Reliance, BG drag govt to arbitration on PMT dispute

Reliance and BG, who along with state-run Oil and Natural Gas Corp (ONGC) are joint operators of the western offshore fields, had in December 2010 sent a Notice of Arbitration on dispute like recovery of contractor cost and price at which royalty is payable, sources in know of the development said.

But despite the reminders, the oil ministry has refused to appoint arbitrator saying the "notice is pre-mature" and the issue should be sorted out of court through conciliation.
Livid with the delays, Reliance-BG have cited clauses in the Production Sharing Contract (PSC) to say that if the arbitrator is not appointed this month, the second arbitrator would be appointed by the Permanent Court of Arbitration in Hague. If that happens, the government's representative may not be an Indian or an English national, sources said.
The prime dispute is over the field operation cost that can be recovered from the sale of oil and gas before profits can be split between the stakeholders including the government.

The PSC prescribes a Cost Recovery Limit (CRL) of USD 545 million on certain development costs in Tapti gas field and USD 577.5 million in respect of Panna-Mukta oil and gas field that can be recovered.

Sources said the operators had in June 2008 applied for increase in CRL for Tapti field of USD 324 million but it was not agreed to by the Management Committee, which comprises of representatives of the ministry and the oil regulator DGH.

DGH, on the contrary, said that CRL should be decreased, the arbitration notice stated. Reliance and BG have disputed this and want the increase in CRL to go to arbitration.

Also, there is a dispute over the price at which 10 per cent royalty is payable to the government. The PSC says the royalty is payable at wellhead price of the gas, which the two firms have calculated by deducting all the capital and operating costs relating to the transportation and processing of the gas from seabed to the delivery point at Hazira in Gujarat.

The arbitration notice stated that this methodology was followed "without any objection from the government", from June 1997 to August 2007 but a gazette notification on August 20, 2007 disallowed the deduction of any depreciation expenses when calculating royalty payments on oil and gas.

DGH on April 23, 2008 stated that a deduction for the amortised value of post wellhead capital expenditure is not a permissible deduction when calculating the value at wellhead.

Sources said Reliance-BG that hold 30 per cent a piece in the fields, have disputed this and want the issue to be resolved through arbitration.

Also, there are differences in auditing procedure which need to be resolved.
Sources said according to the terms of arbitration proceedings laid out in the PSC, if one of the parties to the contract informs the other about appointment of an arbitrator, then the latter would have to appoint its own representative within 45 days of the intimation.
ONGC holds 40 per cent interest in the Panna/Mukta and Tapti fields.

Tapti block comprises an area of 1,471 square kilometers located north-northwest of the city of Mumbai and contains to natural gas fields - South Tapti and Mid Tapti. Panna and Mukta fields are oilfields located in the Bombay Basin in central west offshore India, northwest of the city of Mumbai.