Justice Shah: Why ONGC is not entitled to RIL compensation

The exploration of KG-D6 block by Reliance Industries (RIL) had led to migration of gas from the adjacent KGDWN-98/2 block operated by ONGC, which led to a loss to the exchequer, a report by the Justice AP Shah panel submitted to the government concluded yesterday.

In an interview with CNBC-TV18, Justice Shah elaborated upon the findings on the panel report, explaining why ONGC should not have claim on any "restitution" for the "unjust benefit" RIL received, why he did not quantify a penalty amount and outlined steps that would prevent such conflicts in the future.

The Shah panel accepted the findings of a report by consultant DeGolyer & MacNoughton appointed by RIL and ONGC, which concluded that gas had migrated from the ONGC field to the RIL block.Below is the transcript of Justice AP Shah’s interview to Latha Venkatesh, Sonia Shenoy and Anuj Singhal on CNBC-TV18.Latha: You have flinched from giving an amount. The DeGolyer & MacNaughton (D&M) report refers to the penalty. You do not agree with that penalty. Why have you not gotten into mentioning a penalty figure?A: It is not penalty figure. It is about the quantification of the unjust enrichment. There is no penalty involved. This is unjust enrichment, which is to be returned to the government. That is the finding. So, there is no penalty. The penalty part is in Chapter IX where the committee has proposed strict penalties in case the disclosures are not made.Coming back to the quantification of unjust enrichment, we have said basically in the context of the migrated gas whatever benefit has been received by Reliance Industries (RIL) should be returned to the government. The finding is that the ONGC is not entitled to make any claim on account of unjust enrichment. It has never produced the gas. So, it has no possessory or proprietary title over the gas. So, that amount of the unjust enrichment must be restored to the government and not to ONGC.That quantification has created several problems. For example, whether the cost incurred by RIL should be liable to be deducted for the cost incurred for producing the gas. The argument of the Directorate General of Hydrocarbons (DGH) and ONGC was that the cost was incurred by RIL for extracting gas in its own contract area and not for the extracting migrated gas, which has come to their field fortuitously. So, this was the argument and then there is a question of whether royalty is liable to be excluded, etc. The committee has really no expertise on this issue. Again the problem was about the amount of gas produced by RIL after 2015, the committee did not have the figures. So, we just left it to the government.Latha: You have said in your findings that the committee has entirely accepted the D&M reports’ findings about the connectivity. It is not something you have arrived at and you also say in Chapter VII that Reliance raised four objections to the D&M findings itself. So, does that leave a loophole if RIL were to question the D&M findings itself?A: Of course, RIL has raised certain challenges, but you must understand the background of the D&M report. This report was jointly commissioned by RIL and ONGC. It was under the supervision of the DGH. At every stage, the parties were consulted by D&M, even the draft report was shared with the parties and party's comments were taken into consideration while issuing the final report. Now to raise these objections belatedly, I have not said much on this comments, I have just referred to the ONGC’s reply to the objections raised by RIL. The committee had some limitations in respect of these technical matters. But prima facie, the committee found that the objections may not be sustainable but these objections will have to be considered at some other forum as and when the objection arises.Sonia: So what have you recommended as a future course of action to the government now?A: The future course of action is first about the – naturally, there is a finding on the unjust enrichment and the government’s right to recover the amount from RIL, that is the first finding.Apart from that, what we found was that a certain report was commissioned by RIL and Niko in 2003. The D&M was also engaged as an expert. Now that report indicates the possibility of connectivity between the RIL block and the adjoining block of ONGC that is Godavari-PML block and the report says that as a result of the exploration of gas in RIL’s area, the gas in adjoining block will be depleted. So, this was a clear indication of a possibility of connectivity. Now under the production sharing contract (PSC), all the contractors are liable to disclose every bit of information. All the material information, appraisal reports, the interpretation of such material, everything has to be placed with the DGH and has to be shared with the government.Now here the 2003 report was not shared by RIL with the government. And conversely, we found even the conduct of ONGC rather objectionable in the sense that ONGC wrote the letter to the DGH in 2013 complaining about the connectivity and possible connectivity and the migration of gas. On the basis of material, which was available with ONGC in 2007.Latha: We just had the gentleman who was chairman at that time, RS Sharma. He says that you are suspecting they knew. You are not sure they knew in 2007.A: No, this is clear that they had some information. If they had carried that G&G test in 2007 surely they would have discovered. They could have returned to the DGH in 2007 which they failed to do. Therefore, all that the committee has recommended is that the disclosure regime should be strengthened in the future. There should be serious consequences for non-disclosure of material, reports, anything. That is for the future. This is the first part of the recommendation.Secondly, strengthening the office of the DGH, I found it rather perplexing that DGH’s council argued before the committee that the DGH mostly depended upon the guidance from the parties, from the contractors and does not have its own machinery for the interpretation of data. So we said that it is necessary to strengthen the DGH so that such instances would be avoided in the future and DGH should be far more proactive than the way it acted in the present case. If there was a proper intervention at the right time, the whole controversy could have been avoided. There would have been joint development of the respective blocks by RIL and ONGC both. Today, there is hardly any gas left in that discovery area and the licences are coming to an end in 2019. So, there is no more joint development.(Disclosure: RIL owns Network18, which publishes moneycontrol.com)