India challenges Panna-Mukta field arbitration before English High Court

The Indian government has challenged before an English High Court an arbitration award over a cost recovery dispute in the western offshore Panna-Mukta and Tapti oil and gas fields of Shell and Reliance Industries Ltd.

An arbitration “tribunal gave favourable award on January 29, 2021,” Reliance said in its latest annual report.

Reliance and Shell had through the arbitration sought raising of the limit of cost that could be recovered from sale of oil and gas before profits are shared with the government. The award came this year.

“On April 9, 2021, Tribunal issued its decision on the Clarification Applications of both the parties. It granted the minor correction requested by the Claimants (Reliance and Shell) and has rejected all of the Government of India’s clarification requests,” it said without giving details.

Subsequent to that, the government of India (GoI) has challenged the award before the English High Court, it said.

Reliance and Shell-owned BG Exploration & Production India Ltd had on December 16, 2010, dragged the government to arbitration over cost recovery provisions, profit due to the State and amount of statutory dues including royalty payable.

The government of India also raised counter claims over expenditure incurred, inflated sales, excess cost recovery, and short accounting.

The three-member arbitration panel by majority issued a final partial award (FPA) on October 12, 2016. It upheld the government view that the profit from the fields should be calculated after deducting the prevailing tax of 33 per cent and not the 50 per cent rate that existed earlier.

It also upheld that the cost recovery in the contract is fixed at $ 545 million in Tapti gas field and $ 577.5 million in Panna-Mukta oil and gas field. The two firms wanted that cost provision be raised by $ 365 million in Tapti and $ 62.5 million in Panna-Mukta.

The Panna-Mukta (primarily an oil field) and Mid & South Tapti (gas field) are shallow-water fields located in the offshore Bombay basin. Discovered by state-owned Oil and Natural Gas Corp (ONGC), they were bid out in 1994 to a consortium comprising of ONGC (40 per cent), Reliance (30 per cent) and Enron Oil & Gas India Ltd (30 per cent).

In February 2002, British Gas Exploration and Production India Limited (BGEPIL) acquired Enron’s 30 per cent stake in the joint venture. BGEPIL was subsequently taken over by Shell.

The production sharing contract (PSC) for the fields stipulated deducting costs incurred on field operations from oil and gas sold before sharing profit with the government. Disallowing of certain items in the cost would result in higher profit petroleum for the government.

Reliance and BGEPIL had sought raising of cost recovery limit through arbitration.

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