for an arbitration!), the other is free to approach the CJI to nominate an arbitrator and the two arbitrators then agree on a third arbitrator.
The dispute is a simple one: when RIL estimated around 40 mmscmd of gas could be produced from the KG Basin fields, it had a capex of $2.4 bn but this was raised to $8.8 bn when the output estimate was raised to 80 mmscmd—it so happened that, as the capex rose, RIL’s output plummeted, making the cost hike look even less palatable. Since, under the Production Sharing Contract (PSC), all costs are recoverable before the government gets its share of profits, any hike in costs hurts it. The view that RIL’s costs were excessive got a boost when, after examining RIL’s costs for 2006-07 and 2007-08, CAG asked the petroleum ministry to do an in-depth review of 10 contracts, 8 of which had been awarded to a single group on a single-bid basis. After Nariman gave his view, the ministry reportedly decided to deny RIL around $1.2 bn in costs.
 
Obviously RIL has its explanation for costs rising—it argues costs of rigs went up dramatically and cites other projects where costs have risen similarly. In the event, RIL issued a press release, a big step in the escalating war, saying “the PSC contains no provision which entitles the GoI to restrict the costs recovered by the company by reference to factors such as the level of production or the extent to which field facilities are utilised”. In such a case, arbitration is really the only way out as it gives both sides a chance to thrash out matters fully. Not allowing RIL to recover its costs fully is unfair unless the government is able to show the costs were jacked up. And if the government is able to show this—by the in-depth analysis of the contracts CAG asked it to do—it needs to give RIL a chance to rebut this, all of which will happen only if the arbitration is allowed to take place. While the government is asking the SC to stay clear of its domain in the 2G and other matters, RIL’s decision to ask the Supreme Court to step in to appoint an arbitrator is ironic since it drags in the SC into an area that is clearly the domain of the executive!
 
 

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