The Indian Oil and Natural Gas sector is one of the fastest-growing areas in the world, especially since India has decided to transformitself into a gas-based economy by elevating the share of India’s energy mix from 6.3% to a hefty 15% by 2030. Additionally, with the opening of gates for foreign investors in the sectors of exploration activities of oil and natural gas fields (automatic route; 100%), petroleum refining by the PSUs (without any disinvestment or dilution of domestic equity; 49%), and in infrastructure related to marketing of petroleum products and natural gas (and allied aspects; 100%), the Indian peninsula is set to bolster its economy. However, with the onset of investments, disputes are bound to arise. Therefore, instead of engaging in a long, cumbersome Courtroom battle, the investors usually resort to methods like Arbitration to resolve their disputes.
The authors of this blog post will focus on the aspect of ‘Arbitration’ concerning India’s oil and natural gas sector. Primarily, the authors would focus on the Indian legal framework concerning the redressal of disputes in the oil and natural gas sector by analyzingthe Petroleum and Natural Gas Regulatory Board Act of 2006, coupled with allied aspects. The focus would then be shifted to the laws formulated by the European Union (EU) to resolve the issues present in the Indian system. Finally, the authors would conclude with certain suggestions/recommendations.
Before making the readers sail towards understanding the aspect of Arbitration and allied aspects in the Indian Oil and Natural Gas sector, coupled with a comparative analysis of the laws as made by the European Union, the authors feel that it would be fair to first provide an overview of the industry.
As far asthe Indian Oil and Gas sector is concerned, it places itself in one of the eight core industries, which are not just responsible for the generation of revenue for the nation but also for bolstering the Indian economy. Owing to India becoming the third-largest consumer of oil in the world in the year 2021, the need for oil and gas is expected to spike in the upcoming years. The demand for the same could be seen in the statistics: As far as petroleum consumption goes, India emerged as one of the biggest supporters towards non-OECD petroleum consumption growth at the global level. As of July 2022, India’s consumption of petrol products towered at 72.74 MMT. Additionally, High-Speed Diesel remained the most consumed oil product in the nation, with a consumption of 38.84% in FY 22. Turning towards the oil consumption of the country, it stood at 4.9 million BPD (Barrels Per Day) for the year 2021. This comes from the 4.6 million BPD for the year 2020. As for the LNG (Liquified Natural Gas) imports for the country, the same remained at 2,451 MMSCM (Million Metric Standard Cubic Meters) as of June 2022, coupled with the gross production of 2,813 MMSCM of LNG for June 2022.
With such potential in the Indian Oil and Natural Gas (O&NG) sector, an array of schemes and measures like that of ‘One Nation One Grid’ has been announced by the Government of India. Additionally, measures like reduction in excise duty on petrol, and diesel, amendments to the Biofuel policy of India, etc., have acted as bait for foreign investors to invest in the aforementioned sector. As per the data published by the Department for Promotion of Industry and Internal Trade (DPIIT), as far as the inflow of foreign investment in the Indian O&NG sector is concerned, itstood at US $ 7.98 Billion from April 2000-March 2022. As mentioned above, even with the rosy picture being painted for the sector, it will not be out of place to acknowledge that disputes have become an inevitable part of this sector. The disputes in the sector ariseprimarily because of three reasons:
- Against the Union Government’s schemes/legislations/guidelines/rules concerning theNew Exploration and Licensing Policy;
- Concerning the due payment of royalties in the Union Government’s account; and
- The prospect of application of retrospective tax legislation as brought by the Union Government.
Now, as far as these disputes are concerned, there are different ways in which they are dealt with. Primarily, the authors shall mention the dispute resolution procedure for the Production Sharing Contracts (PSCs).
1.1 Production Sharing Contracts
PSCs refer to an Agreement signed between a ‘Contractor’ and the ‘Government’ in the Hydrocarbon industry, where the Contractor undertakes the entirety of exploration risks, production, and development cost with a return in the form of profits as incurred as a part of such exercise. The disputes revolving around the PSCs are usually resolved through the method of Arbitration. The case of Arbitration as a method of redressal of disputes is not alien even to the cases concerning the retrospective tax legislation, which is initiated against the Government of India. As far as the other methods of dispute resolution are concerned, Conciliation and Mediation have been given validity inNotification No. 387 dated 17th December 2019, published in the Gazette of India, where it was mentioned that an Expert Committee for Dispute Resolution would be responsible for redressal of disputes concerning the exploration and licensing between the contracting parties.
2. Arbitration concerning Oil and Natural Gas in India
2.1 Analysis of the Petroleum and Natural Gas Regulatory Board Act of 2006
The Petroleum and Natural Gas Regulatory Board Act of 2006 has been instrumental in ushering India into a new era of energy security. The Act establishes the Petroleum and Natural Gas Regulatory Board (PNGRB), which is responsible for regulating all activities related to the exploration, production, storage, transportation, marketing and pricing of petroleum, natural gas and petroleum products in India. The Act also provides for the establishment of an Appellate Tribunal to hear Appeals against Orders issued by the PNGRB. Furthermore, the Act mandates that all Companies engaged in these activities obtain a License from the PNGRB before they can commence operations. It also empowers the Board with the authority to impose penalties on companies violating the Act. Additionally, the Board is also empowered to take necessary steps to ensure that there is a level playing field for all players in the industry and that no Company enjoys an unfair advantage over others.
The Act has been instrumental in promoting competition within the energy sector by providing measures such as open access and third-party access. This has enabled the development of an efficient and transparent energy market in India while also providing a level playing field to all players. Additionally, the Act mandates that any new projects be subjected to an environmental impact assessment, thus ensuring that projects are undertaken in an environmentally responsible manner. The Petroleum and Natural Gas Regulatory Board Act of 2006 is an important milestone in India’s efforts to ensure energy security and promote competition within the energy sector. It has provided a clear regulatory framework that promotes investment and development of the industry while also protecting the environment and promoting fair market practices. The Act has proven successful in its aim of enabling growth and progress within the industry while ensuring that all stakeholders benefit from it. The Act has thus been vital in helping India’s energy sector to become more efficient and sustainable.
2.2 Does the Act draw a nexus with the Arbitration and Conciliation Act?
The Petroleum and Natural Gas Regulatory Board Act of 2006 (PNGRB Act) defines the powers of the Petroleum and Natural Gas Regulatory Board, which is an independent regulatory body created to ensure transparency and efficiency in the regulation of India’s oil and gas industry. The PNGRB Act does not specifically reference the Arbitration and Conciliation Act, however, it does contain certain provisions that have an indirect bearing on the enforcement of Arbitration Awards.Section 11 of the PNGRB Act provides for a dispute resolution mechanism whereby parties can refer their disputes to the Board for adjudication. This has implications for Arbitration proceedings, as any Award rendered by an Arbitral Tribunal must be ratified by the Board for it to become enforceable. Additionally,Section 55 of the PNGRB Act authorizes the Board to make regulations relating to Arbitration and dispute resolution in disputes arising out of or connected with any activity regulated by the PNGRB Act. Additionally,Section 24(1) of the PNGRB Act acts as a saviour to the parties in a contract, whereby they can choose Arbitration as a method of dispute resolution. However, it is to be noted that once the parties in the contract decide to pursue the dispute resolution as per section 24(1), they would be governed directly by the provisions of theArbitration and Conciliation Act of 1996.
Therefore, while the PNGRB Act does not draw a direct nexus with the Arbitration and Conciliation Act, it does have a certain bearing on Arbitration proceedings and their enforcement in the oil and gas industry. Thus, the PNGRB Act is an important consideration for parties involved in disputes concerning this sector.The Arbitration and Conciliation Act of 1996 (A&C Act) lays out the legal framework for conducting Arbitration proceedings in India. This Act governs the procedure and enforceability of Arbitration Awards, as well as the settlement of disputes. The A&C Act applies to any dispute between two parties that is arbitrable according to Indian law. However, the PNGRB Act provides a specific mechanism for resolving disputes in the oil and gas industry that may be subject to different rules than those specified in the A&C Act. Therefore, while the PNGRB Act does not draw a direct nexus with the Arbitration and Conciliation Act, it is an important consideration for parties involved in disputes concerning the oil and gas industry in India. The provisions of this Act can have an indirect bearing on the enforcement of Arbitration Awards, as well as the settlement of disputes. Thus, understanding and taking into account the PNGRB Act is essential for parties involved in Arbitration proceedings in this sector.
In conclusion, it can be reiterated that although the Petroleum and Natural Gas Regulatory Board Act does not draw a direct nexus with the Arbitration and Conciliation Act, it does have certain provisions that have an indirect bearing on the enforcement of Arbitration Awards and settlement of disputes in the oil and gas industry. Therefore, it is important for parties involved in such proceedings to understand and consider this Act.
2.3 The case of Panna-Mukta-Tapti oil and gas fields
One of the prominent cases where Arbitration was used as a method of dispute redressal is thePanna-Mukta-Tapti Oil Gas Fields issue. The Panna-Mukta-Tapti oil and gas fields are located in the Arabian Sea, off the coast of India. Initially discovered in 1976 and developed by ONGC Videsh (OVL) and British Gas, they have become a very important source of natural gas and light crude oil for India. Recently, Reliance Industries Ltd (RIL) became the third partner in this field, taking a 30% stake, with a joint venture composed of ONGC taking a 40% stale and Enron taking up the remaining 30% stake. The Panna-Mukta-Tapti oil and gas fields have been producing since 1994 and providing India with nearly 25% of its total gas production. The fields are spread over an area of 110 sq. km. and they have a total estimated reserve of 140 million barrels of oil and 1.2 trillion cubic feet of natural gas. The primary activities undertaken in this field include drilling, production, transportation and marketing of both crude oil and natural gas.
The Panna-Mukta-Tapti oil and gas fields have been an important source for India for over two decades. It has helped meet the growing energy demand of the country while also employing thousands of people in India. This field is likely to remain a major source of oil and gas for India in the years to come, thus ensuring energy security for the nation. The Indian Government has recently introduced various measures to ensure the efficient and optimal utilization of the Panna-Mukta-Tapti oil and gas fields. This includes incentivizing deep-water exploration, introducing new technologies for drilling, enhancing maintenance and safety measures as well as modernizing the production facilities in this field. These measures will help increase efficiency and reduce costs associated with the extraction and refining of oil and gas in this field. These oil and gas fields are a major source of energy for India and have the potential to continue providing to meet the country’s growing energy needs in the future. By introducing measures to ensure their efficient and optimal utilization, India can further ensure that this important source of energy is of utmost efficiently manner.
At the initial level, the dispute arose in the year 2002, when British Gas assumed the role of operator of the field, paving the way for disagreements concerning conducting the operations of the field between the three stakeholders. This made British Gas craving for dominance in the operations, and the other two partners fought for equal control over the fields. Post this, another dispute erupted in the year 2010 when the payment of royalty, reimbursement and service tax became a hindrance for the three parties in the contract. This led to Reliance triggering the International Arbitration clause, where both Reliance and British Gas filed an Arbitration request to a three-member Arbitration panel, which was chaired by Christopher Lau. The contentions by Reliance and British Gas circumnavigated around cost recovery of US $ 545 million in the Tapti Gas Field and US $ 577.5 million in the Panna-Mukta Oil and Gas Production as a part of their contract. Furthermore, the issues also included the calculation of royalty and the extent of an audit as conducted by the CAG (Comptroller and Auditor General) of India. Furthermore, they wished to escalate the cost provision in Tapti Gas Field to US $ 365 million and US $ 62.5 million in Panna-Mukta Oil and Gas Production. On the other hand, the Government of India too hit back with a Counterclaim amounting to US $ 443 million. This Counter-claim contained the loss incurred by the government owing to the employment of an erroneous tax rate for the estimation of the government’s petroleum, coupled with a production loss amounting to US $ 5.7 billion.
After the three-member Arbitration panel headed by Mr Lau issued the Final Partial Award in favour of the government, the very same Award was challenged before the British High Court in the year 2018, which then sent one of the disputed issues back to the Arbitration Tribunal for reconsideration. This led to the Tribunal issuing decisions in the year 2021 concerning the Clarification Applications of both parties, where it had rejected all the clarification requests by the Government of India and made it favourable for the claimants (Reliance and British Gas). This decision has once again been challenged by the Government of India, and the battle continues.
Even before the expiration of the Panna-Mukta and Tapti field Joint Venture’s PSC on 21st December 2019, the Tapti fields ceased their functions, and the allied process platform facilities were handed over to the ONGC.
3. EU’s tryst with the Oil and Natural Gas Sector
The European Union has set several laws and regulations to ensure the safe and sustainable distribution of oil and natural gas across its member states. Firstly, the European Commission enacted anOil Supply Regulation in 2009, which requires refiners to keep sufficient stocks of oil products in case of supply disruptions. This was further strengthened by the EU’sRenewable Energy Directive in 2018, which set goals for the percentage of renewable energy to be used in transport, heating and cooling across Europe. This is particularly important as natural gas can be a major source of emissions when combusted. In addition, the European Commission has established mandatory requirements on environmental performance standards (EPS) for fuel suppliers selling in Europe. The European Commission has also enacted legislation to tackle emissions from the transport sector. This includes theFuel Quality Directive, which set several targets for reducing greenhouse gas emissions and air pollution from fuel used in road vehicles. Finally, the European Union has set up a trading system to allow companies to trade their allowances for carbon emissions, which is intended to incentivize the reduction of emissions from oil and natural gas. This system has been in place since 2006 and has proven effective in reducing emissions across the EU.
Overall, these laws and regulations have created a framework for responsible oil and natural gas distribution throughout the European Union. By setting ambitious goals for renewable energy use and reducing emissions from oil and natural gas, the European Union is taking a leading role in creating a more sustainable energy future. Through these initiatives, the EU is also helping to ensure that Europe’s energy security remains stable for years to come. This is an important step in creating a more sustainable future. The European Union’s commitment to sustainability will benefit all member states as well as the wider world. Together, we can create a greener and cleaner future for everyone. The European Union is quickly becoming a global leader in energy sustainability. The EU is taking the initiative to create an energy future that is both secure and sustainable. Their continued commitment to reducing emissions from oil and natural gas, as well as increasing renewable energy use throughout Europe, will have positive impacts not only on Europe but also on the entire world’s environment. With these actions, the European Union is helping to create a more sustainable and prosperous future for everyone.
In the European Union, Arbitration is commonly employed concerning oil and natural gas orders to settle disputes between parties. The most common type of Arbitration used in the oil and natural gas industry is International Commercial Arbitration (ICA). ICA helps resolve contractual disputes related to international trade and investment agreements. It provides an impartial forum for resolving disputes between parties and is often a preferred alternative to litigation. ICA also allows both sides to come together in an attempt to settle their dispute without the high cost of going through Court proceedings.
At the EU level, theEnergy Charter Treaty (ECT) is an international agreement which aims to promote foreign investment in the energy sector, as well as protect investors from unlawful expropriation and establish a stable and predictable regulatory framework for energy investments. The ECT also provides for dispute resolution through Arbitration if negotiations between parties fail. In addition, certain EU countries have also adopted Arbitration Agreements with other countries or companies dealing in the energy sector, further providing for Arbitration as an alternative dispute resolution system.
In conclusion, Arbitration is an essential tool used in the EU to resolve disputes in the oil and natural gas industry, allowing parties to come together and settle their issues without having to resort to costly litigation. It provides an impartial forum for resolving disputes, allows for a more flexible approach to dispute resolution and is often quicker and more cost effective than traditional Court proceedings (Chicken Shawarma). As such, understanding the basics of Arbitration and how it is employed concerning oil and natural gas can help any business looking to resolve disputes quickly, efficiently, and cost-effectively.
3.1 Relevant Case Laws
When Arbitration has been opted as a method of redressal for the resolution of disputes in the Oil and Natural Gas sector, specifically towards the Indian diaspora, we come across a handful of cases. As explained above in the Panna-Mukta-Tapti Oil and Gas fields case, the Court and the Tribunal took inspiration from cases like that ofDholi Spintex Pvt. Ltd v. Louis Dreyfus Company India Pvt. Ltd. (2016) (where it was held that the Indian parties could opt for a foreign law governing the Arbitration clause as stipulated in the contract, which recognizes that the Arbitration Agreement between the parties is an independent agreement, away from the substantive contract), andGE Power Conversion India Pvt. Ltd. v. PASL Wind Solutions Pvt. Ltd. (2020) (where it was held that a foreign seat of Arbitration could be chosen by the parties concerning Arbitration). There exist other cases as well which incorporate the idea of Arbitration with them. They are:
- The case ofCairn v. India (2020), where Cairn Energy PLC and Cairn Holdings Ltd. initiated Arbitration proceedings against the Government of India (GoI) as a part of the breach of the UK-India BIT on the part of the Indian Government. The Arbitral Tribunal at The Hague sided with the Claimants and issued an Award amounting to US $ 1.2 billion. The Government has challenged the said Award in the Dutch Court, with Cairn filing cases against the Indian Government in the local cases to implement such an Award as issued by the Arbitral Tribunal; and
- In the case ofVedanta Ltd. & Anr. v. Government of India, Through Jt. Secretary, Ministry of Petroleum and Natural gas (2020), the Supreme Court of India upheld the foreign Arbitration Award that mandated the Government to pay US $ 499 million to the Claimants as a process of development of the Ravva Oil and gas fields. The dispute was between the Government and Cairn India (which has now been acquired by Vedanta Ltd) as a part of the exploration of the Ravva oil fields between 2000-2007.
4. Challenges and Recommendations
When we glance towards the aspect of Arbitration concerning the oil and gas sector in the country, it won’t be the wrong perception to acknowledge that it continues to be at a naive stage. Not just this, the oil and gas sector, despite being one of the important sectors where the government has been introducing a slew of schemes and legislations for the same, continues to be choked with legal disputes like that of cost recovery, production targets, etc. The dispute resolution process has often faced a lengthy and cumbersome Courtroom battle in the form of judicial review, where the Government is one of the parties. This Courtroom battle further takes a long period.
Furthermore, the formation of an ‘Expert Committee by the Government of India to redress the disputes arising in the oil and gas sector has failed to satisfy the needs of the oil and gas companies. This is because a majority of disputes concerning the oil and gas sector are over breach of contractual obligations, interpretation of the contract, or procedural issues. These are the issues that require expert knowledge of the subject and, most importantly, no conflict of interest. The aspect of conflict of interest is one of the primary reasons for the failure of such an Expert Committee, as it is the Government of India which constitutes it and formulates the references and terms for the same. This ultimately destroys the confidence that is to be placed in such an expert committee in the eyes of foreign investors.
If the PGNRB Act of 2006 indirectly proposes its nexus with the Arbitration and Conciliation Act of 1996, where if the revenue sharing contracts (RSCs) possess an Arbitration clause, then the entire jurisdiction of the PNGRB Act of 2006 diminishes. As a result, the redressal process is then governed by the former Act. This would pose another shortcoming as the Arbitration and Conciliation Act of 1996does not consider the aspect of International Commercial Arbitration, especially concerning the provisions of the New York Convention, thereby not responding well to the aspect of investment Arbitration in the aforementioned sector.
As a result of which, the Indian Government should not just be focused on the introduction of an array of policies and schemes concerning the Oil and Natural Gas sector but should also address the lacunas mentioned above and resolve the bottleneck of disputes which hangs like a sword over the Indian Government.
About the Authors
Mr. Yazad Udwadia is an Advocate practising Litigation and Dispute Resolution in Mumbai, while simultaneously pursuing a Post Graduate Diploma in Business Management (December 2022) and a Post Graduate Diploma in Arbitration and Mediation (March 2023).
Mr. Abeer Tiwari is a 4th-year B.A. LL.B student from Balaji Law College, Pune, and an Associate Editor at IJPIEL.
Managing Editor: Naman Anand
Editors-in-Chief: Hamna Viriyam and Muskaan Singh
Senior Editor: Naman Jain
Associate Editor: Abeer Tiwari
Junior Editor: Kaushiki Singh
Preferred Method of Citation
Yazad Udwadia and Abeer Tiwari, “India, Arbitration & the Oil and Natural Gas Sector: A Sector with a Tinch of Ignorance” (IJPIEL, 15 December 2022)