The Supreme Court, in a setback to the oil ministry, has dismissed its petition against an order seeking disclosure of documents that formed basis for levy of $3 billion penalty on Reliance Industries over KG-D6 natural gas output not matching targets.

A three-member international arbitration panel, hearing Reliance and its partner’s challenge to the government levying penalty because of unutilised capacity due to production not matching targets, had asked the ministry to share an array of documents that formed basis for its actions.

The oil ministry first challenged the disclosure before Delhi High Court, which on December 18, 2018, dismissed the petition. It then challenged it in the Supreme Court, which on August 5, 2019, dismissed it, saying it was “not inclined to interfere” with the earlier order.

The government had between 2012 and 2016 disallowed Reliance and its partners from recovering the cost of $3.02 billion for KG-D6 output lagging targets. The penalty in form of disallowance of recovery of certain costs was levied because the oil ministry and its technical arm DGH felt that the output lagged targets because the company did not drill the committed number of wells on the fields and created excess capacity.

Sources said a three-member arbitration panel, constituted in 2015 to hear Reliance and its partner BP’s challenge to disallowance of cost recovery, had asked the oil ministry to share a host of documents, including those “sent, received or created” that “set out the reasons” for the government decision.

Reliance and BP believe that there is no provision under the Production Sharing Contract (PSC) signed for the KG-D6 block awarded to them under the first bid round of New Exploration Licensing Policy (NELP) of targets for oil and gas production and disallowing cost if they are not met.

Under NELP, contractors are first allowed to recover all their sunk cost before sharing profits with the government. Disallowing a part of the cost would not just result in contractors having to absorb those expenses but also result in higher profit share from oil and gas produced to the government. The government claimed an additional $175 million as its profit share after the cost disallowance in 2016.

The arbitration panel agreed to most of the 19 requests made by Reliance-BP for disclosure of documents by the government. These included one for “disclosure of earlier formal but unpublished guidelines in effect between 1997 to October 2007 concerning the classification and/or recovery of general and administrative costs incurred by contractors under NELP PSC”.

The other requests of Reliance-BP granted by the arbitration panel included the ministry disclosing “July 2011 response to an enquiry from the government auditor (CAG)”, documents reasoning out decision not to approve revised field development plan that set out reasons for lower output in October 2013 and ones pertaining to the position the ministry took on drilling of development wells.

Reliance-BP say the output in KG-D6 block plummeted because of unforseen reservoir characteristics, including sand and water ingress in wells.

Sources said the arbitration panel also granted Reliance-BP request for disclosure of documents that led to the ministry’s representative of KG-D6 block oversight panel to deny approval of work programmes and budget for the block in 2011-12 and 2012-13.

Delhi High Court in its December 2018 order stated that the arbitration panel has “after examining the requests for discovery directed, wherever necessary, discovery of documents, both by the Union of India as well as the respondents/contractors (Reliance-BP)” following “the principles of natural justice”.

The oil ministry opposed such disclosure over confidentiality and other secrecy clauses.

The court said that the arbitration panel had “correctly kept in mind the provisions” of the arbitration law requiring it to “treat the parties equally and give each party a full opportunity to present its case”.

“Therefore, in my view, if the argument advanced on behalf of the Union of India is accepted, it will stymie the arbitration proceedings; a situation which will enure to the benefit of a recalcitrant party which does not desire a quick resolution of the dispute,” Justice Rajiv Shakdher wrote in the December 18, 2018, order dismissing the oil ministry appeal.

Gas production from Dhirubhai-1 and 3 gas field in the KG-D6 block in the Bay of Bengal was supposed to be 80 million standard cubic meters per day but actual production was only 35.33 mmscmd in 2011-12, 20.88 mmscmd in 2012-13 and 9.77 mmscmd in 2013-14 -- the years for which the over $3 billion penalty was levied. The output has continued to drop in the subsequent years and is now below 2 mmscmd.

Reliance holds 66.6 per cent interest in block KG-DWN-98/3 or KG-D6 in the Bay of Bengal. BP has the rest.