New Delhi: In a significant blow to Mukesh Ambani-led Reliance Industries Ltd and its partner BP Plc, the Delhi High Court has overturned an international arbitration tribunal's ruling that had previously absolved them of compensation liability for the gas they extracted and sold, which allegedly migrated from adjoining fields.
Block KG-DWN-98/3, widely known as KG-D6, was awarded to a consortium consisting of Reliance Industries Ltd and Canada’s Niko Resources during the inaugural bid round under the New Exploration Licensing Policy (NELP) in 2000, under the Atal Bihari Vajpayee-led government. BP acquired a 30 percent stake in the block over a decade later.
In the same bid round, block KG-DWN-98/2 (KG-D5) was allocated to Cairn Energy India Ltd, which was later acquired by state-owned Oil and Natural Gas Corporation (ONGC) in two phases. Additionally, ONGC received an adjacent Godavari block through a nomination process in 1997. Reliance commenced production from KG-D6 in 2009, whereas ONGC started output in January 2024.
The dispute arose in July 2013 when ONGC suspected reservoir connectivity between its KG-D5 and G-4 blocks and Reliance’s KG-D6. On July 22, 2013, ONGC alerted the Directorate General of Hydrocarbons (DGH), stating that geological and geophysical (G&G) assessments of available data from the Godavari and KG-DWN-98/2 blocks suggested "evidence of lateral continuity of gas pools" extending into KG-D6. In simpler terms, the subsurface gas reservoirs of both blocks appeared interconnected, indicating potential gas migration.
Since Reliance had begun production earlier, ONGC contended that it might have been extracting gas from ONGC's reservoirs. ONGC subsequently requested the DGH, the regulatory authority under the Union Ministry of Petroleum and Natural Gas, to provide G&G data along with production and well information from the contiguous area of block KG-DWN-98/3.
The issue was leaked to the press, resulting in a brief news report in one of the newspapers. As was customary for significant developments, ONGC’s board was informed in April 2014. The board then instructed management to investigate the matter and submit a report.
Following the board’s directive, ONGC’s management compiled a comprehensive report and was advised to initiate legal proceedings. A writ petition was filed, which high courts generally handle with urgency. Given that the DGH, as the custodian of resources, was likely aware of the connectivity when approving Reliance’s development plans, ONGC chose to file the writ against the DGH and the petroleum ministry, with Reliance as the third respondent.
The petition was filed in the Delhi High Court on May 15, 2014, just a day before the general election vote counting. On September 10, 2014, the court disposed of ONGC’s petition and directed the government to decide after reviewing a report from an independent panel formed by ONGC and RIL.
ONGC’s petition raised alarms within the petroleum ministry, triggering an inquiry into whether ONGC had sought ministry approval before taking legal action against its largest stakeholder—the Government of India—and the upstream regulator, DGH.
A ministry probe found that then Joint Secretary (Exploration) Armane Giridhar "was aware of the decision to file the writ, though he may not have fully grasped its implications, particularly the government being named as the first respondent." Armane, who also served on ONGC’s board, had suggested that merely referring the matter to the government "might not be useful as the government would be seen as an interested party, creating a conflict of interest."
DeGolyer and MacNaughton (D&M) was engaged to conduct an independent study. In its final report, dated November 19, 2015, D&M concluded that "integrated analyses indicated connectivity and continuity of reservoirs across ONGC and Reliance-operated blocks." The report quantified the volume of gas migration:
Between April 1, 2009, and March 31, 2015, 7.009 billion cubic meters (bcm) of gas migrated from Godavari PML to KG-DWN-98/3. Additionally, 4.116 bcm migrated from the D1 discovery of KG-DWN-98/2 to KG-DWN-98/3. Out of these migrated volumes, Reliance extracted 5.968 bcm from Godavari PML and 3.015 bcm from the D1 discovery. D&M valued the gas extracted by Reliance from ONGC’s reservoirs at approximately Rs 10,000 crore.
Based on D&M’s findings, the government appointed a single-member committee on December 15, 2015, chaired by former Delhi High Court Chief Justice Ajit Prakash Shah, to determine the extent of Reliance’s "unjust enrichment."
The Shah Committee’s report, submitted on August 28, 2016, confirmed gas migration but found no evidence of criminal misconduct by Reliance. However, it concluded that the Government of India—rather than ONGC—was entitled to compensation from Reliance for the undue benefits gained.
Following the Shah report, on November 4, 2016, the Ministry of Petroleum and Natural Gas (MoPNG) demanded USD 1.47 billion from Reliance and its partners for extracting 338.332 million British thermal units of migrated gas between April 1, 2009, and March 31, 2016. After accounting for royalty payments and adding interest (LIBOR + 2 percent), the total demand increased to USD 1.55 billion. Additionally, the government sought USD 174.9 million in extra profit petroleum due to lower-than-expected KG-D6 output.
Reliance contested the demand, arguing that it was based on a "misinterpretation of the PSC" and was unprecedented in the oil and gas sector.
Reliance and its partners initiated arbitration on November 11, 2016. In July 2018, an international tribunal dismissed the USD 1.55 billion claim and instead awarded USD 8.3 million to Reliance and its partners.
The government challenged the tribunal’s decision in the Delhi High Court, asserting that it was contrary to public policy and had allowed Reliance to "unjustly amass over USD 1.729 billion." In May 2023, a single-judge bench upheld the arbitration award, ruling that the tribunal’s decision was a "plausible view" and did not violate Indian public policy.
The government appealed the ruling. On February 15, 2024, a division bench comprising Justices Rekha Palli and Saurabh Banerjee overturned the May 2023 ruling and annulled the 2018 arbitration award, deeming it "contrary to settled law." Reliance has yet to release a statement but is expected to challenge the verdict in the Supreme Court.