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KG-D6: OilMin seeks legal opinion on BP & Niko arbitration notices

The Oil Ministry has sought legal opinion on the arbitration notices slapped by British energy giant BP and Niko Resources of Canada against levy of penalties for KG-D6 gas production falling short of target.

BP and Niko, which filed separate arbitration notices on 23 March, are seeking to join their partner Reliance Industries' fight against $1.8 billion of penalties slapped by the government for KG-D6 output lagging targets.

RIL had in 2012 initiated arbitration proceedings against levy of the penalty and the two foreign partners are seeking to join the same.
Sources said the ministry has asked law officers if the Notice of Arbitration issued by BP and Niko were in accordance with the provisions of the Production Sharing Contracts (PSC) and should they be acceptable by the government in the present form. It also wanted to know how the government should respond to the notices.

The two firms are seeking to join the arbitration so that they too can get the soon-to-be-implemented revised natural gas prices.
They were faced with a situation where the near-doubling of the gas rate to about $8.3 per million British thermal units from the next financial year would not accrue to them.

The Cabinet had stipulated in December last year that the new gas rate would apply to all producers. However, RIL, the contractor of the eastern offshore KG-D6 block, would have to furnish bank guarantees equivalent to the incremental revenue it would get from the new rate.
This bank guarantee would be encashed if it is proved that the company deliberately produced less gas from the D1 and D3 fields in KG-D6. While RIL agreed to the condition, the Oil Ministry felt bank guarantees could not be taken from BP and Niko because they were not part of the arbitration process, sources said. RIL, the operator of KG-D6 block with 60 per cent interest, would get all the revenue after furnishing the bank sureties.

An option that was being considered for BP and Niko was to put their share of incremental revenue in an escrow account during the arbitration.
To break the impasse, BP and Niko, which together hold the remaining 40 per cent in KG-D6, have now served the notice of arbitration and formally join in the legal dispute.

Sources said BP and Niko have taken an almost similar line as RIL in its 2012 arbitration against the levy of a $1.8 billion penalty for output dropping to a 10th of the targeted 80 million standard cubic meters a day. The two firms, like RIL, maintain that the production sharing contract does not provide for a penalty in the form of denying costs incurred if output lags behind projections made in field investment plans.
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