REPORT OF THE COMMITTEE

ON DISPUTE REGARDING OIL AND GAS BLOCKS IN KG BASIN

29 AUGUST 2016

TABLE OF CONTENTS
S. NO

CHAPTER

PAGES

ABBREVIATIONS

iii

INTRODUCTION

1-4

PROCEEDINGS OF THE COMMITTEE

BACKGROUND FACTS

16-22

PETROLEUM REGIME IN INDIA

23-31

JURISDICTION AND SCOPE

32-38

THE D&M REPORT

39-53

UNJUST ENRICHMENT

54-91

RESTITUTION

FUTURE COURSE OF ACTION

102-104

SUMMARY OF FINDINGS AND RECOMMENDATIONS

105-110

10

5-15

92-101

ii

ABBREVIATIONS

BP

BP Exploration (Alpha) Limited

Cairn

Cairn Energy India Pty. Ltd.

D&M

DeGoyler and MacNaughton

DOC

Declaration of Commerciality

DGH

Directorate General of Hydrocarbons

EEZ

Exclusive Economic Zone

FFGM

Full Field Geocellular Model

FFRM

Full Field Reservoir Model

G&G

Geological and Geophysical

GIIP

Gas Initially in Place

GIPIP

Good International Petroleum Industry Practices

IDP

Initial Development Plan

KG

Krishna-Godavari

MDT

Modular Dynamic Tester

MOPNG

Ministry of Petroleum & Natural Gas

NELP

New Exploration and Licensing Policy

Niko

Niko (NECO) Limited

NPV

Net Present Value

NRL

Niko Resources Limited

ONGC

Oil and Natural Gas Commission

PEL

Petroleum Exploration License

PML

Production Mining Lease

PNG Rules

Petroleum and Natural Gas Rules, 1959

PSC

Production Sharing Contract

RIL

Reliance Industries Ltd

TOR

Terms of Reference set out in the Office

Memorandum dated 15.12.2015

The Act

Oilfield (Regulation and Development) Act, 1948

iii

CHAPTER 1
INTRODUCTION

A. Overview

1.1.1

The Krishna-Godavari Basin is a deltaic plain formed by two

large east coast rivers, namely, the Krishna and the Godavari in the state of
Andhra Pradesh, and the adjoining areas of the Bay of Bengal into which
these rivers discharge their waters. The Krishna-Godavari Basin, or the KG
Basin, as it is also referred to, covers an area of 15,000 square kilometres on
land, and an area of 25,000 square kilometres, up to 1000 metres isobath,
offshore. Field studies have shown that the KG Basin has good prospects of
both oil and gas reserves, and multiple commercial discoveries have been
made there. Defined blocks of the KG Basin have been allocated over time to
various parties, including the Oil and Natural Gas Corporation Limited
(ONGC) and Reliance Industries Limited (RIL), for pursuing oil and gas
discoveries.
1.1.2

The dispute, which this report relates to, pertains to the gas

blocks referred to as Godavari PML and KG-DWN-98/2 (both operated by

ONGC), as well as KG-DWN-98/3 (operated by RIL, Niko, and BP). In July
2013, ONGC wrote to the Directorate General of Hydrocarbons (DGH)
stating that there was evidence of lateral continuity of gas pools of the ONGC
blocks with the KG-DWN-98/3 block, operated by RIL. Consequently, ONGC
sought data on RILs block. A series of discussions transpired between ONGC
and RIL, which was facilitated by the DGH, and it was agreed that an
independent consultant would be jointly appointed to carry out a third party
study.
1.1.3

Before a consultant was identified or appointed, however, ONGC

filed a writ petition in the Delhi High Court, being WP (C) No. 3054/2014
dated 15.05.2014 against the Government of India, DGH and RIL in the

present matter. In the petition, ONGC, inter alia, sought directions to the
Government and DGH for the appointment of an independent agency to
establish continuity of reservoirs across the two blocks of ONGC and RIL; and
for compensation, if continuity was established.
1.1.4

Pending the outcome of the petition in the Delhi High Court, an

independent consultant, DeGolyer & MacNaughton (D&M) was mutually

identified and appointed by the parties in July 2015 to undertake a study of
the question of continuity and migration of gas. The order of the Delhi High
Court, which came in September 2015, directed the Government to take
appropriate action on the D&M Report, as and when it was submitted.
1.1.5

The D&M Report was submitted in November 2015. It

established continuity between the pools in question, and the migration of

gas from the ONGC blocks to the RIL block. Pursuant to the directions of the
Delhi High Court, the Government, through the Ministry of Petroleum and
Natural Gas (MOPNG) decided to constitute the present single-member
Committee to examine the D&M Report, and make recommendations on
certain issues.

B. The Constitution of the Committee

1.2.1

The Committee was established by the MOPNG by its office

memorandum F. No. O-22013/17/2015-ONG.DV dated 15.12.2015.

1.2.2

The memorandum, inter alia, stated that block KG-DWN-98/2

has been operated by ONGC since 2005. ONGC also has a nomination block,
Godavari PML, adjacent to block KG-DWN-98/2. These two blocks share a
common boundary with block KG-DWN-98/3 (KG D6), which is being operated
by RIL, with majority participating interest, along with Niko (NECO) Limited
(Niko) and BP Exploration (Alpha) Limited (BP). (Any reference to RILs
operation of the KG-DWN-98/3 block in this Report should be construed as
2

including Niko and BP, wherever applicable.) Block KG-DWN-98/3 has been
under production since 2009, while the Field Development Plan for block KGDWN-98/2 is yet to be approved.
1.2.3

On 22.07.2013, ONGC wrote to the DGH stating that there was

evidence of lateral continuity of gas pools of the ONGC blocks with the pools
in the RIL block. After discussions between ONGC, DGH and RIL, it was
agreed to jointly appoint a third-party organisation D&M to carry out a
third party study. D&M submitted its report on 30.11.2015.
1.2.4

Subsequently, by the order dated 15.12.2015, the MOPNG

decided to constitute a single-member Committee comprising Justice (Retd)

Ajit Prakash Shah, former Chief Justice of the Delhi High Court and the former
Chairperson of the Law Commission of India, to look into the dispute between
RIL and ONGC regarding the ONGC blocks (KG-DWN-98/2 and Godavari PML)
and RIL block KG-DWN-98/3 in the KG basin.

C. The Committees Terms of Reference

1.3.1

According to the Office Memorandum (F. No. O-22013-

/17/2015-ONG.DV) of 15.12.2015, the Committees Terms of Reference

("TOR") were stated as follows:
a) To consider in depth the report submitted by D&M and recommend the
action to be taken by the Government thereon considering legal,
financial and contractual provisions including those contained in
Oilfields (Regulation and Development) Act, Petroleum and Natural Gas
Rules and concerned Production Sharing Contracts (PSCs) etc.;
b) To recommend the future course of action to be taken on this issue in
light of the findings contained in the report;
c) To quantify the unfair enrichment, if any, to the contractors of the
adjacent block KG-DWN-98/3 and measures to prevent future unfair
enrichment to these contractors on account of gas migration and to
recommend action to be taken to make good the loss to

ONGC/Government on account of such unfair enrichment to the

contractors;
d) To consider the acts of omission and commission, if any, on part of the
stakeholders including RIL, ONGC, DGH and Government and give
recommendations on them.
1.3.2

As per the memorandum, the Committee was expected to

submit its report within three months. It was also permitted to formulate its
own procedure, call for records and examine witnesses, as it deemed fit. The
MOPNG undertook to provide the necessary administrative support to the
Committee. The Committee was assisted in its work by two legal consultants,
Vrinda Bhandari and Sumathi Chandrashekaran. Mr Ananda Raman also
operated the Secretariat for the Committee for the first three months.
1.3.3

After a preliminary hearing on 31.12.2015, the Committee called

upon the various parties to the dispute to file their written submissions and
replies. All written submissions were received by April 2016, after which the
Committee held a series of eight hearings in the months of April and May
2016, where all parties made extensive oral submissions on the questions
before the Committee and its TOR. The proceedings of the Committee are
discussed in greater detail in the next chapter.

CHAPTER 2
PROCEEDINGS OF THE COMMITTEE
2.1

The proceedings of the Committee were spread across 13

hearings held between December 2015 and May 2016. Before, during and
after the hearings, several developments took place: certain parties withdrew,
joined and again withdrew from participating in the proceedings; clarifications
on certain issues were needed; and extensions were sought. A brief overview
of the proceedings is relevant to understanding the Committees procedure as
well as the challenges that were faced in the course of arriving at its
recommendations. The developments at each of the hearings are discussed in
the following paragraphs.

A. The hearing dated 31.12.2015

2.2.1

The Committee held its first hearing on 31.12.2015 at Oil India

Ltd., NOIDA, Uttar Pradesh. Prior to the hearing, it issued notices to all
parties, namely, ONGC, RIL, DGH and MOPNG, to appear before the
Committee on the appointed date. In addition, notices were also issued to
Niko and BP in their capacity as consortium partners of RIL in the operation of
block KG-DWN-98/3.
2.2.2

At the hearing, representatives of both RIL and Niko said that

they did not wish to participate in the proceedings of the Committee as they
disagreed

with

the

constitution

and

jurisdiction

of

the

Committee.

Communication to this effect had also been circulated to the Committee

earlier that day. The Committee noted that it was the participants prerogative
to decide whether to participate in the hearing or not, but that it would
proceed to work as per its TOR. After this, the representatives of RIL and
Niko left the meeting. The third consortium partner, namely BP, said that it
had no instructions about its continued participation in the hearing. The BP

representative was thus asked to submit its views on continued participation

in the hearings of the Committee, in writing, within a week.
2.2.3

The Committee directed the remaining parties present, namely

MOPNG, ONGC and DGH (and BP, if it chose to participate), to file written
submissions in response to each item in the Committees TOR within four
weeks.
2.2.4

Prior to the hearing, the Committee had already been supplied

with certain documents by MOPNG, which included the D&M Report; a copy
of the writ petition filed by ONGC in the Delhi High Court (WP (C) No.
3054/2014 dated 15.05.2014) against the Government of India, DGH and
RIL; a copy of the counter-affidavit filed by MOPNG; the order of the Delhi
High Court in the said writ petition dated 10.09.2015; copies of the relevant
laws, and copies of the PSCs between MOPNG and the contractors in
question. The Committee invited the participants to submit any further
documents deemed relevant to their submissions. The Committee also
indicated

that

the

stakeholders

would

be

at

liberty

to

nominate

representatives to depose before the Committee, if necessary.

B. The hearing dated 09.02.2016

2.3.1

The next hearing of the Committee was held on 09.02.2016 at

Oil India Ltd., NOIDA, Uttar Pradesh.

2.3.2

Prior to the hearing, by its letter dated 14.01.2016, BP had

confirmed its participation in the Committees proceedings, subject to certain

reservations. Among other things, BP clarified that it had secured a 30%
Participating Interest in block KG-DWN-98/3 operated by RIL in August 2011,
and it was not the operator of the block itself. BP further clarified that since it
had not participated in the discussions prior to the preparation of the D&M
Report nor provided any inputs in the same, it was only privy to the final
6

report. It also expressed the hope that the Committee would have no
preconceived notion of unfair enrichment attributable to the contractors in
question. It further clarified that any views expressed by BP in the course of
the Committees proceedings would be its own, and independent of views
held by RIL and Niko, and would be without prejudice to its rights available
under contract.
2.3.3

The Committee also received written submissions from ONGC,

DGH and BP within the time specified.

2.3.4

Three days before the hearing, on 06.02.2016, the Committee

received communication from RIL and Niko, indicating that they wished to
reassess their participation in the proceedings. According to them, this
reassessment was particularly in view of the fact that the operator, i.e. RIL
(rather than any other constituent of the contractor), was best placed to
provide technical assistance of the development and production of gas from
block KG-DWN-98/3. Accordingly, RIL and Niko sought leave to continue
participating in the Committees proceedings, while clarifying that their
participation would be limited to assisting the Committee in understanding the
findings of the D&M Report. RIL and Niko further clarified that their
participation would be entirely without prejudice to the position they had
already taken in previous communication regarding the jurisdiction of the
Committee. They reiterated that the Committee had no power to adjudicate
any matters or issues concerning ONGC's claims, and any recommendations
made by it would not be binding on RIL in any manner. RIL further reiterated
that as the Government had sought to intervene in the matter, the dispute
could be resolved only by arbitration, and any report by the Committee would
at best only serve as advice to the Government or ONGC.
2.3.5

In the light of this development, the Committee granted three

weeks time to RIL and Niko to make written submissions in response to its
TOR.
7

2.3.6

All parties were granted additional time up to 15.03.2016 to

respond to each others written submissions and to respond to the concerns

and issues raised by Committee during this hearing. Parties were also
requested to make their submissions available in electronic format, with
copies to all concerned parties.
2.3.7

The Committee informed all parties that its procedure would be

transparent, following due process and principles of natural justice.

2.3.8

With regard to the communication received from RIL and Niko,

and the concerns expressed by the parties, the Committee clarified that its
role was to examine all the issues in its TOR, and to submit its
recommendations to the Government of India. It was thus for RIL and Niko to
decide the extent of their participation, and whether it should be limited to
technical aspects only, or extend to other issues as well.
2.3.9

The Committee sought certain specific clarifications from the

DGH on its written submissions, directing it to file specific submissions on

certain issues.
2.3.10

The Committee also requested the MOPNG to seek an extension

for a period of four months, i.e. up to 31.07.2016, regarding the time for
submitting the Report.

C. The hearing dated 28.03.2016

2.4.1

At the next hearing of the Committee held at Oil India Ltd.,

NOIDA, Uttar Pradesh on 28.03.2016, a request was made on behalf of

ONGC, RIL and BP, to be given an opportunity to file further additional
written submissions. Accordingly, it was decided that all parties could file such
additional written submissions by 10.04.2016.
8

2.4.2

At its preliminary hearing, the Committee had suggested that

D&M may be invited to make a presentation about their Report during the
course of the proceedings to facilitate the Committee's better understanding
of their Report. However, at this hearing, the Committee decided to not call
upon D&M for any presentation. It is relevant to note that at no point in any
of the 13 hearings did any of the parties press for the presence of D&M.
2.4.3

It is further pertinent that no party indicated, at any point of

time, that it wanted to lead evidence or examine any witnesses. At this

hearing, it was mutually agreed by all parties that only oral submissions
would be made, and no oral evidence would be led, nor any witnesses
examined.
2.4.4

Consequently, the Committee proposed to fix a series of dates

in the months of April and May 2016 for oral submissions by all parties. It was
agreed that appropriate arrangements for transcription and recording of the
proceedings would be made for all the days.
2.4.5

The MOPNG informed the Committee that it had obtained an

extension up to 31.07.2016 regarding the time within which the report of the
Committee had to be submitted.

D. The hearing dated 13.04.2016 and 14.04.2016

2.5.1

The next two hearings of the Committee were held on

13.04.2016 and 14.04.2016 at GAIL Bhawan, Bhikaji Cama Place, New Delhi.
ONGC, RIL, Niko, BP and DGH were represented by legal counsel at the
hearing. The counsel for DGH sought time to file additional submissions, and
was given till 20.04.2016.

2.5.2

Due to the voluminous records involved, the parties mutually

agreed to prepare and exchange convenience volumes between themselves,

with three copies being provided to the Committee. Consequently, it was
decided to commence the effective hearing of the matter only after the
parties had filed their convenience volumes by 20.04.2016.
2.5.3

Further, based on the mutual convenience of all the parties, the

following dates were fixed for oral submissions:

25th and 26th April ONGC
27th April (11 am to 1:30 pm) ONGC, if necessary
2nd and 4th May RIL and BP
5th May (11 am to 1:30 pm) RIL and BP, if necessary
(2 pm to 5 pm) DGH
9th and 10th May Rejoinder arguments

E. The hearings dated 25.04.2016, 26.04.2016, and 27.04.2016

2.6.1

The remainder of the hearings, beginning with the hearing

dated 25.04.2016, were held at the Taj Hotel, Mansingh Road, New Delhi.
The transcription for these hearings was arranged through DTI Services.
Reservations were expressed by counsel for ONGC and DGH about the
transcription on grounds of the confidentiality of certain submissions.
However, the Committee noted that at the time of its directing the
transcription of these hearings on 14.04.2016, no objections had been
received from any party. Moreover, in light of the expressed importance of
transparency in proceedings, it was decided to proceed with the transcription.
2.6.2

Nevertheless, in view of the concerns raised regarding

confidentiality, the Committee directed that DTI Services would provide the
transcription only to the counsel for the parties. Further, the Committee said
that the respective parties must ensure that the confidentiality of the
transcribed record was maintained, and that the records were to be shared
with third parties only with the prior permission of the Committee.

10

2.6.3

Over the next three days, i.e. from 25.04.2016 to 27.04.2016,

Mr Sudipto Sarkar, Senior Advocate, argued on behalf of ONGC.

F. The hearings dated 02.05.2016 and 04.05.2016

2.7

At the hearings on 02.05.2016 and 04.05.2016, RIL and Niko,

represented by their counsel, including Mr Tom Sprange, Q.C., Mr Reginald P

Smith, and Mr L Nageshwara Rao, Senior Advocate, made their oral
submissions.

G. The hearing dated 05.05.2016

2.8

At the hearing on 05.05.2016, BP, represented by its counsel,

including Ms Joanne Cross and Mr Madhur Baya, completed oral arguments.

DGH, represented by Mr AK Ganguli, Senior Advocate, also completed its
arguments.

H. The hearing dated 09.05.2016

2.9.1

At the hearing held on 09.05.2016, RIL and Niko, represented

by Mr Sprange, Q.C., addressed the Committee on certain submissions made

by Mr AK Ganguli, Senior Advocate, on behalf of DGH, at the previous
hearing.
2.9.2

According to the RIL, the Committee's TOR only extended to the

dispute between RIL and ONGC, which had been framed as a claim for unfair
enrichment by ONGC against RIL. However, RIL argued that during the
course of the hearings, a new claim had been advanced by the DGH (which
was a technical arm of the Government), seeking reimbursement from RIL.
This was effectively an unfair enrichment claim in its own right. According to
RIL, the question as to whether ONGC had a claim for unfair enrichment, had
been answered by DGH, a representative of the Government, in the negative.
11

As a corollary, the need for the Committee to provide the Government with
advice as to ONGC's claims for unfair enrichment had been superseded, as
the Committee had now heard from the Government on this issue. Further,
DGHs submissions were tantamount to new claims having been articulated,
which were not within the scope of the Committee's TOR. RIL reiterated that
the TORs were geared towards ONGC's claims against RIL, and not the
Government's possible claims against RIL. In the light of the same, RIL
pointed out that any claims made by Government against RIL would need to
be resolved in another forum, in particular, arbitration. Accordingly, RIL
stated that it would be inappropriate for it to engage with the Committee with
respect to DGH's new claims and thus, it could not be of any further
assistance to the Committee. Consequently, RIL stated that RIL and Niko
proposed to withdraw from this process.
2.9.3

ONGC, represented by Mr Sudipto Sarkar, stated that it was for

RIL to decide whether it wished to withdraw or not. However, as per the

Committee's TOR and the PSC in question, there was no identity between
DGH and the Government, and they were and ought to be treated as different
bodies. Mr Sarkar added that the views expressed by Mr Ganguli could not be
attributed to Government, either in relation to ONGC or RIL.
2.9.4

Mr Panda, appearing on behalf of DGH, clarified that the

submissions made by Mr Ganguli on previous hearings of the Committee were

the submissions of DGH as an independent body, and not made on behalf of
the Government, regardless of whether these views were expressed with
respect to RIL or to ONGC. Mr Panda also drew attention to the proceedings
in the Delhi High Court, which had preceded the setting up of this Committee,
where the Government and DGH had been separate parties. Further, Mr
Panda said that the submissions that Mr Ganguli made were in response to a
query raised as to a pure question of law on the interpretation of the PSC.

12

2.9.5

At the hearing, the Committee clarified that the issue before it

was the dispute between ONGC and RIL, which included the question of
whether there exists a claim for unjust enrichment by ONGC against RIL. The
Committee also clarified that its mandate did not extend to considering
claims, if any, between the Government and RIL. If the Government had any
claim against RIL, it could resort to appropriate remedy under the PSCs.
2.9.6

However, Mr Sprange maintained that RIL and Niko did not wish

to participate any longer in the Committees proceedings, as the risk for them
in terms of prejudicing their rights in any subsequent proceedings was too
high.
2.9.7

The representative for BP, Mr Baya, said that he was awaiting

instructions with regard to BPs continued participation in the proceedings.

2.9.8

Accordingly, by its order of the same date, i.e. 09.05.2016, the

Committee recorded that RIL and Niko would no longer be a party to the
proceedings of the Committee. The Committee, however, decided that it
would continue to hear the rejoinder arguments made on ONGCs behalf.
2.9.9

After the withdrawal of RIL and Niko, ONGC, represented by Mr

Sarkar, commenced arguments in rejoinder.

I. The hearing dated 10.05.2016

2.10.1

At the beginning of hearing, BP, represented by Mr Siddharth

Shetty and Mr Madhur Baya, said that it would continue to participate in the
proceedings of the Committee.
2.10.2

Subsequently, all the remaining parties, i.e., ONGC, BP and DGH

concluded their arguments in rejoinder.

13

2.10.3

With these submissions, the Committees hearings in the matter

came to a close.

J. The letter from RIL dated 28.05.2016

2.11.1

During the course of the hearings, by a letter dated 03.05.2016,

ONGC submitted a document titled Appraisal Report as of March 31, 2003,

on block KG-DWN-98/3 located Offshore India for NIKO (NECO) Ltd to the
Committee. The Committee had requested RIL to respond to the same.
Before issuing a response, however, RIL withdrew its participation in the
proceedings. Subsequently, after the hearings were closed, RIL submitted its
response by its letter dated 28.05.2016.
2.11.2

Parties were asked to respond to the RIL letter by 30.05.2016.

Only ONGC responded to the same, on 08.06.2016.

2.11.3

In its letter, ONGC indicated that RILs response should not be

taken on record in view of the fact that RIL had already withdrawn from the
proceedings of the Committee. ONGC further said that if the Committee
wished to take RILs letter on the record, it should be construed as RIL's
deemed continued participation in the proceedings of the Committee.

K. The letter from MOPNG dated 07.06.2016

2.11.4

Meanwhile,

MOPNG

by

its

letter

dated

07.06.2016

(0-

22013/17/2015-ONG-V(FTS 41044)) drew the Committees attention to the

Committees order of 09.05.2016 stating that it may not be correct to say
that the mandate of the Committee does not include quantification of unfair
enrichment, if any, vis--vis the Government of the India. All parties, barring
RIL and Niko, were requested to respond to this letter. ONGC said it had no
comments in response. DGH did not respond. BP responded on 09.07.2016,

14

stating that MOPNGs contentions raised concerns about the representations

made on behalf of the Government before the Committee.
2.11.5

Further clarifications were sought from the Government, while

also seeking an extension in the light of these developments. Specifically, the

Committee asked the Government if it adopt[ed] the stand taken by the
Directorate General of Hydrocarbons on 05.05.2016 that ONGC has no right
to make a claim for unfair enrichment against RIL, and it is only the
Government of India that can make such a claim?
2.11.6

By its office memorandum O-22013/17/2015/ONG.DV dated

29.07.2016, MOPNG, while confirming a further extension to the Committee

till 31.08.2016, stated the Competent Authority has decided that the
Committee will look into the case on the basis of contractual provisions and
considering the finding brought out in D&M Reports related to migration of
Gas. At this stage, Government cannot take stand that whether ONGC or the
Government has unfair enrichment claim. The Committee has to look into the
case with the fair prospective and should not get restricted by DGHs view or
by the view of any other stakeholder. Government will take a final stand in
the case after considering the report of the Committee.
2.11.7

Having summarised the procedure followed by the Committee, it

is necessary to understand the background of the dispute before it.

15

CHAPTER 3
BACKGROUND FACTS
3.1

This chapter is a detailed account of the facts pertaining to the

dispute between ONGC and RIL, having discussed the proceedings of the
Committee in the previous chapter. The present dispute pertains to three
blocks allocated to ONGC and RIL for exploration of gas in the KG Basin. A
brief history of the allocation of these blocks, and the manner in which this
dispute arose is laid out in the following paragraphs.

A. ONGCs Block Godavari PML

3.2.1

In 1997, ONGC applied for an IG Petroleum Exploration License

("PEL"), which was granted by MOPNG initially for four years, and
subsequently extended up to 31.01.2003. In 2002, ONGC submitted an
application for a re-grant of the PEL, which was re-granted by MOPNG for a
further period of four years, and extended further on ONGC's request till
31.01.2008.
3.2.2

Based on the results of drilling during the re-grant period, ONGC

applied initially for grant of 104.4 sq km area for converting the IG PEL into
Godavari Production Mining Lease ("PML") on 24.01.2008. Subsequently, it
applied for PML for an additional area that had been earlier relinquished.
MOPNG finally granted ONGC the PML for an area of 111.5 sq km (which
included 18.36 sq km from the earlier relinquished area) as Godavari PML,
with effect from 24.01.2008.
3.2.3

No PSC was signed with ONGC for this block. ONGC submitted a

Declaration of Commerciality ("DOC") for this block clustering with D1

discovery of KG-DWN-98/2 on 26.12.2013, but the DOC was not accepted
due to certain missing data. As a result, the DOC is still awaited, and ONGC is
yet to start development of this block.
16

B. ONGCs Block KG-DWN-98/2

3.3.1

In February 1999, the MOPNG issued the New Exploration

Licensing Policy ("NELP") inviting companies to bid for 48 exploration blocks

in the KG Basin. Cairn Energy India Pty Ltd ("Cairn") successfully bid for KGDWN-98/2 during NELP-1, which was located south of Godavari PML. At the
time of entering into a PSC with the Government of India on 12.04.2000,
Cairn had 100% participating interest. In 2003, ONGC acquired 90%
participating interest in this block from Cairn and applied for the
Governments approval for operatorship of the block. In March 2005, the
Government of India approved ONGCs application and it became the operator
of block KG-DWN-98/2 with a 90% participating interest, with Cairn retaining
10%.
3.3.2

In November 2011, Cairn assigned its 10% participating interest

to ONGC, which then became the sole operator with 100% interest, subject to
Government approval, given in 2012. Since then, ONGC has been the sole
operator of the KG-DWN-98/2 block.
3.3.3

After being handed over operatorship, and concluding that

discoveries in the block were not commercially viable on a stand-alone basis,

ONGC proposed to develop an integrated cluster along with the discoveries in
adjacent nomination block (Godavari PML) for better economic viability.
3.3.4

ONGC submitted a proposal for DOC for some of its discoveries

in 2009-10. Later, ONGC sought permission for additional appraisal drilling,

after which MOPNG restructured the Exploration Period of the block, and the
Exploration Period was extended till 29.12.2013. A revised DOC was
submitted by ONGC on 26.12.2013. This included DOCs for three clusters,
encompassing the Godavari PML and KG-DWN-98/2 blocks. Of these, only
one was approved (cluster II), pertaining to nine discoveries in Northern
17

Discovery Area of KG-DWN-98/2 block (the others could not be considered

due to inadequate data). ONGC has since submitted the field development
plan for cluster II on 30.08.2015, which is presently under examination by
DGH.

C. RILs Block KG-DWN-98/3

3.4.1

Under the NELP, RIL along with Niko Resources Limited ("NRL")

bid for NELP-1 for the right to enter into a PSC for block KG-DWN-98/3 or KGD6. This was a contiguous block located directly to the south-east of
Godavari-PML block and to the east of KG-DWN-98/2 (KG-D5). At the time of
entering into the PSC with the Government of India on 12.04.2000, RIL had
participating interest of 90% while NRL had 10%, as specified in Article 2 of
the PSC.
3.4.2

On 12.07.2003, NRL assigned its 10% participating interest to

Niko. On 21.02.2011, RIL assigned 30% of its participating interest to BP,

which was approved by the Government on 08.08.2011. Thus, as on date,
RIL has 60%, BP has 30% and Niko has 10% participating interest in block
KG-D6.
3.4.3

RIL made Pliocene gas discoveries in 2002, for which the Initial

Development Plan ("IDP") was approved in November 2004, and an

addendum approved in December 2006. RIL drilled four development wells
between December 2006 and November 2007, and started commercial gas
production on 01.04.2009.

D. Events leading to the Dispute

3.5.1

The dispute between ONGC and RIL started when, by its letter

addressed to DGH dated 22.07.2013, ONGC stated that it had carried out a
detailed Geological & Geophysical (G&G) interpretation of the available data
18

pertaining to the Godavari PML and KG-DWN-98/2 blocks. The results of this
study, according to ONGC, indicated that there were laterally aggrading
channel features of G-4 pools [in the ONGC blocks] extending southeast into
adjacent D-6 block [i.e., block KG-DWN-98/3] and, furthermore appear to
have a continuity with the producing pools of block KG-DWN-98/3. It further
stated that in order to corroborate the existence of lateral continuity of these
gas pools across the blocks operated by ONGC and RIL, additional integrated
interpretation of G&G data was required, comprising all three blocks in
question. Accordingly, ONGC requested the DGH to provide it with G&G data,
along with the production and well data of the contiguous area of block KGDWN-98/3.
3.5.2

This communication led to the Management Committee for the

block KG-DWN-98/2 to pass a resolution on 04.08.2013 regarding, among

other things, gas balancing assessment.
3.5.3

On 20.08.2013, DGH wrote a letter to RIL, stating that G&G

data along with production and well data for the block KG-DWN-98/3 may be
provided to ONGC for analysing field continuity of the pools. Reminders were
sent to RIL in this regard as well.
3.5.4

A series of meetings was convened over the next few months

between all the parties concerned, including ONGC, RIL, DGH and MOPNG.
Various issues were discussed at the meetings, including the appointment of
an independent third party for conducting a study on the core issue of
continuity of channels and connectivity of reservoirs in question.
3.5.5

A meeting was convened by ONGC and RIL on 30.09.2013 at

the office of ONGC in New Delhi, the outcome of which was communicated to
DGH thereafter. On 21.11.2013, an exchange of data took place between
ONGC and RIL at the RIL office in Mumbai. A technical meeting was held on
10.12.2013, but the minutes of this meeting remained unsigned.
19

Another

meeting was held on 11.03.2014 between ONGC and RIL, with DGH as the
observer. At the next meeting on 28.03.2014 held between ONGC and RIL at
the DGH office, the parties agreed to appoint a reputed international
consultant to evaluate the possible continuity of reservoirs across the block
boundaries. At the meeting held on 15.04.2014, at DGH, between ONGC, RIL
and DGH, a broad scope of work for the consultant was drawn up, as well as
a course of action for identifying the third party consultant worked out.
Another meeting was held at DGH between these three parties on
09.05.2014, where it was agreed that a draft of enquiry would be prepared
and sent out to identify third parties for conducting the study.
3.5.6

However, before the independent consultant could be appointed

and the study formally commissioned, ONGC filed a writ petition in the Delhi
High Court against the exploitation and extraction of gas by RIL from ONGC
blocks, being WP(C) No. 3054/2014

dated 15.05.2014

against the

Government of India, DGH and RIL.

3.5.7

The petition sought, among other things, directions to the

Government and DGH for the appointment of an independent agency to

establish continuity of reservoirs across the two blocks of ONGC and RIL and
for gas balancing in accordance with the provisions of Oilfield (Regulation and
Development) Act, 1948 ("the Act" or "Oilfield Act"), and Petroleum and
Natural Gas Rules, 1959 ("PNG Rules"). The petition also pleaded that if
ONGC was found entitled by the independent agency, RIL should agree to
compensate ONGC, and that RIL be directed to submit full accounts of the
past and prospective gas production, and past and prospective gas sales, and
undertake to pay ONGC as may be determined. A reply and counter-affidavit
to the petition was filed by the Government, through the MOPNG.
3.5.8

In the interim, a draft scope of work was agreed to by ONGC,

RIL and DGH, and sent onwards to possible international experts. Regular

20

meetings were held at the office of the DGH from 02.06.2014 to 14.06.2014
to expedite the engagement of the third party.
3.5.9

Finally, an independent consultant D&M was appointed on

03.07.2014 to conduct a third-party assessment of the study area, with

certain specified objectives. The study/project, which commenced on
25.09.2014, was carried out under the supervision of the DGH and managed
jointly by ONGC and RIL.
3.5.10

The study area included portions of three contract areas

(blocks), i.e., the Godavari PML and block KG-DWN-98/2, operated by ONGC,
and block KG-DWN-98/3, operated by RIL. The coordinates for each of the
contract areas were provided to D&M by ONGC and RIL through the DGH.
3.5.11

The Delhi High Court issued its order on the writ petition on

10.09.2015, prior to the report being submitted by D&M. The order of the
Court directed the Government to decide on the action to be taken on the
D&M Report, as and when it would be submitted and within six months from
the date of submission of the report. All concerned parties were directed to
co-operate fully with D&M and promptly furnish all information, particulars
and data required to enable and assist the agency to submit their report as
soon as possible. Parties were also granted liberty to, if the need was so felt,
to revive this petition, subject to the pleas of the respondents, including as
already taken and as to the very maintainability of this petition.
3.5.12

Meanwhile, data was provided to D&M by both RIL and ONGC

through DGH, and eight meetings were conducted between ONGC, RIL, and
DGH at Dallas, Texas, USA, at the office of D&M.
3.5.12

D&M submitted its report to DGH on 30.11.2015, in terms of its

scope of work.

21

3.5.13

The report of the study conducted by D&M estimated the

connected and unconnected gas volumes in the gas blocks in question, and in
conclusion, indicated that there was connectivity and continuity of reservoirs
across the blocks operated by ONGC and RIL. The report quantified the
volume of gas that was estimated to have migrated from Godavari PML and
KG-DWN-98/2 to KG-DWN-98/3. The report also simulated two forecast cases
for gas production, using, in one case, continued operations and active wells
as of 31.03.2015 as the base case; and in the other case, by including three
additional wells added after 31.03.2015.
3.5.14

The findings of the D&M Report will be discussed in more detail

subsequently. However, having discussed the background facts that led to the
present dispute, it is necessary to understand the prevailing petroleum regime
in India. This will enable the Committee to evaluate the stand taken by the
parties, and their interpretation of the varying contractual, statutory, and
constitutional rights. To this, we now turn.

22

CHAPTER 4
PETROLEUM REGIME IN INDIA
4.1

The petroleum regime, as will be detailed below, operates on an

interaction between the Constitution of India, the existing legislations and

rules therein, and the PSC executed between the contractor (ONGC or RILNiko) and the Government of India. Together, these laws govern the
relationship and actions of the parties to the present dispute.

A. The Constitution of India

4.2.1

To understand the petroleum regime in India, one must start

with Article 297 of the Constitution. By virtue of Article 297, natural gas and
petroleum in its natural state in the territorial waters and the continental shelf
of India are vested in the Union of India, i.e. the Government. It states that:
297. Things of value within territorial waters or continental shelf and
resources of the exclusive economic zone to vest in the Union.
(1) All lands, minerals and other things of value underlying the ocean
within the territorial waters, or the continental shelf, or the
exclusive economic zone, of India shall vest in the Union and be
held for the purposes of the Union.
(2) All other resources of the exclusive economic zone of India shall
also vest in the Union and be held for the purposes of the Union.
(3) The limits of the territorial waters, the continental shelf, the
exclusive economic zone, and other maritime zones, of India shall
be such as may be specified, from time to time, by or under any
law made by Parliament.
4.2.2

Apart from this, Article 39(b) and Article 14 of the Constitution

are also relevant, with Article 39(b) requiring the State to direct its policy
towards securing the distribution of ownership and control of the material
resources of the community as best to sub-serve the common good.

23

4.2.3

The position as it currently stands is that the Government,

through the people of India, owns the natural resources (including gas) for
the purpose of development in the interests of the people, till the point of
time it reaches the ultimate consumer. The Government thus has a
proprietary interest in the gas, and the title passes only upon the sale at the
delivery point. The relationship between the Government and the contractor,
such as the contractors right of distribution, is governed by the PSC, which
overrides all other contractual obligations.
4.2.4

In its three judge bench decision in RNRL v RIL, (2010) 7 SCC 1,

the Supreme Court clarified that the Constitutional mandate of the country
was that the natural resources belong to the people of the country and that
the word vest in Article 297 of the Constitution must be seen in the context
of the Doctrine of Public Trust. The public trust doctrine is premised on the
principle that certain resources such as air, water, gas etc. are gifts of nature
that should be made freely available to everyone, and should not be the
subject of private ownership. The doctrine, usually applied in environmental
jurisprudence, also has broader application. The Court thus clarified that gas,
being an essential natural resource, is held by the Government in trust for the
people of India. Consequently, it concluded that it is the duty of the
Government to provide complete protection to the natural resources as a
trustee of the people at large. This is consistent with Article 39(b) of the
Constitution.

B. The Legal Regime

4.3.1

While the Constitution indicates the nature of ownership of

natural resources such as gas, it is the statutory scheme that details the
rights and obligations of the parties. The statutory scheme of control of
natural resources, the regulation of petroleum operations and the grant of
licenses and leases for exploration, development, and production of

24

petroleum in India is governed by a combined reading of the Oilfields Act and

the PNG Rules.

(i)
4.3.2

The Oilfields (Regulation and Development) Act, 1948

The Act is meant to provide for the regulation of oilfields and for

the development of mineral oil resources. It has been enacted by Parliament

in exercise of its powers under Entry 52 of the Union List of the Constitution.
The Constitution Bench of the Supreme Court in In Re Special Reference No.

1 of 2001, (2004) 4 SCC 489 confirmed that natural gas, whether in its raw or
liquefied form, is a petroleum product and part of mineral oil resources
under Entry 52, List I and not Entry 25 of List II dealing with gas and
gasworks. Thus, only the Centre has legislative competence to pass laws
dealing with the regulation and development of natural gas.
4.3.3

Section 3(a) defines lessor and lessee as including a licensor

and licensee respectively; while Section 3(c) defines mineral oils as

including natural gas and petroleum. The Act further defines mining lease
(to include an exploring or prospecting license) and oilfield (an area where
any operation for obtaining natural gas and petroleum is carried on) in
Section 3(d) and Section 3(e) respectively.
4.3.4

Section 5 of the Act lays down the power of the Central

Government to make rules in respect of mining leases and Section 6 provides

for the power to make rules for the conservation and development of mineral
oils. Section 6A of the Act deals with royalties in respect of mineral oils, which
are described in greater detail in the Schedule to the Act. Finally, Section 7
delineates the Central Governments power to make rules for the modification
of existing leases and Section 8 provides for delegation.

25

(ii)
4.3.5

The Petroleum and Natural Gas Rules, 1959

The PNG Rules have been notified by the Government in the

exercise of its powers under Sections 5 and 6 of the Act. These Rules seek to
regulate the grant of exploration licenses and mining leases in respect of
petroleum and natural gas that belongs to the Government, and provide a
mechanism for their conservation and development.
4.3.6

Thus, Rule 4 in Chapter II clarifies that there shall be no

prospecting or mining except under a license or lease, which is granted under

Rule 5. The PNG Rules, vide Rule 7, also outline the rights of the licensees
and lessees. Apart from this, Chapter III of the Rules deals with different
features of a PEL and PML. Chapter IV details other provisions relating to
licenses and leases, including the provision of raw, interpretative and
derivative data by the licensee or lessee to the Central Government. Chapter
V lays out the conditions for suspension or cancellation of licenses and leases.
At the end, Chapter VI focuses on conservation and development, with
specific provisions for the restriction of petroleum, oil, and gas production
(Rule 27) and for the regulation of operations in a field or area (Rule 28) by
the Central Government. The Committee will discuss the specific rules relied
upon by the parties, and necessary for this Report, subsequently.
4.3.7

Having

detailed

the

statutory

and

constitutional

regime

application to petroleum operations in India, it is apt to turn to the agency

responsible for supervising such operations, namely the DGH, which was also
a party in the present proceedings.

C. The Directorate General of Hydrocarbons

4.4.1

The DGH was established under Resolution No. O-20013/292-

ONG,D-III dated 08.04.1993 under the administrative control of the MOPNG,

in the exercise of the Central Governments powers under Section 8 of the Oil
26

Fields Act read with Rule 32 of the PNG Rules. Through Notification No. S.O.
1391(E) dated 01.09.2006, the MOPNG designated the DGH as the authority
or agency to exercise the powers and functions of the Central Government to
promote the sound management of Indian petroleum and natural gas
reserves, with balanced regard to the environmental safety, technological,
and economic aspects.
4.4.2

The DGH has, inter alia, been tasked with reviewing and

monitoring

the

exploration

programmes

and

development

plans

for

commercial discoveries of hydrocarbon reserves, as proposed by companies

operating under PEL granted under the Act and the PNG Rules, and to advise
the Government on the adequacy of such plans. Such powers and functions
have to be fulfilled by the DGH with a view to optimise hydrocarbons recovery
from the reservoir in accordance with good international petroleum industry
practices (GIPIP). The DGH also has to review the management of petroleum
reservoirs, and advise the licensees or lessees on actions to ensure the sound
management and conservation of the reservoirs in accordance with GIPIP.
4.4.3

Furthermore, in cases where the Central Government signs a

PSC for the exploration and production of hydrocarbons, the DGH has been
tasked with discharging the Governments powers and functions consistent
with the PSC.

D. The New Exploration and Licensing Policy (NELP), 1999

4.5.1

Under the Act and the PNG Rules detailed above, natural gas

was produced only from the fields operated by state-owned companies such
as ONGC and Oil India Ltd. from the blocks given to them by the Government
on a nomination basis. The gas herein was subject to an administered price
regime. This changed in the mid-1990s when the Government decided to
open the petroleum sector to private investment on a competitive basis in
order to fund exploration and production of oil and gas. Consequently, various
27

blocks were awarded to private sector companies under PSCs and served as
the pre-NELP PSCs, where the pricing formula was specified in the PSC itself.
Although the early-1990s administered price mechanism did not continue,
contractors under these PSCs were obliged to sell all their gas to the PSU, Gas
Authority of India Ltd. Therefore, they did not have any marketing freedom in
respect of natural gas.
4.5.2

This pre-NELP regime was replaced by NELP, under which the

two PSCs in issue were entered into. Under the NELP regime, petroleum
blocks could be awarded to private contractors for exploration, development
and production of petroleum and gas and these private entities (both Indian
and foreign) were on a level playing field with PSUs. Thus, contractors in
NELP-I were given limited marketing freedom and were free to determine
arms length price or market price, subject to the overall regulation by the
Government.
4.5.3

In 1999, when NELP was announced for the exploration,

development and production of petroleum and gas, RIL and NRL were
awarded block KG-D6 (KG-DWN-98/3) and Cairn was awarded block KG-D5
(KG-DWN-98/2) from among the bids.

E. The Relevant PSCs

4.6.1

The petroleum regime in general, and the history of petroleum

operations in India, has to be read alongside the contractual regime

governing the rights and obligations of both the parties. The case before the
Committee concerns two PSCs entered into by RIL and NRL for KG-DWN-98/3
and Cairn for KG-DWN-98/2 with the Central Government, and one
nomination block Godavari PML.
4.6.2

On 12th April 2000, the Government of India (through the

President) entered into a PSC with RIL and NRL with respect to contract area
28

identified as block KG-DWN-98-3 comprising approximately 7645 sq. km. The

Preamble, in Recital 2, makes it abundantly clear that the Oil Fields Act and
the PNG Rules are the applicable legal regime. Thereafter, Recital 4 states
that RIL-NRL had applied for a license/letter of authority to carry out
exploration operations in the offshore area identified as block KG-DWN-98-/3
and had been duly authorised to carry out petroleum operations therein.
Recital 8 makes it clear that the contract entered into between the
Government and RIL-NRL is based on the terms and conditions set forth in
the PSC. As on date, RIL has 60%, BP has 30% and Niko has 10%
participating interest in block KG-DWN-98/3
4.6.3

On 12th April 2000, the Government of India (through the

President) also entered into a PSC with Cairn, a company incorporated in New
South Wales, with respect to the contract area identified as block KG-DWN98-2 comprising approximately 9800 sq. km. The recitals in the Preamble and
the Articles in the KG-DWN-98/2 PSC are mutatis mutandis those in KG-DWN98/3. As on date, ONGC is the sole operator with 100% interest in the KGDWN-98/2 or KG-D5 block.
4.6.4

It is pertinent that there is no PSC in respect of the Godavari

PML block over an area of 111.5 sq km, which is a nomination block,

adjoining block KG-DWN-98/2 and sharing a common boundary with block
KG-DWN-98/3.
4.6.5

It is pertinent that Articles 10, 11 and 12 of both the PSCs flow

from Rule 28 of the PNG Rules, and form the crux of the controversy. They
are discussed in brief here.
4.6.6

Article 10 of the PSCs deals with Discovery, Development, and

Production. Article 10.15 states that if the area encompassing the

commercial discovery extends beyond the development area designated in
the

Development

Plan,

the

Management
29

Committee

may

make

recommendations to the Government concerning the enlargement of the

development area, provided the same was not awarded to any other
company by the Government or is not held by any other party or not on offer
by the Government and there is no pending application for a license or lease.
The Government may consider such an extension request at its discretion and
on such terms and conditions it thinks fit.
4.6.7

Article 11 is another important provision concerned with PML for

an Offshore Area. Article 11.1 states that after submitting a development plan
of a commercial discovery pursuant to Article 10.7, the contractor has to
submit an application to the Government for lease in respect of the proposed
Development Area. Article 11.2, was repeatedly referred to by the parties,
and is quoted below for reference:
Where a part of a Reservoir in respect of which a Commercial
Discovery has been declared extends beyond the Contract Area,
subject to Article 10.15 such area may be included in the proposed
Development Area, in relation to which application for a Lease is made,
on terms and conditions as decided by the Government; provided that
such area is:
a) not subject to a license or lease granted to any other person;
b) not the subject of negotiations/bidding for a license or lease;
c) available for licensing (i.e. is not an area over which Petroleum
Operations are excluded)
4.6.8

Article 12 of the PSCs is concerned with Unit Development and

sub-clause (1), which forms the crux of the controversy, provides that:
If a Reservoir in a Discovery Area is situated partly within the Contract
Area and partly in an area in India over which other parties have a
contract to conduct petroleum operations and both parts of the
Reservoir can be more efficiently developed together on a commercial
basis, the Government may, for securing the more effective recovery
of Petroleum from such Reservoir, by notice in writing to the
Contractor, require the Contractor:

30

a) collaborate and agree with such other parties on the joint

development of the Reservoir;
b) submit such agreement between the Contractor and such other
parties to the Government for approval; and
c) prepare a plan for such joint development of the said Reservoir,
within one hundred and eighty (180) days of the approval of the
agreement referred to in (b) above.
4.6.9

The terms of the PSC and the various PNG Rules will assume

great relevance when the question of unjust enrichment is discussed later in

the context of the prevailing legal and contractual regime. Having examined
this in detail, including the parties rights and obligations deriving from the
Constitution, the Act, the PNG Rules, and the PSCs, it is first appropriate to
consider the jurisdiction and scope of the enquiry, being conducted by the
Committee, and then examine the TOR in detail.

31

CHAPTER 5
JURISDICTION AND SCOPE OF THE COMMITTEE
5.1

The Committee was faced with two key challenges right at the

outset, even before it could address the issues contained in its TOR. These
pertained to challenges to the jurisdiction and scope of the Committee, raised
by RIL and Niko at the very outset.

A. Jurisdiction

5.2.1

RIL objected to the constitution of the Committee on several

grounds, both in its written submissions and oral arguments.

5.2.2

First, RIL said that MOPNG did not have statutory powers to

establish the Committee. RIL argued that the Governments actions were
restricted to what was permitted under the PNG Rules and the parties PSCs.
Therefore, the appointment of this Committee went beyond the order of the
Delhi High Court and Rules 28 and 32 of the PNG Rules since the Committee
was not a suitable supervisory agency, and that its functions were at their
core adjudicatory in nature.
5.2.3

Secondly, RIL argued that the appointment of the Committee to

examine ONGCs claims for unjust enrichment; make any necessary

quantification; and give recommendations, instead of leaving it to a court of
competent jurisdiction, violated the doctrine of separation of powers under
Article 50 of the Constitution.
5.2.4

Thirdly, RIL contended that the Committee, being incapable of

recording evidence or evaluating the facts against legal standards, lacked the
requisite judicial authority to make recommendations. On the contrary, ONGC
had to prove its claims in a court of competent jurisdiction, where there was

32

due process of law and compliance with principles of natural justice,

especially since it had no contractual relationship with RIL.
5.2.5

Fourthly, RIL said that any recommendations given by the

Committee, even if not binding, would be likely to cause irreparable harm to

RIL and its reputation since the recommendations would be released in the
public. The recommendations would also likely provide the foundation for the
Government of India to base its actions on, and guide the determination of
civil proceedings.
5.2.6

Finally, RIL also expressed concerns that the Committees

recommendations, being likely to be premised on the D&M Report, even

though the Report was jointly commissioned by the parties on a without
prejudice basis, may amount to or imply a determination of the parties
rights, liabilities, or wrongdoings.
5.2.7

Even

if

the

Committee

decided

to

make

certain

recommendations, RIL argued that they should be limited to requiring ONGC

to prove its case against RIL and DGH in an appropriate forum, being either
an international arbitration under the PSC or in a court of competent
jurisdiction in India.
5.2.8

RIL, in the course of its further arguments, reiterated that the

Committee could be regarded as only one of recommendation, rather than

adjudication. In other words, it was not a Committee that could make findings
of fact, or reach conclusions of law. RIL also said that Committee could
highlight issues that did not have such a sufficient basis in fact or law and
indicate that these could be decided by the right jurisdiction, whether that be
arbitration or a court of competent jurisdiction.
5.2.9

In its response, ONGC said that the purpose of the Committee

was to make recommendations on the basis of which the parties could base
33

future action. These recommendations would not be binding on any party.

The role of the Committee was to help the MOPNG understand how it should
proceed. This role is important, particularly since the petroleum, oil and gas
regime is such that such incidents are likely to occur again in the future, thus
making it critical for the MOPNG to know and understand as to how such
matters should proceed.
5.2.10

Further, ONGC pointed out that the MOPNG could constitute an

ad-hoc Committee of this nature under its executive powers under Article 73
of the Constitution of India. ONGC also stated that the Committee was not a
quasi-judicial body, and would be carrying out a purely administrative role,
the objective of the Committee was to assess the facts relating to the dispute,
and make recommendations, which would be considered by the MOPNG in
taking its final executive decision.
5.2.11

ONGC also argued that the jurisdiction of the Committee could

not be challenged before the Committee itself. ONGC argued that the
authenticity of the D&M Report could not be challenged either, because the
Committee was expected to consider the Report, and make recommendations
after an in-depth study of the Report. Indeed, as pointed out by ONGC, none
of the parties were in a position to state that the D&M Report was invalid or
wrong.
5.2.12

On its part, DGH argued that this was not an adjudicative

forum, but is merely an extension of what the Government was going to do.
Instead of setting up this Committee under a retired judge, according to DGH,
the Government could have deputed one of its officers to perform this task of
making recommendations, but the Government decided to appoint an
independent authority, with the view that, perhaps because the parties would
feel more confident approaching an independent authority like this
Committee, which, in turn, would be in a position to render proper advice as
to what the Government should do. In sum, the constitution of this
34

Committee, according to DGH, is nothing but a consequence of the

compliance of the order of the Delhi High Court.
5.2.13

In the view of the Committee, it is clearly not open for the

Committee to itself look into the issue of its own appointment or constitution.
In any event, the Committee was appointed by the Government of India, and
the argument that the Government had no competence to make such an
appointment is without merit, as pointed out by both ONGC and DGH.
Further, the appointment is directly in consonance with, and in adherence to
the order of the Delhi High Court, as again made clear by ONGC and DGH.
5.2.14

In the view of the Committee, it is important to read the

memorandum appointing the Committee along with the terms of the order of
the Delhi High Court in W.P. (C) No. 3054/2014 dated 10.09.2015, in which
the High Court directed the MOPNG to take appropriate action after receipt of
the report to be submitted by D&M. Once D&M submitted its report to the
MOPNG, the Government had the choice to take advice and recommendations
from any person or body by virtue of its executive prerogative. In its wisdom,
MOPNG decided to appoint this Committee. At no stage could the
Government have been said to transgress its executive powers in appointing
such a Committee and seeking its recommendations.
5.2.15

Further, it is evident from the TOR of the Committee that it is

intended to play a purely recommendatory and advisory role. There is no

indication contained in the TOR that the Committee is expected to act as
quasi-judicial body, and indeed, there is no question of adjudication, as no
evidence has been presented, and no witnesses have been examined. Several
questions about the interpretation of various provisions have been raised by
the parties before the Committee, and every effort has been made to address
these questions of interpretation, despite the limitations that the Committee
was operating under.

35

5.2.16

It is fairly clear that the role of the Committee is limited to

expressing a prima facie view, based on the points raised by the parties, and
that its role is purely advisory and recommendatory, and certainly not
adjudicatory in nature. By its office memorandum O-22013/17/2015/ONG.DV
dated 29.07.2016, MOPNG has reiterated that the Committee has to look
into the case with the fair prospective [sic] and should not get restricted by
DGHs view or by the view of any other stakeholder, which is what this
Committee has striven to do. Wherever the Committee has been incapable of
recording any prima facie view, it has made an observation to that effect, and
clarified that such recording is not possible for lack of evidence, or insufficient
material, or some such similar reason.

B. Scope of the Committees TOR

5.3.1 RIL

argued

that

the

TOR

limited

the

Committees

role

to

recommendation, and did not extend to the determination of any legal

rights or obligations of the parties. In any event, RIL argued that the terms of
the TOR were themselves demonstrative of unfair bias.
5.3.2

RIL contended that the Committee could not make any

recommendation for various reasons.

a) First, several issues under the PSC remained undetermined, such as in
relation to joint development, contractual rights, limitation etc. These
issues could only be resolved in a forum constituted under Article 33 of
the PSCs.
b) Further, the question of proprietary interest over any oil and gas that
may underlie a block at any given time remained undetermined,
especially in light of the legal regime, specifically Articles 15, 16 and 27
of the PSCs.
c) Finally, the Committee lacked any basis to demonstrate that RIL owed
any obligation to ONGC since the Committee could not examine
ONGCs claims or determine the parties rights (including the question
of privity between RIL and ONGC and questions of tort) as if it were a
competent forum.

36

5.3.3

It was RIL and BPs further case that the phrasing of the TOR

reflected an unfair bias against RIL, since the Committee was asked to make
recommendations in respect of the quantum of unfair enrichment to be
paid by RIL to ONGC, without first establishing the factum of unjust
enrichment or legal liability of the parties.

Additionally, the parties legal

rights and obligation had also not been established, which in any event, could
not be determined by the Committee.

5.3.4

According to RIL, the TOR also erred in presuming that the D&M

Report provided a valid and sufficient basis to enable the Committee to make
the required recommendations.
5.3.5

The Committee believes that in order to address these

challenges as regards the scope of its TOR, it is useful to examine the text of
the TOR in detail to understand the same. The office memorandum dated
15.12.2015, prior to setting out the TOR, opens with recording a statement of
fact that after ONGC had written to DGH on 22.07.2013 indicating evidence of
lateral continuity of gas pools in relevant blocks, ONGC and RIL jointly
appointed D&M to carry out a third-party study. Thus, this Committee was
expressly appointed to make its recommendations based on the D&M Report.
The Committees role does not extend to making an independent assessment
of the validity of the D&M Report itself, which in any event, no party has
challenged. Therefore, the Committee cannot entertain or accept the
contention that the TOR incorrectly presumes the D&M Report to be a valid
and sufficient basis for the Committees recommendations.
5.3.6

Next, the order of the Delhi High Court in W.P. (C) 3054/2014

dated 10.09.2015 directed the MOPNG to make a decision based on the D&M
Report. The TOR makes a reference, therefore, to the conclusions drawn by
the D&M Report as regards continuity and connectivity of reservoirs, etc., and
crafts the scope of the Committee accordingly. While no party has challenged
the validity of the D&M Report, concerns have been expressed about its
37

limitations and ambiguities contained in the Report, which the Committee has
been fully cognizant of in making its recommendations. It is also incorrect to
speculate that the TOR was biased with respect to ONGCs alleged claims of
unjust enrichment. On the contrary, the Committee has made no such
assumptions. Instead, the Committee has examined the Report, and the
contentions of both sides, and provided its views and recommendations
accordingly. Therefore, RILs allegations that the TOR is biased in favour of
ONGC does not stand.
5.3.7

Further, it is relevant to reiterate that the Committee was asked

to make an in-depth study of the D&M Report, and it has attempted to do

precisely that. In arriving at its recommendations, the Committees
proceedings were completely open and transparent, and all parties were
heard extensively, and given a chance to make rebuttals/sur-rebuttals.
5.3.8

The Committee reiterates that its scope does not extend to

assessing the validity of the D&M Report, and is restricted to the issues raised
in the TOR, which will be addressed in the following pages. It is further
clarified that while making any recommendations on the TOR, the views of
the Committee are to be regarded as being only prima facie, as it is not a
quasi-judicial body, and has not had the opportunity or remit to examine
witnesses, study evidence, or perform any such procedural roles. To reiterate,
the Committees role is one of providing advice and recommendations to the
MOPNG, and does not, in any capacity, extend to an adjudicatory function,
and the contents of the Committees Report must be read in this context.
5.3.9

The subsequent chapters consider the various TORs of this

Committee in detail, in the light of the submissions made by the parties to the
Committee, both in writing and in oral hearings, and make findings and
recommendations accordingly. It begins with paragraph 4(a) of the TOR
requiring an in-depth examination of the D&M Report.

38

CHAPTER 6
D&M REPORT

A. Reference

6.1.1

The Committee has been tasked in paragraph 4(a) of the TOR

with the reference to consider in depth the report submitted by D&M and
recommend the action to be taken by the Government thereon considering
legal, financial and contractual provisions including those contained in
Oilfields (Regulation and Development) Act, Petroleum and Natural Gas Rules
and concerned Production Sharing Contracts (PSCs) etc. The appointment
of D&M as an international consultant to evaluate the connectivity of
reservoirs and migration of gas across the block boundaries was a critical
event in the course of this dispute. This chapter briefly discusses the manner
in which this appointment was made, offering a broad overview of the
findings of the report submitted by D&M, as well as a discussion of the
challenges put to the Committee against the D&M Report, with a view to
addressing the reference put to the Committee.
6.1.2

The history of D&Ms engagement in the matter can be traced

to the letter sent by ONGC to DGH on 22.07.2013 raising concerns about

continuity and connectivity. Subsequently, there was an agreement between
ONGC and RIL to collaborate and provide data to a third-party independent
agency, which would be identified to conduct the study of the wells in
question. This agreement was entered into on 03.07.2014.
6.1.3

Under the terms of this agreement, DGH for and on behalf of

ONGC and RIL ha[d] invited a password protected tender to undertake an

independent third-party study in the

contiguous area, where the agency

would be required to carry out [c]omprehensive reservoir modelling and

analysis to evaluate continuity of channels and connectivity of reservoirs in
the Contiguous Areas, [i]f reservoir continuity and connectivity is
39

established,

[t]o

estimate

gas

volumes,...

allocation

of

connected/unconnected gas volumes in respect of the Contiguous Areas to

ONGC and RIL for the purpose of any commercial agreement / gas balancing
if applicable.
6.1.4

As per the agreement, DGH was the project coordinator for this

project, and no party except DGH was to interact or submit any information
or data and make any correspondence with the agency in any manner
whatsoever, except for payment related communication and except for
interaction in review meetings. Further, the agreement stated that unless
otherwise mutually agreed by the parties, all review meetings would be held
at the office of the agency so appointed. Finally, regarding the review, it was
decided that ONGC and RIL would review the work flow processes and time
lines being followed by the agency, and the review [would] be carried out
under the supervision of DGH. Further, parties were expected to make all
endeavours to make decisions unanimous or by consensus. It was agreed
that parties would review draft reports prepared by the agency, and would
provide the agency with comments to DGH within ten business days of
receipt of the same for the purposes of finalising the report. The final report
would be issued, as per the agreement, by the agency after a representative
of each party had reviewed and commented on the same.
6.1.5

In effect, the Committee notes that as per the terms of the July

2014 agreement between ONGC and RIL, both parties would participate
jointly in the review meetings, jointly review the workflow, processes and
timelines being followed by D&M, as well as make all efforts to make
decisions unanimous or by consensus. The parties also agreed to review all
draft reports submitted by the appointed agency, and provide the agency
with feedback within a stipulated period. It was agreed that the final report
would be issued by the appointed agency only after representatives of each
party had an opportunity to review and comment on the same.

40

6.1.6

Thereafter, an agreement was entered into between ONGC and

RIL on the one hand and D&M on the other hand, with DGH as project
coordinator, for D&M to conduct the independent third-party study in the
matter.

B. Objectives of the D&M Report

6.2.1

D&M

was

awarded

the

Contract

No.

ONGC-RIL-

DGH/KG/01/2014 for an 'Independent Third Party Study in KG Offshore', and

the project started from 25.09.2014.
6.2.2

The objectives of the Third Party Study entrusted to D&M were

as follows:
a) Comprehensive reservoir modelling and analysis to evaluate the
continuity of channels and connectivity of reservoirs across the block
boundaries operated by ONGC and RIL.
b) If reservoir continuity and connectivity was established, the objectives
were further as follows:

6.2.3

i.

To estimate gas volumes (in-place volumes, estimated ultimate

recovery (EUR), and reserves) in the proposed study area of the
respective blocks operated by ONGC and RIL

ii.

The allocation of connected/unconnected gas volumes (in-place

volume, EUR and reserves) to ONGC and RIL for the purpose of
any commercial agreement/gas balancing, if applicable
This study was to be carried out under the supervision of DGH,

the technical arm of the MOPNG, Government of India and managed jointly
by ONGC and RIL.

41

6.2.4

The Scope of Work for the Third Party Study was as follows:

a) All analysis to be done based on the available data

Consultant to review the available data and advice on data preparation
and requirements, if any
b) Milestones are indicated for the purpose of QC, Technical Assurance
and Progress Review
c) Petrophysical analysis with 2 Milestone review & acceptance
d) Seismic with 2 Milestone review & acceptance
e) Static model with 2 Milestone review & acceptance
f) Dynamic model with 4 Milestone review & acceptance
g) Consolidated analysis
h) Preparation of reports
i) Deliverables
6.2.5

In effect, the study required D&M to design certain reservoir

models, and on the basis of these models, establish whether there was
connectivity of reservoirs, and if so, estimate the gas that might have
migrated. This appears to have been agreed to between the parties. As part
of the scope of work under the contract, 12 milestones were identified by
ONGC and RIL, and review meetings would be periodically held to address the
milestones.
6.2.6

In all, eight review meetings were held for quality assurance

and acceptance for completion of the relevant milestone prior to heading

towards the next milestone. The meetings, held at the D&M office at Dallas,
Texas, were attended by representatives from ONGC, RIL and DGH.
6.2.7

It was ONGCs case that the D&M Report was the outcome of

the agreement of the parties on the matters discussed at the various

meetings held. The matters so discussed included static and dynamic
modelling, the preparation of estimates, and so on. ONGC highlighted that the
review meetings held at D&Ms premises were held for quality assurance and
acceptance for the relevant milestone, prior to heading to the next milestone,
under the terms of the agreement between them. For instance, ONGC
42

referred to the main objective of one of the meetings, which was to discuss
the results to date for static modelling, engineering and dynamic modelling,
thus indicating that even the modelling pattern was discussed, and there was
no objection to the same from any party. At another meeting, the objective
was to discuss quality check aspects for static and dynamic modelling,
review of results on dynamic modelling and discuss

scenarios for forecast.

Thus, the inputs of the parties were invited for static modelling, dynamic
modelling, the forecast case, as well as, later, for the final report. This
demonstrated that any uncertainty that may have existed with regard to any
of these aspects (modelling, forecast, etc.), had been accounted for by
incorporating the inputs from parties.
6.2.8

ONGC cited further minutes of certain meetings to point out that

the D&M representative presented the status of the pending actions and the
work completed to the companies [and] provided copies of the preliminary
draft reports for review and comments. The parties were expected to
provide initial comments on the preliminary draft report for D&M to review
and incorporate as appropriate. It was also agreed that once the comments
were discussed and reviewed, the contractor would provide the final report to
ONGC and RIL.
6.2.9

The process described by ONGC to the Committee through the

lens of the meeting minutes reveals that there was considerable attention
paid to the views and considerations of both ONGC and RIL, by allowing them
to give continuous feedback and comments during the course of the study
and on the draft of the final report. In this process, it is evident that any
objections that the parties might have had regarding the study, the
methodology or the results, would have been taken note of, and the report
would have proceeded accordingly.

6.2.10

The Committee notes that the Third Party independent project

was completed on 08.10.2015 and the draft report was submitted by D&M on
43

08.10.2015 itself. After examination and incorporation of views/comments

from ONGC and RIL, the final report was submitted by D&M on 30.11.2015.

6.2.11

Read with the terms of the previous agreement between ONGC

and RIL to appoint an agency to conduct the study, it is evident that the
proceedings of the meetings involving ONGC, RIL, DGH and D&M were
extremely transparent; every stage of the D&M study was carried out with the
consent of the parties; the methodology was agreed upon beforehand and
fixed by both the parties; the draft report was shared prior to finalising, and
comments were solicited from all. Considering this sequence of events, the
process followed, and the continuous participation of all the parties, it
becomes difficult for either party to bring into question the authenticity,
reliability or validity of the report.

C. Methodology of the D&M Report

6.3.1

D&M followed a detailed methodology for the purpose of its

study. To begin with, two three-dimensional (3D) seismic data sets of ONGC
and RIL covering the study area were merged into a single data set.
Thereafter, an Area of Interest was defined within the three contract areas
belonging to ONGC and RIL. This Area of Interest included discovered gasbearing sands within the reservoir interval, inferred from the distribution of
seismically defined geobodies and from the results of dynamic data
interpretations. A detailed petrophysical analysis of the 38 logged wells in the
study area was carried out, which provided calibration to the seismic analysis
and input to the Full Field Geocellular Model ("FFGM"). The depositional
setting for these Upper Pliocene sediments was that of a complex deep water
submarine fan fed by an evolving series of sediment gravity flows, with most
sand deposition confined within or adjacent to one of two major channel
systems. Based on an analysis of multiple logs, four petro physical rock types
in all wells were consolidated.

44

6.3.2

The FFGM was constructed via a series of iterative steps as

follows: the structural framework was defined; petro physical rock types and
petrophysical properties were propagated using geostatistical methods of
Good International Petroleum Industry Practices ("GIPIP"), and the results
were iterated to ensure the distributions were consistent with well data and
interpretations. The FFGM framework consists of over 114 million cells, with a
vertical resolution of about 1 metre.
6.3.3

Thereafter,

Full-field

Reservoir

model

("FFRM")

was

constructed by upscaling the grid and properties of the FFGM within the Area
of Interest, and initializing the pressure and fluid distribution in the model.
The initial water saturation (Swi) was estimated by PRT-specific J functions
relative to the appropriate fluid contact. Pressure-Volume-Temperature
properties used were consistent with the existing dry gas. The total Gas
Initially in Place ("GIIP") of the reservoir model was estimated consistent
with the material-balance analysis. A history match was achieved to
reproduce the volume, timing and character of gas and water production for
the field and for individual wells. The history-matched model was then run in
forecast model to investigate the production scenarios to be expected from
continued operations and also with additional producing wells.
6.3.4

Sensitivity on the pressure depletion was conducted to estimate

the connected and unconnected gas volumes within the Area of Interest. The
connected gas volume was defined to be the gas volume that has significant
pressure depletion and contributes to the production and pressure
performance of the field. The simulation model was calibrated by historymatching the FFRM to measure pressures and fluid volumes, including postproduction Modular Dynamic Tester ("MDT"), through 31.03.2015.

D. Findings of the D&M Report

6.4.1

The technical study by D&M indicated the connectivity and

continuity of reservoirs across block boundaries of Godavari PML, KG-DWN98/2 and KG-DWN-98/3. The report quantified the volume of gas migrated

45

from Godavari PML and KG-DWN-98/2 to KG-DWN-98/3 block and respective

production of gas from migrated volumes till 31.03.2015. Based on the model
prepared by D&M, two production forecast cases were simulated. The
estimated gas migration volumes from Godavari PML and KG-DWN-98/2 to
KG-DWN-98/3 as on 01.01.2017 and 01.04.2019 were simulated along with
production volumes of respective contract areas.
6.4.2

The findings of the D&M Report are summarised as follows:

a) The GIIP for Godavari PML and D1 discovery area of KG-DWN-98/2

block were found to be 14.210 and 11.857 BCM respectively.
b) From 01.04.2009 (gas production commenced from KG-DWN-98/3
block) till 31.03.2015, 7.009 and 4.116 BCM of gas had migrated from
Godavari PML and D1 discovery of KG-DWN-98/2 block respectively to
KG-DWN-98/3 block. Of these migrated gas volumes, 5.968 and 3.015
BCM of gas was produced from Godavari PML and D1 discovery of KGDWN-98/2 block respectively, through KG-DWN-98/3.
c) The D&M Report also makes two future gas production forecasts (Base
Case and Case 1) with effect from 31.03.2015. The Base Case forecast
was simulated using continued operations and active producers as on
31.03.2015. A Case 1 forecast was simulated using continued
operations as in the Base Case and further including three additional
producers that were added post 31.03.2015, and are currently in
operation. As on date, it is the only Case 1 forecast which is to be
considered.
d) The Base Case forecast indicates that as on 01.01.2017, 7.519 and
4.377 BCM of gas would have migrated from Godavari PML and D1
discovery of KG-DWN-98/2 block respectively to RIL's KG-DWN-98/3
block. Out of these migrated volumes, 6.549 and 3.395 BCM of gas
would be produced from Godavari PML and D1 discovery of KG-DWN98/2 block respectively through KG-DWN-98/3 block.
e) As on 01.01.2017 thus, 6.691 and 7.480 BCM of gas would be left
behind in Godavari PML and D1 discovery area of KG-DWN-98/2 block
respectively.
f) The Case 1 forecast indicates that as on 01.04.2019, 8.059 and 4.650
BCM of gas would have migrated from Godavari PML and D1 discovery
of KG-DWN-98/2 block respectively. Out of these migrated volumes,
7.065 and 3.846 BCM of gas would be produced from Godavari PML
and D1 discovery of KG-DWN-98/2 block respectively through KGDWN-98/3 block.
46

6.4.3

The final Report was submitted by D&M after incorporating the

comments of both the parties to the Reference, i.e., RIL and ONGC.
Pertinently, a substantial portion of the arguments of RIL and ONGC, as
discussed next, pertained to this report.

E. Challenges to the D&M Report

6.5.1

The D&M Report was jointly commissioned to independently

evaluate the continuity of channels and connectivity of reservoirs across the

block boundaries operated by ONGC and the RIL-JV, and if so established,
estimate gas volumes and their allocation for gas balancing, if applicable.
D&M used the production data from individual wells in the D1-D3 fields
between April 2009 and March 2015. In its arguments, RIL raised several
issues regarding the limitations of the D&M Report, in light of the uncertainty
and the use of the Report to answer the TOR.
6.5.2

RIL stated that the D&M Report was not commissioned to

address the issues raised in the TOR and thus lacked the necessary data and
analysis to assist the Committee. In particular, RIL referred to paragraphs
4(b) and (c) of the TOR that required the Committee to recommend the
future course of action, quantify the unjust enrichment, and suggest
measures to prevent future unjust enrichment.
6.5.3

However, according to RIL, the D&M Report did not fulfil the

TORs objectives since it did not contain the requisite information or analysis
to arrive at accurate or justifiable volumetric estimates for quantifying any
purported damage from the alleged unjust enrichment. For instance, the
Reports scope of work did not actually require it to conduct any gas
balancing exercise, nor did it consider any of RILs development, drilling and
facilities costs (CAPEX), operating costs (OPEX), realised sales gas volumes,
or resultant NPV of the gas etc.
47

6.5.4

RIL argued that the D&M Report suffered from some significant

limitations and uncertainties, which were acknowledged in page 102 of the

D&M Report itself. In this regard, RIL raised at least four objections. First, the
complex nature of the KG reservoir created uncertainty in reservoir modelling,
which was exacerbated by insufficient field data. Secondly, D&Ms analysis
could not resolve the geological and technical issues that arose in the TOR,
especially given the inherent uncertainty in its static (FFGM) and dynamic
(FFRM) models. Thirdly, D&Ms approach to subsurface modelling and the
failure to run multiple scenarios on a model calibrated by field performance
data could not answer the TOR since it generated only a single deterministic
outcome that ignored the range of other (equally valid) possible outcomes. As
a result, the D&M Report failed to establish the range of uncertainty that
existed in the reserves. Finally, the data set underlying the D&M Report
limited its reliability considering its asymmetric nature, i.e., where RIL has
shared considerable static and dynamic data from its D1-D3 fields (such as
field performance, coring, gas samples, and well tests) in contrast to ONGCs
undeveloped blocks. This further added to the quantitative uncertainties in
the input data.
6.5.5

Additionally, RIL stated that the reliability of the D&M Reports

findings were put into question by the fact that the field performance data
from the D1-D3 fields after March 2015 (which was the end period of the
D&M Report) revealed that the reservoir did not behave in a manner
consistent with D&Ms dynamic model and ensuing predictions.
6.5.6

According to RIL, the Committee lacked the necessary

information to enable it to make recommendations consistent with principles

of natural justice and due process. Additional data and analysis is required to
assess the volume of gas migrated and quantify the compensation, if any,
due to ONGC.

48

6.6.7

RIL averred that the Committee could only fulfil its TOR if it was

in possession of additional field data from ONGCs undeveloped contract

areas and RILs contract area post March-2015; if it could calibrate the static
dynamic and geological models with this additional data; if it could generate
multiple cases with different input parameters; if these multiple scenarios
could be evaluated by internationally recognised experts to provide a quality
check; and if the uncertainties could be quantified and applied to the final
result.
6.6.8

ONGC countered the objections raised by RIL regarding the

reliability of the D&M Report in equal measure. ONGC stated that the
methodology of the D&M Report was transparent, as it was conducted with
full participation of RIL (and BP, as one of the members of the contractor in
the PSC), ONGC and DGH. Eight review meetings were held at Dallas, at
which RIL, ONGC and DGH were all present. Input data for the report was
provided to D&M through DGH, with each party having full knowledge of, and
access to each others data. Further, D&Ms technical workflow was adopted
by D&M after consultation with the parties, and the draft report was also
circulated for comments to the parties. The final report was thus issued by
D&M after discussion at every stage between the parties.
6.6.9

ONGC further argued that RILs concerns of data asymmetry

were not credible, and did not affect the reliability of the D&M Report in any
way. As regards the complex nature of the reservoir creating uncertainty in
reservoir modelling, ONGC argued that the D&M Report had utilised all the
data sets to arrive at a robust FFGM and FFRM to draw its conclusions.
Moreover, the analysis conducted by D&M included an analysis to validate its
own results, due to which there could be no ambiguity in the estimates of gas
volumes made by D&M.
6.6.10

In response to RILs contention that the D&M Report contained

a single realisation model leading to a single deterministic outcome, ONGC

49

argued that D&M did not run a single realisation model, but had run a
number of iterations and arrived at the final model to obtain a history match
of the production and pressure data of both RILs and ONGCs wells. ONGC
further pointed out that these iterations were carried out with RIL's full
knowledge, and at no point of time during the study, had RIL raised this
issue.
6.6.11

Additionally, ONGC contended that RILs argument that D&M

had conducted inaccurate history matching to arrive at its conclusions was

incorrect because the history matching had been done as per standard
industry practice and as per agreed technical workflow. Further, ONGC
pointed out that till 31.03.2015, the history match had been successfully
achieved for the bulk quantity of the gas reserves produced by RIL.
6.6.12

On RILs contentions that there was a lack of actionable findings

of the D&M Report, ONGC argued that the D&M Report was prepared at the
joint request of ONGC and RIL, under the supervision of DGH. The
information used in preparing the report was obtained from both ONGC and
RIL, with DGH as the intermediary. The methodology was clearly stated in the
D&M Report, and all the evidence relied upon and its own evaluation results
were clearly mentioned in the report itself. Accordingly, ONGC argued that
RIL was estopped from raising these contentions, as it had not demonstrated
any legally-established basis to fault an expert report.

6.6.13

ONGC also pointed out that the level of uncertainty projected by

RIL was not supported by any material or evidence. On the contrary,

according to ONGC, D&M had made three key findings which were relevant
for the Committee to proceed with this recommendations: first, the integrated
analysis indicated connectivity and continuity of natural gas reservoirs across
the ONGC and RIL blocks. Secondly, RIL had produced gas (of 8.983 BCM up
to 31.03.2015) which had migrated from Godavari PML and KG-DWN-98/2,

50

through the field wells of KG-DWN-98/3. Thirdly the estimated forecast of gas
migration till March 2019 was approximately 10 BCM.

6.6.14

On its part, DGH stated that D&M issued its final draft Report to

both ONGC and RIL for their review and comments prior to finalising the
same. Notably, RIL did not raise any issue regarding D&Ms study or data
limitation while finalising the final draft report, prior to the submission of the
final report by D&M. Further, DGH said that RIL signed all the minutes of the
review meetings held with D&M at Dallas, and agreed to the technical
completion of every milestone defined for the study, prior to taking steps
towards the next milestone. Therefore, RIL was aware of the limited data
availability from the ONGC acreages since the beginning of D&Ms study, but
never raised any issue towards it, during the progress of the Report.
6.6.15

DGH additionally pointed out that D&M had already mentioned

the limitations of its study in the report itself. Further, DGH submitted that
subsurface studies always involve uncertainty issues, because the characters
and production behaviour of the reservoirs are assessed indirectly through
geological, geophysical and petro-physical characteristics. In such cases,
subjectivity or uncertainty in sub-surface data interpretation always exists,
which gives rise to variation from the simulated and actual performance of
the reservoir.
6.6.16

Incidentally, as a peripheral note to the conclusions drawn by

the D&M Report, ONGC raised the issue of stranded gas. ONGC stated that
it had independently evaluated the models provided by D&M, to understand
the extent of reservoir damage and the quantum of otherwise-producible gas
that would have been left behind as stranded gas due to the operations
carried out by RIL. This was countered in detail by DGH (as well as RIL),
which said that ONGC's claim was speculative for various reasons, and
pointed out that there were technical discrepancies in ONGCs assessment of
stranded gas.
51

6.6.17

The issue of stranded gas raised by ONGC appears to be only

incidental, and with limited or no merit, in the view of the Committee,

particularly in the light of the explanation provided by DGH regarding the
concept of stranded gas. As a result, the Committee has not considered this
issue any further.

6.6.18

The Committees review of the D&M Report in the context of its

remit under the TOR addresses three key issues. The first pertains to an indepth study of the Report itself, which the Committee has attempted to do in
a preceding sub-section in this chapter. The in-depth study suggests that the
Report was commissioned under terms agreed upon by all the stakeholders in
the present dispute, crucially by RIL and ONGC. All the meetings with D&M
had extensive minutes, revealing that all proceedings were as transparent as
possible. The data to be shared was agreed upon in advance, and analyses,
methodology and results were jointly agreed upon throughout the process of
conducting the study. In the circumstances, and with the information
available at hand, it is difficult for the Committee to believe that the manner
in which the D&M Report was arrived at was questionable. The Committee is
unable to evaluate in any further detail the concerns expressed by RIL about
data asymmetry or methodological limitations or uncertainty in the results,
and the Committee has not considered these concerns in any more detail.
6.6.19

The D&M Report itself appears to be reasonable in its research,

methodology and conclusions drawn, and is hard to be faulted. The D&M

Report establishes connectivity and quantifies the gas that has migrated and
is likely to migrate within the time period covered by the Base Case and Case
1 Scenarios. Further, the D&M Report as well as the statements made by the
parties to the Committee point to the fact that gas production in the relevant
fields is likely to cease because of pressure depletion, and the fields are
expected to reach their technical limits for further gas production. Due to the
fact that only meagre reserves are left in the relevant fields, there is no
52

question of contemplating any kind of joint development, unitisation, or gas

balancing. The D&M Report appears to establish that there is practically no
development or further production that can be carried out by ONGC in its
fields in the current scenario.
6.6.20

In sum, the Committee notes and accepts that the D&M Report

finds that connectivity between the reservoirs in KG-DWN-98/3, KG-DWN98/2 and Godavari PML blocks is established. Further, as per the calculations
contained in the report, from 01.04.2009 (when gas production commenced
from KG-DWN-98/3 block) till 31.03.2015, 7.009 and 4.116 BCM of gas had
migrated from Godavari PML and D1 discovery of KG-DWN-98/2 block
respectively to KG-DWN-98/3 block, of which, 5.968 and 3.015 BCM of gas
was produced from Godavari PML and D1 discovery of KG-DWN-98/2 block
respectively, through KG-DWN-98/3.
6.6.21

Additionally, the Committee notes that the D&M Report makes

two forecasts regarding gas migration. First, as per the Base Case forecast, as
on 01.01.2017, 7.519 and 4.377 BCM of gas would have migrated from
Godavari PML and D1 discovery of KG-DWN-98/2 block respectively to RIL's
KG-DWN-98/3 block, of which 6.549 and 3.395 BCM of gas would have been
produced from Godavari PML and D1 discovery of KG-DWN-98/2 block
respectively through KG-DWN-98/3 block. Secondly, as per the Case 1
forecast, as on 01.04.2019, 8.059 and 4.650 BCM of gas would have migrated
from Godavari PML and D1 discovery of KG-DWN-98/2 block respectively, of
which 7.065 and 3.846 BCM of gas would have been produced from Godavari
PML and D1 discovery of KG-DWN-98/2 block respectively through KG-DWN98/3 block.
6.6.22

In light of the findings of the D&M Report, and the Committees

acceptance of the same, it is now instructive to consider the question of

unjust enrichment and its legal and contractual implications, as required by
paragraphs 4(a) and (c) of the TOR.

53

CHAPTER 7
UNJUST ENRICHMENT
7.1

The previous Chapter, in pursuance of paragraph 4(a) of the

TOR, examined the D&M Report in depth to conclude that the D&M Report
establishes was connectivity of reservoirs and continuity of channels across
the blocks operated by ONGC and RIL, with 11.125 BCM gas having migrated
from ONGCs blocks to block KG-DWN-98/3 and 8.983 BCM produced from it
at block KG-DWN-98/3 up to 31.03.2015. The D&M Report also made two
forecasts, the Base Case and Case 1 Forecast for 2017 and 2019 respectively,
which the Committee accepts.
7.2

Consequently, the ensuing questions before the Committee now

are whether the migration, production, and sale of such gas from the ONGC
blocks constitutes unjust enrichment to RIL, the contractor of the adjacent
KG-DWN-98/3 block. This has to be examined in light of the detailed scrutiny
of the legal and contractual provisions contained in the Oilfield Act, PNG
Rules, and the PSCs, governing the rights and obligations of the parties. The
Committee thus, also has to determine the construction and import of Articles
10.15, 11.2 and 12 read together. Apart from this, the other questions before
the Committee include determining whether RIL had prior knowledge of
connectivity, or potential connectivity, of reservoirs; and notwithstanding the
same, whether ONGCs alleged laggard conduct and unpreparedness
permitted the exploitation of gas by RIL from ONGCs adjoining blocks.
7.3

This Chapter will thus answer parts of paragraphs 4(a) and (c)

of the TOR dealing with the determination of unjust enrichment in view of the
applicable contractual provisions and law. It will begin by discussing and
interpreting the current petroleum regime, comprising the relevant PNG Rules
and clauses of the PSCs. Apart from being essential to answer all the four
clauses of paragraph 4 of the TOR, a discussion of the petroleum regime will
54

enable the Committee to evaluate the parties stands and answer whether the
migration of gas to block KG-DWN-98/3 and its subsequent production and
sale by RIL has caused RIL to be unjustly enriched.
7.4

During the course of the arguments, and in its written

submissions, ONGC made extensive submissions charging RIL with having

prior knowledge of the connectivity and continuity of reservoirs (which it did
not share with anybody) and deciding the position of its four development
wells in KG-DWN-98/3 very close to ONGCs blocks, so as to unduly benefit
from gas that would migrate from there. Incidentally, RIL also charged ONGC
with having knowledge of potential connectivity and extension of the
Reservoir as far back as 2007 (or that it could have been discovered with due
diligence), but remaining silent about it till 2013, when ONGC finally brought
it to DGHs notice. However, to determine whether there was any unjust
enrichment, the Committee will not delve into the question of knowledge at
this stage, and will discuss it later. Instead, notwithstanding this issue of
knowledge, it will partly answer para 4(c) of the TOR by interpreting the PNG
Rules and the terms of the PSCs, specifically Articles 10, 11 and 12, in light of
the parties positions and the law on unjust enrichment.

A. The PNG Rules

7.5.1

The PNG Rules form part of the statutory regime that governs

petroleum operations, both in nomination blocks such as Godavari PML, and

in PSCs, such as for blocks KG-DWN-98/2 and KG-DWN-98/3.
7.5.2

Rule 4 clarifies that a person shall prospect for petroleum and

mine it only pursuant to a PEL (license) and PML (lease) granted under
the PNG Rules respectively.
7.5.3

Rule 5 deals with the grant of licenses and leases and states

that a license or lease in respect of any land or mineral underlying the ocean
55

within the territorial waters, continental shelf, or the exclusive economic zone
(EEZ) of India, which is vested in the Union, shall be granted by the Central
Government. Rule 5(2) provides that every such license or lease shall contain
such covenants as may be prescribed by the PNG rules and such additional
covenants as may be contained in the agreement with the Central
Government. The regime operates slightly differently if the license or lease is
in respect of land vested with the State Government, which is not the case
before the Committee.
7.5.4

Rule 7 enumerates the rights of the licensee and lessee subject

to the provisions of the Act, Rules, and any terms of agreement between the
Central Government and licensee/lessee, such as the PSCs. Rule 7(i) grants
every licensee the exclusive right to carry out, in addition to geological and
geophysical surveys, information drilling and test-drilling operations for
petroleum in the area covered by the license and shall have the exclusive
right to a lease over such part of the area covered by the license as he may
desire. Rule 7(ii), inter alia, grants every lessee the exclusive right to
conduct mining operations for petroleum and natural gas in and on the area
demised by such lease along with other connected rights. Thus, licensees are
granted these rights in respect of an area (defined in Rule 3(d) under field).
7.5.5

Rule 10 of the PNG Rules covers the area and term of license

and, inter alia, requires that the area covered by the license shall be
specified. Thus, the area where the hydrocarbon reserves are, have to be
demarcated. Following from this, Rule 16 provides for the identification of
areas, where the licensee or lessee is required to display notices at all
conspicuous points on the area covered by the license or lease to indicate the
boundaries.
7.5.6

As part the amendments that were carried out to the PNG Rules

in 2003, Rule 19(c) was inserted in General Provisions. It requires the

licensee or lessee to provide the Central Government or its designated agency
56

(which is the DGH, as per Notification No. S.O. 1391(E) dated 01.09.2006), as
soon as possible, all the data obtained or to be obtained as a result of its
petroleum operations free of cost. This data encompasses raw data as well
interpretative and derivative data, including reports, analysis, interpretations
and evaluations prepared in respect of petroleum operations. All such data
has been declared the property of the Government.
7.5.7

Rules 20 and 21 of the PNG Rules provide for suspension of

conditions of a license/lease and the cancellation of a license/lease

respectively. Rule 30 injuncts the licensee or lessee from suspending normal
drilling or production operations or abandoning an oil/gas well without giving
the Central Government at least a fortnights notice or 24 hours after, if
operations have to be suspended immediately.
7.5.8

Chapter VI of the Rules focuses on conservation and

development. Rule 27 empowers the Central Government to restrict the

amount of petroleum or gas that may be produced by a lessee in a particular
field in the interests of conservation of mineral oils. This thus makes clear the
power of the Government to regulate petroleum production within a
demarcated field for certain reasons.
7.5.9

Similarly, Rule 28 enables the Central Government to prescribe

conditions to regulate the conduct of operations by a licensee or lessee in a

field or area where the Central Government has reason to believe that the
petroleum deposit extends beyond the boundary of the leased or licensed
area into another operators area. The Government may require the licensee
or lessee to undertake any operation, or prohibit any operation, or permit it to
be undertaken subject to certain conditions. Thus, Rule 28 empowers the
Central Government to control the conditions under which, if at all, a licensee
or lessee can operate outside their field or area. Pertinently, Rule 28 is the
genesis for Articles 10.15, 11 and 12 of the PSCs of both the parties, as shall
be discussed in detail in the next section.
57

B. The PSCs
7.6.1

Although both ONGC and RIL-Niko-BP have entered into

separate PSCs with the Central Government, the terms of these PSCs are

mutatis mutandis, and thus, shall be used interchangeably. Furthermore, the

terms of the PSC that apply to oil, also apply to natural gas by virtue of
Articles 10 and 21. Apart from the Articles of the PSCs, it is also important to
examine various recitals, which reaffirm certain foundational principles in
respect of petroleum operations.
7.6.2

Recital 1 stipulates that under Article 297 of the Constitution,

petroleum in its natural state, whether in Indias territorial waters or

continental shelf, vests in the Union of India. This reiterates the position that
the Central Government is the owner of natural resources, including gas, and
holds it in public trust for the people of India. Thus, only the Government has
a proprietary interest over the gas, till it is sold at the delivery point, by
contractors.
7.6.3

Recital 4, mentioned above, makes it clear in each of the PSCs

that Cairn and RIL-Niko applied for a license or letter of authority to carry out
exploration operations in the offshore area identified as block KG-DWN-98-/2
and block KG-DWN-98/3 respectively, and that they had been duly authorised
to carry out petroleum operations therein. These offshore blocks were
described in greater detail in the accompanying Appendix. Thus, Recital 4
highlights the idea that each contractor only applies for exploration in a
specified and demarcated block and is granted rights for that block, and is
reinforced by Recital 8, which stipulates that this area (in Recital 4) forms the
subject matter of the PSC.
7.6.4

Recital 6 of the Preamble highlights the Governments desire

that petroleum resources that may exist in the continental shelf, territorial
58

waters and the EEZ of India be discovered and exploited with the utmost
expedition in the overall interest of India and in accordance with GIPIP.
The emphasis here is on expeditious discovery in the interest of the people of
India and consistent with international practices. It is also reflective of the
proposition that the Union Government holds the gas in trust for the people
of India.
7.6.5

Article 1 of both the PSCs defines the various terms used

throughout the contract, and focuses on contract area.

a) Under Article 1.24, Contract Area means the area described and
delineated on the map in two Appendices A and B respectively on the
Effective Date (the later of the date of the PSC or the grant of PEL
under Article 1.40). It also includes any portion of the said area that
remains after relinquishment or surrender pursuant to the PSC, and
any additional area under Article 11.2. Thus, unless certain additional
area is provided under Article 11.2, the contract area is confined to the
coordinates of the two Appendices (pre-relinquishment).
b) The focus on the contract area is also found in Article 1.5, which
defines Appraisal Programme as one carried out following a discovery
in the contract area for the purpose of appraising such discovery.
Thus, even the Programme is restricted to the contract area itself.
c) Similarly, even Cost Petroleum in Article 1.28 permits the contractors
recovery of contract costs only from the total portion of the crude oil
and natural gas produced and saved from the contract area. It is
connected to Profit Petroleum in Article 1.77, which is the total value
of the crude oil and natural gas produced and saved from the contract
area as reduced by the cost petroleum.
d) Further, Article 1.32 defines Development Area to be an area within
the contract area comprising of single or multiple reservoirs, which has
been designated by the Management Committee, subject to Article
11.2, to include the maximum area of potential productivity in the
contract area in respect of which a commercial discovery has been
declared and a development plan approved.
e) The focus on contract area continues in Article 1.39s Discovery Area,
which is that part of the contract area where the contractor believes
petroleum exists, and is likely to be produced in commercial quantities.

59

7.6.6

Other definitions in Article 1 that lay emphasis on contract area

include Exploration Operations conducted in the contract area in search for

petroleum in an Appraisal Programme (Article 1.43); Gas Field (Article 1.51)
and Oil Field (Article 1.67) located within the contract area; Lessee (Article
1.57) and Licensee (Article 1.60) being contractors permitted to carry out
petroleum operations within the contract area; Production Operations (Article
1.76) for petroleum conducted from the development area. In contrast,
Reservoir has been defined under Article 1.80 as a naturally occurring
discrete accumulation of petroleum.

Pertinently, there is no reference to

contract area. This emphasis on contract area is helpful in understanding the

boundaries and restrictions of a conductors exploration and mining
operations to his block or specified area.
7.6.7

Recital 6 relies on GIPIP, defined in Article 1.52, and mentioned

in various Articles of the PSC as a condition of the license or lease. GIPIP are
those that are generally accepted and followed internationally by prudent,
diligent, skilled and experienced operators in petroleum exploration,
development, and production operations, which are best equipped at that
point of time to accomplish the desired results. GIPIP are not intended to be
limited to the optimum practices or methods to the exclusion of others, but
are a spectrum of reasonable and prudent practices, in light of the facts then
known, to accomplish the desired results. In case a party raises a question as
to what constitutes a GIPIP, the Management Committee decides, failing
which the Government decides with input from DGH or other listed
organisations, which decision shall be binding.
7.6.8

Following the definition clauses, Article 3 of the PSCs deals with

the License and Exploration Period, with the exploration period lasting seven
years unless extended (Article 3.1). Article 3.9 stipulates that if no commercial
discovery is made in the contract area by the end of the exploration period,
the contract shall terminate. Article 4 deals with Relinquishment, while Article
5 is about the Work Programme.
60

7.6.9

Article 6 of the PSCs deals with the Management Committee,

comprising of two members nominated by the Government to represent it

and one member nominated by each company constituting a contractor to
represent it. It is important because it demonstrates that the Government,
through the Committee, is expected to be kept in the full know-how of all
matters pertaining to petroleum operations in the block. Article 6.5 and 6.6
specify a list of matters that are to be submitted by the Operator on behalf of
the Contractor to the Management Committee for review and approval
respectively. These include, inter alia, proposals for an Appraisal Plan and
declaration of discovery as Commercial Discovery (Article 6.5) and for the
approval and modification of Development Plans (Article

6.6). The

Management Committee is required to meet at least once every six months

during exploration and once every three months or more thereafter under
Article 6.8. The voting procedures in Article 6.13 stipulate that in matters
requiring the Management Committees approval, the Government had to give
a positive vote in favour of the decision.
7.6.10

Article 8 lists the rights and obligations of the parties and

stipulates that the contractor shall, in the conduct of petroleum operations,

follow GIPIP (Articles 8.3 and 8.3(e)) and be mindful of the rights and
interests of India (Article 8.3(k)). Article 8.1(a) grants the contractor exclusive
rights, subject to Article 12, to carry out petroleum operations in the contract
area while Article 8.1(d) gives the right to use all available technical and other
data of the contract area. Once again, thus, the emphasis is on contract area.
Contractors are also obliged, under Article 8.3(c), to ensure the provision of
all information, data, samples etc. required to be furnished under the law or
the PSC. This is similar to the requirements under Rule 19(c) of the PNG
Rules discussed above.
7.6.11

Article 10 of the PSCs deals with discovery, development and

production and reiterates the focus on contract area and providing raw and
61

interpretative and analytical data to the Management Committee (and the

Government) at every stage to enable them to exercise their powers and
make a decision.
a) The scheme of the article is that when a discovery is made within the
contract area, its particulars are required to be communicated to the
Management Committee and the Government under Article 10.1(a).
The contractor is also required under Article 10.1(c) to determine if the
discovery is of potential commercial interest and to submit the data
and its analysis and interpretation with a written notice to the
Management Committee stating its opinion and whether the discovery
is of potential commercial interest and merits appraisal.
b) Under Article 10.5, within 30 months of sending the aforementioned
notice, the contractor has to advice the Management Committee on
whether the discovery should be declared as a commercial discovery
and it should send a report containing all the relevant economic and
technical data alongside.
c) If, after following the provisions of Article 10, the contractor declares
the discovery a commercial discovery, it has to submit a
comprehensive development plan to the Management Committee
under Article 10.7, which shall relate to discovery area, contain a
Reservoir and boundaries of the development area, and detailed
proposals along with data and supporting interpretation. This discovery
has to be within the contract area.
d) If the area encompassing the commercial discovery, extends beyond
the designated development area, and outside the original contract
area, the Management Committee may recommend the enlargement of
the development area to the Government, provided that the
Government has not awarded or offered this to any other person, nor
is held by any other party, nor is any application pending. Thus, if
another contractor has the area adjoining the contract area, no
recommendations for enlargement can be made under Article 10.15.
7.6.12

Article 11 deals with PML for Offshore Areas and comes into

play only after the contractor submits a development plan of a commercial

discovery under Article 10.7. Thereafter, under Article 11.1, he shall submit
an application to the Government for a lease in respect of the proposed
development area. Article 11.2 has already been quoted above and deals with

62

conditions under which a part of the reservoir in respect of which a

commercial discovery has been declared, which extends beyond the contract
area, can be included in the proposed development area when the adjoining
area is not subject to a license or lease granted to another contractor.
7.6.13

Although similar, Articles 10.15 and 11.2 are materially different

in two respects elucidated below:

a) First Article 10.15 contemplates situations where the area
encompassing the commercial discovery extends beyond the
designated development area outside the original contract area.
However, Article 11.2 applies in situations where the reservoir (where
the commercial discovery has been declared) extends beyond the
contract area, and that is why it is subject to Art. 10.15.
b) Second, Article 10.15 regulates the powers of the Management
Committee to make recommendations to the Government about the
enlargement of the development area, whereas Article 11.2 deals with
the subsequent stage of the Government decision to include the
adjoining/outside area within the contractors proposed development
area in respect of which his lease application has been made.
7.6.14

Article 12 of the PSC, which forms the crux of the controversy,

refers to Unit Development. Article 12.1, extracted previously, lays down the
conditions under which the Government may require joint development in
cases where a reservoir in a discovery area is situated partly within the
contract area and partly in another contractors area. The rest of Article 12
lays down the scheme in cases where no plan is submitted within the
specified period/or is acceptable to the Government; or when the parties are
unable to agree on the proposed plan for joint development; or when the
proposed joint development plan is agreed and adopted by the parties.
7.6.15

Apart from this Articles 15 and 16 respectively lay down the

mechanism for recovery of cost petroleum (i.e. the entire cost including
royalty payments, exploration development and production costs with

63

provisions for carry forward) and production sharing of petroleum (i.e. profit
petroleum).
7.6.16

Article 26 relates to information, data, confidentiality, inspection

and security. Similar to Rule 19(c) of the PNG Rules, it reiterates that the
contractor shall provide the Government all the data obtained as a result of
its petroleum operations, along with all interpretative and derivative data,
which shall be the property of the Government. The confidentiality of such
data is highlighted and parties cannot disclose it contents to third parties
without written consent of the other parties.
7.6.17

Article 27 on the title to petroleum, data and assets reiterates

that the Government is the sole owner of the petroleum underlying the
contract area and shall remain the sole owner of the petroleum produced
under the PSC, except that part of crude oil or gas whose title has passed to
another person pursuant to the PSC. Title to the petroleum passes at the
delivery point to the buyer party. Such a stand also has judicial support, in

RNRL v RIL, (2010) 7 SCC 1.

7.6.18

Article 33 of the PSC provides for on dispute settlement through

a sole expert, conciliation and arbitration.

7.6.19

Having conducted a detailed scrutiny of the applicable statutory

and contractual regime, the Committee is now in a position to consider the

question of unjust enrichment in detail.

C. Whether RIL has unjustly enriched itself?

(i)
7.7.1

ONGCs case
This Committee will discuss ONGCs case on unjust enrichment

here only very briefly, and will consider it in detail during the discussion on
64

the law of unjust enrichment and its applicability to the facts of the present
case. The case law relied upon by ONGC, RIL, and DGH on the scope and
meaning of the phrase unjust enrichment will also be discussed.
7.7.2

ONGC contended that while ownership and title of the

hydrocarbons were with the Central Government, contractors had possession

of such hydrocarbons within their contract area, and thus had been given the
right to produce and get economic benefits from the gas within their contract
area. Further, since the gas belonged to the Government, the rule of capture
had no applicability in India.
7.7.3

The Counsel for ONGC took the Committee through various

provisions of the PSC in detail to highlight the emphasis on contract area, and
the fact that contractors could only produce gas and make cost and profit
petroleum recoveries from gas that was drilled from their demarcated
contract area. It was their case that bearing in mind the legal proposition
that contracts involving the State conferring rights to another party have to
be construed strictly against the party and in favour of the State, the PSC had
to be construed strictly against RIL. Under such an interpretation, since the
PSC did not expressly grant RIL the right to produce any gas that had
migrated from outside its contract area, RIL could not claim to exercise extracontractual rights to produce such migrated gas.
7.7.4

On the interpretation of the terms of the PSC, ONGC in their

arguments claimed that Articles 10.15 and 11.2 functioned as a complete bar
against RIL in developing their block since their reservoir extended into
ONGCs adjoining blocks. The only option available in such a case with RIL
was to apply to the Government for joint development. In the present case,
since RIL applied for their mining lease on 02.03.2005, Article 11 became
applicable then, and since RIL could not proceed under Article 11.2 (since it
knew that its development area was outside its contract area), RIL had to
apply for joint development under Article 12. ONGC claimed that the
65

Government never exercised its powers under Article 12 to consider the

question of joint development. Thus, in the absence of joint development, RIL
had no right to go ahead and unilaterally produce and sell the gas that had
migrated from ONGCs blocks.

It was contended that ONGCs allegedly

laggard conduct did not grant RIL any additional property rights, which in any
way it did not have, and which could have enabled it to justify its actions.
This was because there was a complete prohibition in the PSC, in the absence
of action under Article 12, for a contractor to develop its block when the
discovery/reservoir extended beyond its contract area.
7.7.5

Finally, on unjust enrichment, it was argued that ONGCs alleged

conduct or failure to commence commercial production was irrelevant in

determining whether RIL had been unjustly enriched by producing ONGCs
migrated gas. It was stated that the Committee had to only consider RILs
conduct their unjust retention of the benefit in deciding the issue of
unjust enrichment. Consequently, ONGC claimed that it was entitled to
restitution in equity from RIL, which had unjustly enriched itself from the gas
migrating from ONGCs blocks.

(ii)
7.7.6

RILs case
It is now instructive to briefly state RILs case on unjust

enrichment. RILs case is premised on the fact that ONGC and RIL, as
contractors, have no legal or proprietary rights or possessory interests in
hydrocarbons, and are not the owners of the hydrocarbons. Consequently,
they have no right to the unproduced gas. RILs rights are best understood
through a service contract analogy where it has been given an opportunity to
take a development risk as service provider with possible resultant economic
benefit at its cost and expense.
7.7.7

In the present case, RIL argued that only it had taken the

opportunity to expeditiously develop its block and comply with its duties
66

under the PSC, while ONGC had been laggard throughout, not commencing
commercial production till date. Thus, in the absence of any order of joint
development under Article 12 of the PSC, RIL was entitled to produce all the
gas that existed or had migrated into its block KG-DWN-98/3, as long as such
gas was produced from wells drilled in its own contract area. In support, RIL
cited the PSCs omission to expressly prohibit the production of migrated gas
from outside its contract area. Hence, ONGCs claim to have rights or
possession over the gas was argued to be irrelevant.
7.7.8

RIL further claimed that the Central Government was agnostic

about the source of the produced gas, as long as it was in line with the
Governments stated policy of expeditious and efficient production of
hydrocarbons in the interest of the people of India and in accordance with
GIPIP. In fact, RIL referred to Rule 30 of the PNG Rules to highlight the
Governments emphasis on uninterrupted petroleum operations and the
penalty that could be imposed on them in terms of suspension if they did not
act efficiently and expeditiously.
7.7.9

It interpreted Articles 10.15 and 11.2 as being facilitative in

nature, and not prohibitive, and thus not operating to restrict RILs rights to
conduct petroleum operations within its contract area, regardless of the
source of the gas. With respect to Article 12, it argued that Article 12 could
only be invoked at the Governments discretion and this was not a fit case for
the exercise of such discretion, since neither had ONGC argued that the
conditions for joint development were fulfilled nor had DGH ever
recommended it. In support, it relied on DGHs written submissions before the
Honble Delhi High Court in W.P. (C) No. 3054/2014 and before the
Committee dated 23.03.2016, where DGH took the stand that the option to
exercise Article 12 in the present case became irrelevant since one part of
the reservoir [ONGC] remained without appraisal when the other part entered
the development stage.

67

7.7.10

Thus RIL concluded that it was entitled to produce whatever gas

flowed into the geographical confines of its contract area, so long as it was
produced from a production well located within its contract area, and received
the Management Committees approval. Its emphasis was on the location of
the physical operations that led to production from its contract area, and
not the source of the oil or gas.
7.7.11

Finally, RIL relied on the report and expert opinion by Prof.

Terrance Daintith on Dispute between RIL and ONGC regarding ONGC blocks
KG-DWN-98/2 and Godavari PML, and RIL block KG-DWN-98/3 in KG Basin,

inter alia, that Indias petroleum regime only granted contractors the right to
carry out mining activities within their contract area. He cites similar
petroleum statutory regimes in UK, Australia, and Nigeria, and federal leases
in USA to conclude that drainage from one block to another as a result of
lawful exercise of rights does not give rise to a compensation claim.

(iii)
7.7.12

DGHs case
Before proceeding with laying out DGHs stand, it is important to

note that in its oral arguments, the counsel for DGH completely departed
from their stand as taken in their written submissions. DGHs case, as pleaded
in their oral arguments, in summary was that RIL had been unjustly enriched
by producing and selling gas that had migrated from ONGCs blocks outside
its contract area into RILs contract area.

A claim for unjust enrichment

would lie regardless of motive, as long as the benefit (in terms of production
and sale) had been unjustly retained. Thus, whether RIL had deliberately
positioned its four wells near ONGCs block boundary or had given the wells a
particular slant in a manner so as to induce their migration was irrelevant to
the question of whether RIL had been unjustly enriched.
7.7.13

This view was predicated on the fact that only the Government

had title and ownership over hydrocarbons below the ground, including un68

extracted gas, and RIL had no rights over the gas that happened to migrate
into its contract area from ONGCs adjoining blocks.
7.7.14

DGH further relied on the fiduciary nature of the relationship

between the contractors and RIL, which amounted to a principal-agent

relationship. In support, it relied on the decision of the Supreme Court in

CBSE & Anr v Aditya Bandopadhya & Ors, (2011) 8 SCC 497, which refers to a
fiduciary relationship as one involving a common duty or obligation. It cites

Blacks Law Dictionarys definition of such relationship as one where one

person is under a duty to act for the benefit of the other on matters within
the scope of the relationship and which requires the highest duty of care. A
principal-agent relationship is cited as an example of a fiduciary relationship,
which can arise when one person has a duty to act for or give advice to
another on matters falling within the scope of the relationship.
7.7.15

Thus, DGH argued that the Central Government and the

contractor are in a fiduciary relationship, where the contractor (RIL), as the

agent is under a duty to act for its principal, i.e. the Governments benefit.
This involves RIL advising the Government (or the Management Committee)
on matters such as under Article 10.5 on whether a discovery should be a
commercial discovery, which, in turn, requires it to fulfil its duty of disclosure,
and provide DGH with all its data and its interpretation and analysis of the
raw data. Additionally, all of RILs actions have to keep in mind that it has to
act in the overall interests of India and according to GIPIP.

7.7.16

On the question of the applicability of Article 12, it is pertinent

to note that DGH in its submissions before the Honble Delhi High Court in
W.P. (C) No. 3054/2014 and in its written submissions dated 23.03.2016 took
the stand that the option to exercise Article 12 in the present case became
irrelevant since one part of the reservoir remained without appraisal when
the other part entered the development stage. Thus, DGH submitted that

69

ONGCs lagging operations meant that planning of joint development with

RILs block was not possible.
7.7.17

However, in his arguments before the Committee, Mr. Ganguli,

Sr. Adv. for DGH departed from this stance. He stated that in the absence of
any data presented by either party indicating the possibility of continuity or
connectivity, DGH had no reason to refuse RILs IDP and Addendum to IDP in
November 2004 and December 2006 respectively. On facts, thus, the DGH
never had any occasion to even decide whether to invoke Article 12 or not.
On law, he argued that ONGCs failure to produce gas did not automatically
imply that the conditions under Article 12 could not be satisfied. In any event,
the alleged failure of ONGC did not give any right to RIL to unilaterally
produce the gas that had migrated from ONGCs adjoining blocks.

(iv)
7.7.18

The law on unjust enrichment

Before deciding whether RIL had been unjustly enriched, it is

important to understand the legal principles arising in the present case,

including the meaning of unjust enrichment.
7.7.19

A seminal case in India discussing the concept of unjust

enrichment is Indian Council for Enviro-Legal Action v UOI & Ors, (2011) 8
SCC 161 where the Supreme Court cites Blacks Law Dictionary to define
unjust enrichment as
A benefit obtained from another, not intended as a gift and not legally
justifiable, for which the beneficiary must make restitution or
recompense.. A claim for unjust enrichment arises when an unjust
retention of a benefit to the loss of another, or the retention of money
or property of another against the fundamental principles of justice or
equity and good conscience.

70

7.7.20

Thus, unjust enrichment takes place when a person retains the

benefit or money, which in justice and equity belongs to another. The basis
for the development of this principle is not strictly in law (contract/tort) or
even equity, but in the quasi-contractual principle of the doctrine of
restitution, as stated in Sahakari Khand Udyog Mandal Ltd. v Commissioner of

Central Excise & Customs, (2005) 3 SCC 738.

Indian Council for Enviro-Legal Action also cited the American

7.7.21

decision of Schock v Nash, 732 A 2d 217 (Delware) for the proposition that
the Defendant retaining the benefit may be liable even when he is not the
wrongdoer and even though he may have received it honestly in the first
place.
7.7.22

Thus three principles arise from the following decision, as will

apply in the present case. First, there has to be a benefit (profit) in favour of
RIL or a loss to ONGC/Government i.e. RIL has to be enriched. Second, this
benefit retained by RIL must not have been intended as a gift to it, nor is it
legally justifiable, i.e. RIL has to be unjustly enriched. Third, RILs motive or
knowledge is irrelevant if it chose to retain the benefit after coming to know
of the connectivity of reservoirs. The question of who can seek restitution
from RIL, whether ONGC or the Central Government, will be discussed later.
Next, however, we turn to examine the nature of the relationship between
the Government and the contractor to better understand the case of unjust
enrichment.

(v)
7.7.23

Fiduciary relationship between the Government and the contractor

The contractors share a fiduciary relationship with the Central

Government, which, as we have seen, is the owner of the natural resource

and holds it in public trust. Thus, when the Government gives rights over
such trust property to a contractor, it forms a fiduciary relationship between
them. The contractors fiduciary duty is evident from reading the terms of the
71

PSC, which incorporate the duty to disclose (Articles 8(3)(c), 10.1(a) and
10(1)(c), 10.5, 10.7, 26.1 and 27.3 of the PSC, Rule 19(c) of the PNG Rules)
and the duty to act in the overall interest of the people of India and in
accordance with GIPIP (Recital 6, Articles 8(3), 8.3(e) and 8(3)(k)) of the
PSC.
7.7.24

However, it is important to note that while the Committee finds

merit in the argument elaborated above on behalf of DGH on the fiduciary

relationship and the principal-agent relationship, these principles are not
decisive and are not the sole, or even primary, basis for the Committees
findings. This is especially because the case is primarily one of contractual
obligations, and thus the Committee does not wish to dwell upon questions of
fiduciary duties and principles of agency any further.

(vi)
7.7.25

Nature of the rights and obligations of the parties

In determining whether RIL has been unjustly enriched, the

Committee must first decide whether RIL has been enriched, i.e. has it
benefited from the migration of gas from Godavari PML and block KG-DWN98/2 into its block KG-DWN-98/3. The answer to this, simply, is in the
affirmative, since it is clear that RIL has produced and sold such migrated gas
that it has drawn from its wells, and has recovered cost and profit petroleum
in accordance with Articles 15 and 16 of the PSC.
7.7.26

The Committee must, as a second step, determine if this benefit

has been unjustly retained, i.e. whether the migrated gas was intended as a
gift or was its retention legally justifiable. In the present case, the extra gas
that migrated into RILs production wells was obviously not intended to be
given to them as a gift by the Government of India, nor even by ONGC. In
fact, the Governments position as a trustee of natural gas for the people of
India precludes it from making any largesse in RILs favour by allowing it to
use the migrated gas from Godavari PML and block KG-DWN-98/2; to do so
72

would be a breach of trust. The retention of the benefit of the migrated gas
by RIL would amount to unjust enrichment, regardless of whether RIL had
prior knowledge about such migration. This only leaves the question of
whether RILs production and sale of migrated gas was legally justifiable.
7.7.27

As a related point, it is worthwhile reiterating that it is an

accepted position, both in the Supreme Courts enunciation in RNRL v RIL or

from Article 27 of PSC that only the Central Government is the owner of
natural resources, which it holds in trust, for the Indian people. Contractors
cannot claim a special title to the natural gas given under a lease, and they
have no ownership or possessory interests in the same.

Only the

Government has title over the gas, which passes to the buyer at the point of
sale. In this respect, thus, the Committee agrees with Professor Daintiths
observations that contractors have no rights to the sub-surface gas until they
produce that gas to a delivery point, after which they are entitled to recovery
of cost and profit petroleum as compensation and that imposition of
unitisation is discretionary.
7.7.28

However, the Committee respectfully disagrees with Professor

Daintiths conclusion in the context of the UK and Australian regimes that no

claim for compensation arises for gas drainage between blocks as a result of
lawful exercise of rights under a license, given that RIL has not exceeded the
scope of its lease. First, the examples cited by Prof. Daintith are only
statutory regimes, which albeit similar, are not judicial decisions. However, in
his book, Finders Keepers: How the Law of Capture Shaped the World Oil

Industry, he cites the Dutch Supreme Court decision in Unocal Netherlands

B.V. v Continental Netherlands Oil Co. (Conoco), that petroleum licensing
arrangements do not incorporate the rule of capture, and thus, production of
petroleum by way of drainage from the adjoining licensed block is, in certain
circumstances at least, unlawful and will give rise to a duty of compensation.

Second, the examples cited by Prof. Daintith involved the Governments of

Australia and England deciding not to impose unitisation or joint development
73

on the parties, which is different from the case before the Committee. In the
present case, the question of applying Article 12 and ordering joint
development never actually came up and no decision was taken by the
Central Government under Article 12 in that regard. Thus, Prof. Daintith does
not examine a situation akin to the facts of the present case, where the
contractor unilaterally proceeds to produce and sell migrated gas, without any
determination of unitisation and joint development, and then unjustly retains
the benefit. Third, only India has the public trust doctrine, which gives a
different interpretation to the rights and obligations of the parties. Fourth, as
will be explained in the next paragraph, RILs production and sale of the
migrated gas was not a result of its lawful exercise of rights.
7.7.29

On the possible justification for RILs actions, the PSCs and the

PNG Rules do not expressly bar a contractor from using the wells located
within its own contract to produce gas that has migrated into its contract
area. Nevertheless, a detailed reading of the various clauses tells us that the
answer is in the negative.
7.7.30

As the previous discussion on the terms of the PSC make

evident, there is a clear focus on contract area through all the definitions in
Article 1, and other clauses such as Articles 3.9, 8(1)(a) and 8(1)(d), 10.1.
10.7, 10.15, 11.2 and 12.1 and Rule 7 of the PNG Rules. The PSC and PNG
Rules thus grant the parties rights only in respect of their demarcated
contract area. No rights are granted to parties in the PSC to conduct their
drilling, development, or production operations or recover their cost and profit
petroleum from outside their contract area, even if such gas migrates into the
contractors block.
7.7.31

The only exceptions to this rule are laid out in Articles 10.15,

11.2 and 12.1, which have limited applicability in permitting the Management
Committee to make recommendations for enlargement of development area
(Article 10.15), in permitting a contractor to include the adjoining area in his
74

proposed development area for his lease application (Article 11.2), or in the
Government ordering joint development (Article 12.1). In fact, the very
existence of these clauses and the limited exceptions they carve out in
permitting development or production from outside a contractors contract
area would be rendered nugatory if a contractor could unilaterally produce
and sell the gas that has migrated into his contract area.
7.7.32

In the present case, it is clear that even though RILs area

encompassing its commercial discovery extended beyond its contract area,

Articles 10.15 had no application since the extra area, with the migrated gas,
was located in ONGCs gas blocks, which was adjoining RILs block. Thus,
there was no question of the Management Committee recommending the
enlargement of RILs development area.
7.7.33

Similarly, at the time of RILs application to the Government for

a lease in 2004, Article 11.2 could not come into play and RIL could not have
included the extra area (part of ONGCs blocks) as part of its proposed
development area in the lease because of Article 11.2(a). Article 11.2(a)
precludes the application of Article 11 if the area outside the contract area is
subject to a license or lease granted to another person, which in this case
was ONGC. Notably, RIL was actually precluded from even applying for its
lease, and getting its IDP and AIDP approved in 2004 and 2006 in the present
form, much less commence commercial production in 2009, without
approaching DGH for joint development. At that stage in 2004, thus, RIL
could only have proceeded if it had sought for, and was granted, an order for
joint development at the Governments discretion under the conditions
stipulated in Article 12 of the PSC.
7.7.34

Thus, a true interpretation of the PSC is that Articles 10.15 and

11.2 function as a prohibition in cases where a contractors development area

extends outside its contract area and it wishes to produce gas from outside
this area. They are not merely facilitative in nature, as argued by RIL. In fact,
75

accepting RILs argument would be analogous to accepting the rule of

capture, which has no application in India, and only applies in some States in
U.S.A. where there is no federal lease and there is individual ownership of gas
below the ground. In the present situation, however, contractors can only
proceed with the production of migrated gas if they get an order for joint
development under Article 12.
7.7.35

The above conclusion that RIL cannot rely on the absence of

prohibition of extraction and production of migrated gas in the PSC to justify

its conduct is further strengthened by the proposition that in the absence of
any express grant of right to RIL to produce and sell migrated gas, the PSC
has to be strictly construed against it. The PSC in such a case has to be
construed in favour of the Central Government, especially since it holds the
gas in public trust. This is because of the principle of strict construction of
crown contracts in favour of the State conferring the right and against the
contracting party, recognised by the English court in Attorney General v

Ewelme Hospital, [1853] 17 Beavan 366, as cited by ONGC, in arguments.

These cases highlight the common law principle of construction that cases
involving grants by the Crown have to be construed favourably for the Crown.
7.7.36

In fact, the principle of strict construction of contracts, without

altering the nature of the contract so as to affect either parties interest

adversely, has been recognised by the Indian Supreme Court in Rajasthan

State Industrial Development and Investment Corporation v Diamond and

Gem Development Corporation Ltd., (2013) 5 SCC 470. The Court in this case
held that a party cannot claim anything more than what is covered by the
terms of the contract since a contract is a transaction between two parties,
who have entered into it with open eyes and after fully understanding the
nature of the contract. Thus, the claims of a party are limited by what it had
bargained for, and do not entitle it get anything extra, regardless of whether
such a gain has been on account of its deliberate conduct or a fortuitous gain.
This is also supported by principles of contract law, which make it clear that
76

breach of contract does not require intention, and questions of motive can
only play a role at the stage of determining compensation, or in the present
case, the quantum of restitution for unjust enrichment.
7.7.37

Such a finding is consistent with the terms of the contract and

the law. This is because even if joint development has not been ordered by
the Government (for instance because ONGCs alleged laggard conduct
rendered such development inefficient), and thus Article 12 is inapplicable, it
does not grant RIL an extra-contractual right to go beyond the prohibition of
Articles 10.15 and 11.2 and produce part of ONGCs migrated gas. ONGCs
conduct does not affect the legal nature of the rights granted to RIL by the
Government of India in respect of its block KG-DWN-98/3. Nor does it permit
RIL to take benefit of the gas, which had flowed from ONGCs adjoining field,
whether due to RILs actions in drilling the wells at certain locations or not,
which right RIL otherwise did not possess.
7.7.38

At this stage, as an aside, it is useful to consider RILs argument

that its commencement of commercial production in 2009, and ONGCs failure

to do so till date, was a relevant factor in deciding the question of unjust
enrichment. As has been stated above, the conduct of either parties in 2009
is irrelevant since the question of joint development had to come up at the
stage of the IDPs approval, i.e. in 2004 and 2006, and not thereafter. Since
joint development was not considered or ordered by the Government in 2004
and 2006, RIL was precluded from unilaterally producing the migrated gas
and retaining the benefits.
7.7.39

Similarly, RILs reliance on Rule 30 of the PNG Rules on

suspension of operations for the proposition that the Rules emphasised

uninterrupted petroleum operations and would penalise contractors for their
failure to act expeditiously is also misconceived. A bare perusal of Rule 30
makes it clear that it does not deal with the Governments power to cancel or
suspend the contractors operations based on its diligence and conduct. It
77

only requires contractors to give the Government a fortnights notice of

suspending normal drilling or production operations.
7.7.40

The third and final proposition articulated above in determining

whether RIL has been unjustly enriched makes it clear that RILs motive or
knowledge in producing and selling the migrated gas is irrelevant if it chose to
retain the benefit after coming to know of the connectivity of reservoirs. The
migration of gas was like a fortuitous gain, which the PSC did not
contemplate, and thus RIL could not have retained it.

(vii)
7.7.41

Duty to disclose and appraise

It is evident that Articles 8(3)(c), 10.1(a) and 10(1)(c), 10.5,

10.7, 26.1 and 27.3 of the PSC read with Rule 19(c) of the PNG Rules, along
with the emphasis on protecting the interests of the people of India and
acting in accordance with GIPIP imposes a duty to disclose on contractors.
Thus, both ONGC and RIL were obliged to provide DGH with raw, analytical,
and interpretative data, and to keep the Management Committee informed at
every stage of the discovery, exploration and production.
7.7.42

The underlying premise for such a duty to appraise and the

emphasis on providing interpretations of the data is that the submission of

raw data, in and of itself, does not lead to any conclusive finding. It does not
assist the Management Committee in exercising its powers under Article 6 to
approve work programmes, development plans, and development areas, even
though it has access to all contractors data, especially since the Committee
only meets once every six months or three months. Nor does it enable the
Government to determine in any meaningful way whether the effective
recovery of petroleum can be secured by ordering joint development under
Article 12.

78

7.7.43

Consequently, the Committee believes that even a potential for

reservoir extension had to be immediately conveyed by a contractor to DGH

so that a decision on Article 12 could have been taken in 2004-05 itself. The
burden is thus on the contractor to ascertain connectivity, and in fact, that is
why there is no unilateral right of contractors to produce and sell gas. Thus
both RIL and ONGC were obliged to give full disclosure with the appropriate
data and studies to the Management Committee and to ascertain whether
there was connectivity. This is consistent with the fiduciary relation between
the contractor and the Government.
7.7.44

In the instant case, there has admittedly never been an exercise

of power under Article 12 to order joint development, whether during the

submission of RILs IDP in 2004 or when ONGC brought the potential
extension to DGHs notice in 2013.
7.7.45

This brings us to the next argument put forth by RIL that joint

development could not have been ordered when one party, namely ONGC,
was laggard and had not commenced commercial production of gas, while the
other party, namely RIL, has been doing so since 2009.

(viii) Interpretation of Article 12

7.7.46

At this stage, it is important to keep in mind the change in

DGHs stance from its written submissions to oral arguments on the issue of
Article 12.

In oral arguments before the Committee, DGH, through Mr.

Ganguli, argued that the question of applying Article 12 did not, as a matter
of fact, ever arise. This stand is predicated on a reading of Article 12 with the
wider Rule 28 of the PNG Rules, and as such, the Committee finds merit in it.
The pre-requisite for exercising Article 12.1 in the instant case involving
fulfilling the following conditions: (a) The reservoir in RILs discovery area be
situated partly within its contract area and partly within ONGCs area; and (b)
both parts of the reservoir can be more efficiently developed together on a
79

commercial basis. In such circumstances, the Government then has the

discretion to order joint development for securing more effective recovery of
petroleum from such reservoir. A bare reading of this provision makes it clear
that the conduct of one party in commencing production, whether laggard or
efficient, has no bearing on the decision to order joint development and
Article 12 does not speak about conduct. The only consideration is whether
the reservoir can be more efficiently developed together on a commercial
basis. Thus, in a hypothetical situation, the development of the reservoir can
begin from only one part of the reservoir (the RIL block), instead of both
parts (the ONGC and RIL blocks), as long as the conditions of Article 12 of the
PSC and Rule 28 of the PNG Rules are satisfied.
7.7.47

The Committee thus does not find any merit in DGHs stance in

its written submissions of 23.03.2016 since it has no textual basis, and finds
that on a true interpretation of Article 12 of the PSC, conduct of either party
is not a condition precedent and plays no role in determining whether to
exercise power under Article 12. On the facts of the present case, the time to
invoke Article 12 was in 2004/2006 when RILs IDP/AIDP was approved, and
not in 2009, when commercial production commenced in block KWDN-98/3.
Since no facts regarding potential connectivity were brought before DGHs
notice, it did not even have the opportunity to consider the question of joint
development.
7.7.48

This section makes it clear that Article 12, although potentially

applicable, was never actually exercised by the Government in the present

case. In fact, the Government can only be attributed knowledge of
connectivity of reservoirs and migration of gas from ONGCs blocks to RILs
block and its sale when the D&M Report came out on 30.11.2015. Even at
that stage, neither party approached the Government with a request for joint
development. In fact, it is admitted by all that keeping in mind the limited
amount of gas left in RILs and ONGCs blocks and that the PSC is set to
expire in 2019, there is no question of joint development today.
80

7.7.49

To summarise thus, the Committee finds that, regardless of

RILs knowledge or intention, its production of migrated gas and retention of

the ensuing benefits amount to unjust enrichment, being the exercise of an
extra-contractual right in the absence of an order under Article 12. As is
evident, the legal determination of unjust enrichment is not tied to a factual
determination of whether RIL had prior knowledge of the connectivity of
reservoirs or whether ONGC took up the claim of unjust enrichment belatedly.
However, in light of the facts of the present case and the extensive
arguments advanced by the parties, the Committee finds it important to
examine the aspect of RILs and ONGCs prior knowledge. To this, we now
turn.

D. Prior knowledge
7.8.1

The previous section detailed the issue of unjust enrichment

with the assumption that none of the parties had prior knowledge of
continuity or connectivity of the reservoirs. However, it is also relevant to
discuss prior knowledge of continuity and connectivity of the reservoirs on the
part of the parties, in order to understand the acts of omission and
commission of by the parties, and to make recommendations accordingly. As
mentioned throughout this report, it is impossible to draw adjudicatory
conclusions regarding any issue being examined in this matter; however,
there are some facts and incidents that have emerged during the course of
the proceedings that the Committee believes are worth highlighting.

(i)
7.8.2

RILs prior knowledge

Regarding RILs prior knowledge, ONGC made a three-fold

allegation against RIL, regarding data gathering, technical aspects of

production and information contained in a 2003 Appraisal Report.

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7.8.3

First, ONGC alleged that RIL collected data pertaining to gas

blocks beyond its allocated/demised area, without the permission of DGH and
without the knowledge of ONGC. According to ONGC, RIL acquired
conventional 3D seismic data in 2001, and Q-Marine 3D seismic data in 2007
in KG-DWN-98/3 block, which extended into KG-DWN-98/2 and Godavari PML
blocks. ONGC pointed out that contractors sometimes acquire data beyond
their block boundaries to the extent of an area necessary to acquire fullfoldage at their blocks boundary, and in such cases, usually seek the
permission of DGH and the operator of the block from which data is to be
acquired, as per GIPIP. However, ONGC argued that RIL acquired data for an
area that was more than the area required to get full-foldage data for its
block and covered all of ONGCs discovery areas without any permission.
According to ONGC, this came to their knowledge only when the information
was shared by RIL with ONGC in December 2013. ONGC further claimed that
RIL got its IDP approved for the KG-DWN-98/3 block from DGH and MOPNG
with full knowledge of the extension of discoveries into the ONGC blocks. In
effect, ONGC argued that RIL acquired seismic data in respect of ONGCs
reservoirs without its knowledge. This data, so obtained, was more than what
was technically required to produce from RILs own block. On its part, RIL
claims that there was no concealment of data; that all parties had
commonality of knowledge regarding geology; and that the knowledge that
all parties had was limited and did not reveal reservoir connectivity. There
may or may not be truth or substance in the allegations made by ONGC in
this regard. The Committee believes that it is not possible to resolve this issue
in the absence of any further evidence, and is incapable of recording a finding
in this regard.
7.8.4

Second, ONGC makes certain allegations against RILs method

of production that are of a technical nature. For instance, ONGC claims RIL
drilled four development wells very close to ONGCs blocks, one being as near
as about 50 metres to ONGCs block boundary, and two others being inclined
or slanted towards ONGCs reservoirs, presumably with the intention of
82

deliberately guiding the flow of the gas so extracted. Another allegation

pertains particularly to the location of one production well near the boundary,
which is unaccompanied by either an appraisal well or an exploration well
(which are otherwise precursory structures). ONGC alleges that locating wells,
per se, near block boundaries may not be ordinarily objectionable. However,
when combined with possible prior knowledge of connectivity and continuity
of reservoirs, and the absence of appraisal or exploration wells, such location
raises suspicion about the intent behind such structures. ONGC also made
reference to the drainage radius/radii of wells, which are regarded as a
determinant for the quantity of gas that could be extracted from a well. RIL
denies all allegations made by ONGC in this regard, and states that its
development and production processes were consistent with the terms of the
PSC, GIPIP, and approved by the DGH in all respects, including the placement
and drilling of wells. Again, the Committee, in view of the factual controversy,
is incapable of recording a finding, as any finding or recommendations would
necessarily require recording and consideration of evidence.
7.8.5

Third, and most importantly, perhaps, towards the close of the

proceedings of the Committee, ONGC produced a report prepared in 2003 by

D&M, apparently commissioned by Niko, and relying on data submitted by
Niko and RIL, which according to ONGC, provides information about
connectivity and continuity of the reservoirs in question. A reply to this
allegation was given by RIL much later, after closure of the proceedings, and
comments on that reply were received thereafter from ONGC, all of which will
be discussed in detail below.
7.8.5

During the course of the oral arguments of the parties, on

03.05.2016, ONGC produced before the Committee a copy of a document

titled Appraisal report as of March 31, 2003, on block KG-DWN-98/3 located
offshore India for Niko (Neco) Ltd. (Canadian Policy No. 2-B Case) authored
by D&M (the Appraisal Report), alleging that this document clearly
showed connectivity and continuity of the reservoirs in question.
83

7.8.6

The report appeared to contain an appraisal of the extent and

value of the proved, probable, and possible natural gas reserves of the fields
located in block KG-DWN-98/3. The information used in the preparation of the
report appeared to have been obtained from Niko or on behalf of Niko by the
operator, RIL. Further, it appeared that the authors of the report had relied
upon the information thus provided by Niko and RIL without independent
verification, and had not undertaken a field examination of the properties in
question, since all pertinent data was available for review, and no special
circumstances warranted a field examination.
7.8.6

Four wells of the KG-DWN-98/3 block were considered for the

assessment in the 2003 Appraisal Report, i.e., A1, B1, B2 and C1 wells. The
report relied upon a 3-D seismic data set furnished by RIL that covered the
area of interest for the field areas. The report obtained estimates of ultimate
recovery after applying recovery factors to original gas in place (OGIP), and
these factors were based on the consideration of the type of energy inherent
in the reservoirs, analyses of the petroleum, and the structural positions of
the properties. The reserves estimates contained in the Appraisal Report were
based on consideration of data available until 31.03.2003, although at the
request for Niko, data from the D1 well that became available after
31.03.2003 was also considered.
7.8.7

Besides the KG-DWN-98/3 block itself, according to the

Appraisal Report, the reserves that [were] located off the KG-DWN-98/3
block have been included as possible reserves attributable to development of
the KG-DWN-98/3 block. The Appraisal Report suggested that [t]he
reserves associated with that portion of the OGIP [i.e., the neighbouring
block] would require a separate stand-alone development by the owner of the
block (KG-OS-IG) which could prove cost-prohibitive. The Appraisal Report
further added that the [d]evelopment of the KG-DWN-98/3 block will be
capable of depleting the OGIP in the KG-OS-IG block.
84

7.8.8

According to ONGC, the KG-OS-IG block, which lies westward of

the KG-DWN-98/3 block, has now been converted into the Godavari PML
block (a fact that is not disputed by RIL and Niko), and the Appraisal Report
clearly showed that there was connectivity of the reservoirs in question.
7.8.9

In effect, based on this 2003 Appraisal Report, ONGC contended

as follows: that the Appraisal Report suggested that the adjacent gas pool
(Godavari PML) was connected with the KG-DWN-98/3 block; that the
Appraisal Report concluded that a standalone working of the ONGC block
Godavari PML would be cost prohibitive and may not be commercially viable;
that the drawing of gas from the connected reservoir (RILs KG-DWN-98/3
block) would deplete the gas reserves of ONGCs Godavari PML block; and
finally, that all these findings of the 2003 Appraisal Report were known to RIL
and Niko. Despite allegedly having this information as far back as March
2003, ONGC further alleges that neither Niko nor RIL chose to report the
conclusions of this Appraisal Report to DGH in terms of its commitments
under Article 26 of the PSC, or in the IDP filed with the DGH in 2004.
7.8.10

On its part, RIL, by its written communication dated 27.05.2016,

claimed that the Appraisal Report said very little from a technical perspective,
and said nothing that was helpful for the consideration of any joint
development. RIL also pointed out that the report was in public domain.
Further, RIL said that the impacted party was ONGC, and ONGC as a prudent
operator, would have had access to the report in 2003, and could have raised
the contents of the report with either RIL or DGH if it felt it required attention
or discussion. ONGC, however, denies that it had knowledge of this report,
and reiterated that till date, RIL and Niko had not filed the complete Appraisal
Report with DGH.
7.8.11

According to RIL, the 2003 Appraisal Report was commissioned

by Niko and prepared by D&M for the specific purpose of Nikos compliance
85

with the Canadian National Policy Statement 2-B Guide for Engineers and
Geologists Submitting Oil and Gas Reports to Canadian Provincial Securities
Administrators of the British Columbia Securities Commission. In this regard,
the Appraisal Report adopted a basic, static methodology and analysis, and
relied on, in RILs terms, a simplistic consideration of seismic data and very
limited well data confined to discovery wells in block KG-DWN-98/3, with no
modelling but rather a reliance on D&Ms general experience of similar
geology. According to RIL, while this methodological approach was
appropriate for the purposes of the public filing that was required, it would
not be appropriate for the complex question of whether reservoir connectivity
existed across the contract areas, to what extent, and whether joint
development was viable. RIL states that the comments made in the 2003
Appraisal Report suggest that there was a possibility of connectivity, but was
not itself firm evidence of it; and it was not until D&M undertook its detailed
14-month study and analysis and furnished the 2015 D&M Report that
reservoir connectivity was indicated. RIL additionally drew attention to the
fact that the 2003 Appraisal Report focused on wells other than those under
present consideration. In effect, RIL contended that the 2003 Appraisal
Report had no probative value in establishing reservoir connectivity.
7.8.12

ONGC contended that RILs letter of 27.05.2016 in response to

the tabling of the 2003 Appraisal Report should be rejected by the

Committee, particularly when RIL and Niko had withdrawn from the
proceedings; or alternately, if the letter were taken on record, it would be
construed as RILs deemed continued participation in the proceedings before
the Committee.
7.8.13

On its part, DGH argued that full disclosure of all information

available with the parties flowed not only from its obligations under Article 26
of the PSC, but also from several other obligations and duties, such as GIPIP;
the fact that such disclosure was in national interest, since the gas blocks

86

were held in trust for the nation; and the fiduciary relationship between the
contractor/operator and the Government.
7.8.14

DGH also stated that contractors or operators could not take

refuge under the PSCs or the Petroleum and Natural Gas Rules, regarding the
depositing of raw data. They are obliged to not only report any significant
data they come across while working in the field, but they are also duty
bound to provide an interpretation of the data so collected. This data could
include data to establish whether the gas has been taken from the area
demarcated or demised for them. DGH too would have its role to play in
interpretation, but the duty of the contractors/operators remained a key
operative one.
7.8.14

The Committee took particular note of Article 26.1 of the PSCs,

which contains a duty upon the parties to disclose all data with the DGH. In
the absence of complete data having been submitted to the DGH, it would be
very difficult for the DGH to form any opinion regarding future development
of the blocks in question. At best, it could only be said that an IDP was
submitted, which in turn came to be granted. In other words, DGH, without
adequate information, could not have taken a conscious decision regarding
the development of the well based upon knowledge of reservoir connectivity,
or that gas would be likely to migrate from an adjoining area. In the present
case, the DGH was bound to make its assessment on the basis of the
representations made to it by the parties concerned.
7.8.15

The Committee is prompted to question as to why the 2003

Appraisal Report was not shared with the DGH. Had this report been
presented by Niko or RIL to DGH at the appropriate time, a further
investigation could have been immediately initiated. The Committee disagrees
with RILs contention that the 2003 Appraisal Report is of no probative value,
as it is not for RIL to make a determination to this effect. RILs duties, in the
context of the 2003 Appraisal Report, was to have made it available to DGH,
87

and why it was not done remains inexplicable and difficult to understand.
There were multiple opportunities for RIL to have presented the report, for
example, along with its IDP, when it first submitted in 2004, or when the IDP
was later amended in 2005.
7.8.16

The Committee notes that the 2003 Appraisal Report clearly

indicated that there would be depletion of gas in the Godavari PML block,
which in fact, the course of time has resulted in, leading to the migration of a
huge amount of gas from the Godavari PML block to RILs KG-DWN-98/3
block, and its subsequent production from the latter block. Even otherwise,
the 2003 Appraisal Report appears to be at least a significant indicator of the
fact that RIL may have had prior knowledge of connectivity. The Committee
believes that the 2003 Appraisal Report, and knowledge of its findings, is
worth further consideration by the MOPNG.
7.8.17

It bears reiteration that the Committee is not in a position to

provide final views on the issue of prior knowledge on the part of RIL and
Niko regarding connectivity or continuity. However, its prima facie assessment
suggests that such prior knowledge did exist, and the non-submission of the
2003 Appraisal Report to DGH is a pointer to such prior knowledge. The more
important concern that the Committee wishes to express is regarding the
apparent failure of RIL and Niko to have placed this material on record before
the DGH, and indeed, the Committee is inclined to believe that a substantial
part of this dispute could have been avoided if this Appraisal Report had, in
fact, been placed before the DGH at the appropriate time.

(ii)
7.8.18

ONGCs prior knowledge

According to DGH, ONGC also had prior knowledge about

possible continuity in the channels as far back as 2007, but took no action for
several years. DGH points out that ONGC acquired and processed 3-D seismic
Q-marine data in 2006-2007 in Godavari PML overlapping with the KG-DWN88

98/3 block. ONGC made a third party G&G study for appraisal plan for
Godavari PML, which it submitted to DGH in October 2007, and which
indicated the continuity of Pliocene channels from ONGCs block to RIL's block
of KG-DWN-98/3. However, ONGC never raised any allegation regarding the
possible continuity of Pliocene reservoirs for a period of more than six years,
i.e., from at least 2007 to 2013. Ideally, according to DGH, ONGC should have
carried out pressure tests in its blocks, once RIL commenced commercial
production in April 2009, to confirm the suspected connectivity and continuity.
Instead, DGH alleges that ONGC neither acted in time as a prudent operator
nor took any steps to carry out prompt analysis of the data available with it.
7.8.19

Prompted by DGHs submissions, the Committee directed ONGC

to

before

submit

the

Committee

the

records/files

related

to

the

analysis/interpretation of the 3D Q- marine seismic data along with details as

to when the G&G data became available, when the so-called detailed
interpretation was commenced at the ONGC-end, and to explain the reasons
as to why it took six years for ONGC to raise allegations regarding continuity
in the present matter. However, no such records/files were submitted or
explanation provided to the Committee.
7.8.20

RIL also relied upon DGHs submissions to contend that prior

knowledge and inaction of the part of ONGC.

7.8.21

In sum, the Committee believes that there appears to be

substance in DGHs contentions regarding ONGCs prior knowledge. It appears

that ONGC had some information about the gas blocks in 2007, with which
information it could have come to certain conclusions about continuity and
connectivity, acted diligently, and taken appropriate action right away.
However, it chose to wait until 2013, and did not offer any explanation to the
Committee as to why it waited to so long to take any action. Pertinently,
ONGC promised to produce before the Committee the new knowledge of

89

connectivity/continuity that it had purportedly acquired between 2007 and

2013, but did not do so.
7.8.22

As in the case of the examination of prior knowledge on the part

of RIL, the Committee is unable to draw final conclusions regarding ONGCs

prior knowledge, other than that, prima facie, it appears that ONGC may have
had information about possible continuity in 2007 itself, but chose to take no
action until 2013. The Committee notes that this dispute could have been
avoided to a great extent if ONGC had acted with diligence to bring the issue
of connectivity to the notice of DGH. The reasons for such inaction may be
probed further, but it is beyond the Committees remit to do so.
7.8.23

Thus, in the view of the Committee, RILs production of

migrated gas and retention of the ensuing benefits amount to unjust

enrichment, since the PSC, in the absence of an order on joint development
under Article 12, does not permit a contractor to produce and sell migrated
gas. There is also no other extra-contractual right granted to the contractor
that enables it to produce gas, regardless of its source. In fact, a contractor is
limited by the gas that is available in its clearly defined and demarcated
contract area.

In the present case, Articles 10.15 and 11.2 appeared to

contain a prohibition on the unilateral production of migrated gas, and the

only remedy (exception) available to the contractor was to approach the
Government and get an order for joint development. Since RIL did not pursue
such a step, and it had not been given the migrated gas as a gift or largesse,
its actions had no lawful justification and amounted to unjust enrichment.
Further, the Committee finds that the 2003 Appraisal Report prima facie
reveals that RIL had prior knowledge about connectivity and continuity of
reservoirs. It also appears that RIL did not bring the contents and findings of
the 2003 Appraisal Report to the notice of DGH, which is particularly
disconcerting, considering the obligations of contractors/operators to make all
relevant information pertaining to their block available to the regulator.
ONGC, on its part, also appears to have had some form of prior knowledge
90

about possible continuity in 2007, but did not act promptly or with due
diligence, and took up the matter only six years after it first obtained relevant
information. The Committee believes that the allegations of prior knowledge
on the part of both RIL and ONGC must be enquired into further, with
particular emphasis laid upon the failure of both parties to present the
information they had to DGH at the time they allegedly obtained the
information. Regardless of the question of knowledge, however, in light of the
Committees findings that RIL had unjustly enriched itself, the following
question is whether it is ONGC or the Government of India that can seek
restitution. This will be dealt with next.

91

CHAPTER 8
RESTITUTION
8.1

Having concluded in the previous chapter that RILs actions of

producing and selling the gas migrated from ONGCs blocks to its block
amount to unjust enrichment, the next step is to determine who can seek
restitution from RIL. Paragraph 4(c) of the TOR also enjoins the Committee
to

recommend

action

to

be

taken

to

make

good

the

loss

to

ONGC/Government on account of such unfair enrichment to the contractors

and to quantify the unfair enrichment, if any. This chapter will thus, first
determine whether ONGC or the Central Government can make a claim for
restitution from RIL for its unjust enrichment; and second, what is the
quantum of such restitution that RIL is liable to pay.

A. Stand taken by ONGC

8.2.1

As has been stated above, ONGC filed W.P. (C) No. 3054/2014

before the Honble Delhi High Court, seeking inter alia, compensation from
RIL. In its written submissions before the Committee dated 28.01.2016 and
10.04.2016, ONGC reiterated its claim that RIL be directed to account for and
compensate it the monetary value, in USD($), for:
a) 9.476 BCM gas extracted from its blocks, KG-DWN-98/2 and Godavari
PML from April, 2009 till 31.12.2015, with interest @ 18 % p.a. till the
date of payment;
b) 1.435 BCM migrated gas to be extracted by RIL from 01.01.2016 to
31.03.2019 on monthly basis at a price realisable by RIL from time to
time along with interest at 18% p.a. calculated from the end of each
month till payment;
c) 7.3359 BCM gas as stranded gas, estimated to be not recoverable/
under-recovery because of damage to the reservoirs by RIL along with
interest @ 18 % p.a.
92

8.2.2

It was ONGCs stand throughout that it was it had a (right to)

claim for unjust enrichment against RIL, based on its possessory interests in
the hydrocarbons beneath the surface allocated to it in block KG-DWN-98/2
and Godavari PML, which in turn gave it a right to economic benefit (from the
production of gas). As we shall see later, this stand was opposed by DGH in
its oral submissions before the Committee.
8.2.3

Notably, ONGC did not frame its claim either on ownership of

the gas or for the breach of contract, which could only admittedly be made by
the Government of India. ONGCs claim was based on the law of tort for
trespass and conversion for having possession of gas to which economic
benefit was attached, and having lost that possession to RIL due to the
migration, being entitled to restitution from RIL.
8.2.4

The trigger for ONGCs claim was the migration and loss of gas

to RIL, irrespective of RILs intentions or knowledge in drilling four wells near

ONGCs block boundaries. In support of its claim, ONGC cited various English
and Indian decisions, specifically Bocardo SA v Star Energy UK Offshore Ltd,
[2011] 1 AC 380; Islamic Republic of Iran v Barakat Galleries, [2008] 1 All ER
1177; and Dhian Singh Sobha Singh v UOI, [1959] SCR 781. These laid out
the proposition that possession, or the right to possession is a pre-condition
to bring a claim for trespass or conversion, and not ownership. The tort of
conversion only requires a legal change in possession, and will still lie even if
physically, possession does not change. Since, ONGC had lawful possession of
the gas within their blocks, their rights were protected, and RIL, as a private
party, could not take away such rights, especially when the property (gas) in
question was held in public trust by the Union of India.
8.2.5

Counsel for ONGC also relied on multiple other English cases

such as Wilson v Lombank Ltd, [1963] 1 WLR 1294 and Marfani & Co v

Midland Bank, [1968] 1 WLR 956 for the proposition that the tort of trespass
93

and conversion is of absolute liability, and the moral fault or knowledge of

any party or the ensuing damage is not relevant as long as possession of
goods has been obtained and disposed. Thus, in the present case, ONGC
argued since RIL had, whether knowingly or unknowingly, produced the gas
that had migrated away from ONGCs possession, it was liable under tort. It
was no defence for them to argue that ONGC had not commenced
production.
8.2.6

Based on the above, ONGC argued that RIL had obtained a

benefit, retained it unjustly, and thus, had to disgorge the same in favour of
ONGC. ONGC thus claimed the monetary value of the migrated gas produced
by RIL and the gas that would migrate to its block KG-DWN-98/3 till the
expiry of the lease period under the PSC. It did not therefore frame its claim
for restitution in terms of the profits earned or the money made by RIL
because its case was that RIL had not made any extra investment or incurred
additional costs for the development, production or sale of the migrated gas.
In fact, ONGC argued that the fact or quantum of sale was irrelevant since
the gas was within RILs control. Thus, these costs could not be factored into
a final determination of quantum.

B. RILs case
8.3.1

In contrast, RILs position throughout has been that the

contractors, including ONGC, have no legal or proprietary rights to, or

possessory interest in, the hydrocarbons below the ground. At most, they can
only be said to have been granted the exclusive right to carry out mining
activities and the chance to a take a development risk at their cost and
expense with the possibility of economic benefit in the future. This is
supported by the PSC, which noticeably contains no terms conferring such
ownership or possessory rights to contractors, whilst also not prohibiting the
production of migrated gas.

94

8.3.2

Instead, analogous to a service contract, RIL argued that the

Central Government at all times owns the oil and gas that had been produced
and that, which remains unproduced. Thus, contractors such as ONGC are
only entitled to receive gas at the delivery point as cost and profit petroleum,
as compensation or consideration for performing services. The important
point to focus on is the point of delivery, at which stage the Central
Government stops retaining ownership of all the produced and unproduced oil
and gas and the contractor can recover its cost and profit petroleum. Apart
from decisions of the Supreme Court of India, such a position also finds
support in Article 27, among other articles of the PSC.
8.3.3

Thus, as explained in the previous chapter, RILs contention was

that it had not been unjustly enriched since its actions had been legally
justifiable, and thus outside the ambit of the definition of unjust enrichment
in Blacks Law Dictionary and the judgments of the Supreme Court. This was
consistent with the principle of equity follows the law, recognised in

Narinder Chadha v Municipal Corporation of Greater Mumbai, (2014) 15 SCC

689 and LAO v H. Narayanaiah, (1976) 4 SCC 9, where equity reliefs cannot
be granted outside the recognised legal framework, and can only supplement
and not supplant the law (the PSC and PNG Rules). Thus ONGC had no claim
for unjust enrichment, regardless of any loss suffered by it, since RIL was in a
better position to justify its actions under the contract. RIL further relied on

Krishi Uptadan Mandi Samiti v Pahal Singh, (2007) 12 SCC 193 to argue that
delay defeats equity.
8.3.4

However, what is also relevant for this chapter is RILs

argument that ONGC could not maintain an action in trover or conversion,

and thus, could not make any claim for restitution, since it did not have any
title on the goods in question (the oil and gas), nor did it have a right of
possession. For this, it relied on the Supreme Courts decisions in LJ Leach v

Jardine Skinner, [1957] SCR 438 and Yarlagadda Venkatasubbaya v Gajjala

Satyanarayanmurthy, (1940) 51 LW 644. All rights, thus, continued to belong
95

to the Government of India, which meant that without any rights, ONGC
could not seek any restitution.
8.3.5

On the question of quantification, RIL put forward the case that

it did not unduly benefit from the migrated gas, since it assumed all the costs
and risks of drilling and extraction itself, while the profits went to the
Government after RIL recovered its cost and profit petroleum.

Thus, the

D&M Report could not be used as a basis for quantifying the value of the gas,
since it had not estimated RILs costs of producing or monetising the migrated
gas. RIL further argued that the Government had not suffered any loss that
merited restitution; since it was only due to receive royalty, which it would
receive from RIL, regardless of the source of the gas.

C. The stand taken by DGH

8.4.1

The DGH, in its written submissions filed before the Committee

on 25.01.2016 and 23.03.2016, also seemed to support ONGCs right to claim

compensation from RIL through a gas balancing agreement. It clarified that
although neither RIL nor ONGC had proprietary rights for un-extracted
hydrocarbons under their respective PSCs or the PML, they were entitled to
economic benefits.

These economic benefits were in respect of the

contractors share of cost petroleum and profit petroleum under the PSC, to
be shared with the Government; and in entirety under the PML. Pertinently,
the written submissions made no reference to the Government of Indias
(possible) claims against RIL under the PSC.
8.4.2

Thus, in the present case, DGHs written stand that ONGC

possessed a right to the economic benefits under the PSC for the gas that
migrated beyond its block boundaries, implies, that even assuming ONGC
took no steps to develop and produce the gas, RIL could not have the
economic benefit in respect of those reserves that may have migrated from
ONGCs blocks into RILs block.
96

8.4.3

Further, DGH opined that the commercial issue associated with

the natural gas migration should be addressed by ONGC and RIL through a
gas balancing agreement, where ONGC could have approached RIL to share
the infrastructure already constructed in its neighbouring contract area in
block-KG-DWN-98/3. It cited the case of the Hazira gas terminal and the
Hazira offshore pipeline belonging to ONGC, which had been shared by the
contractors on Panna-Mukta and Mid- and South-Tapti PSCs on a chargeable
basis.
8.4.4

However, in its oral submissions before the Committee, Mr.

Ganguli, Senior Advocate, representing DGH departed from this written stand
taken by DGH and put forward an entirely new case stating that ONGC had
no right to any restitution.

He argued that in the absence of joint

development, it was the Central Government that was entitled to restitution

from RIL for its production and sale of the excess migrated gas. This was
because the migrated gas represents the entitlement and property of the
Government, and not ONGC. The crux of Mr. Gangulis argument was two fold
first, after RIL had recovered its costs under Article 15 of the PSC, the
Central Government was entitled to a certain, varying percentage of the profit
petroleum from RILs production of gas in its contract area in block KG-DWN98/3 in terms of Article 16, apart from the royalty. Such a mechanism was
applicable for the gas produced by RIL from gas in situ in its own block.

Second, and more importantly, however, was the argument that for the
excess gas that RIL produced from its block on account of gas migration from
ONGCs block KG-DWN-98/2, there can be no profit or production sharing
between the Central Government and RIL. This is because, in the absence of
any commercial production by ONGC, the entire amount of migrated gas
belongs absolutely to the Government.
8.4.5

Thus, Mr. Ganguli argued that the migrated gas produced by

RIL was a quantity which only the Government is entitled to and to which
97

ONGC had no right whatsoever. Since ONGC had not produced any gas
from block KG-DWN-98/2, it had lost the opportunity to make a claim for
restitution. However, from the Governments perspective, instead of receiving
100% of the excess migrated gas in RILs block, it was only getting a certain
percentage, such as 10%, with the rest going to RIL (and whose retention
constituted unjust enrichment). Thus, the Government was suffering a loss.
8.4.6

Subsequently, it was clarified by the counsel appearing for DGH

that the stand taken before the Committee in oral submissions was that of
the DGH alone and did not represent the views of the Government of India.
The Government also issued O.M. No. O-22013/17/2015-ONG-D-V on
29.07.2016 stating that at this stage, it cannot take stand that whether
ONGC or Government had unfair enrichment claim and the Committee
should give its views independently.
8.4.7

The DGH, agreed in substance with ONGCs arguments

regarding the quantification of the unjust enrichment being based on the

value of the migrated gas produced by RIL, and not on its profits or sales
figures.

D. Discussion
8.5.1

As discussed earlier, the Supreme Court in RNRL v RIL, (2010) 7

SCC 1, and Article 27 of PSC state that only the Central Government is the
owner of natural resources, which it holds in trust, for the Indian people, till
the point of delivery. Further, contractors have no legal rights or possessory
interest in the un-extracted gas below the surface. However, at this stage of
production and sale, contractors are granted the right to recover cost and
profit petroleum. Thus, ONGCs reliance on cases to support their claims for
trespass and conversion and absolute liability have no applicability in the
present case since ONGC cannot be said to be in possession of the gas in
block KG-DWN-98/2 and Godavari PML. ONGCs arguments to that effect are
consequently, rejected.
98

8.5.2

The principle that contractors have no rights till the stage of

production is also supported by a Privy Council decision U Po Naing v Burma

Oil Company Ltd., (1928-29) 56 IA 140 cited by the counsel for RIL in their
oral arguments. Here, the Plaintiff/Appellant was in possession of an oil well
site in Upper Burma and was granted the right to win and get earth oil from
this site and sell it, subject to payment of royalty to the Government. The
Plaintiff leased this well site to the Defendants, giving them the right to win
oil from there. However, despite sinking wells, the Defendants did not find
any oil, but instead found gas. The Defendants then proceeded to extract the
gas and use it for their purpose, leading to the Plaintiffs claim for
compensation for the use of the gas. Under the prevailing regulations, the
right to all minerals and earth oil was deemed to belong to the Government,
even though private ownership on the land was recognised. The Privy Council
rejected the Plaintiffs claim based, inter alia, on the proposition that unextracted gas under the soil was not the property of the Plaintiff and that,
unless it can be said that the gas was always the property of the
[Plaintiff/]appellant, it never became his property at any material date.
Further, the Defendants were in possession of the site from the time of
signing the lease and were not mere holders of the Government grant.
Consequently, the Privy Council ruled that even though gas could be reduced
into possession, it only became the property of the person reducing it by
digging the well and using it. Hence, the Respondents were not liable for any
compensation. The Committee finds that the principle of the Privy Council
decision that without production, contractors have no rights or title is
consistent with the petroleum regime in India today.
8.5.3

Applying these principles, the Committee concludes that till the

time ONGC produces gas from its blocks, it has no legal or possessory rights
in the gas under its surface and contract area. The property (gas) continues
to belong to the Government of India. Consequently, ONGC does not have
the locus standi to bring a claim for unjust enrichment or for the tort of
99

trespass and conversion; and cannot seek restitution. It is only the

Government that has the right to claim restitution from RIL for its unfair
enrichment.

E. On Quantification
8.6.1

Having answered the first part of paragraph 4(c) of the TOR of

locus standi against ONGC, the Committee will now determine the
quantification of unfair enrichment to RIL.
8.6.2

As is evident from the arguments of the parties, the

quantification of unjust enrichment can either be based on the monetary

value of the migrated gas produced, and to be produced, by RIL or it can be
the profits earned by RIL, after taking into account its costs and sales figures.
8.6.3

ONGC and DGH argued that the quantification of unfair

enrichment has to be based on the monetary value of the migrated gas

produced by RIL. Conversely, RIL argued that in case the Committee were to
conclude that it had been unjustly enriched, it was still entitled to recover the
development, drilling and facilities costs (CAPEX) and operating costs (OPEX)
for the migrated gas and to take into account its sales figures.
8.6.4

However, in actual terms, the Committee faces significant

limitations in quantifying a value of the gas since it does not have access to
any data related to the market value of the gas nor does it have access to the
actual production figures post-2015, i.e. after the submission of the D&M
Report. With respect to pre-2015 data, the D&M Report provides a basis for
the Central Government to act on. The Committee also lacks the expertise to
assess the operation of CAPEX and OPEX in the present case. It is thus for
the Government of India to inquire into this issue of quantification in further
detail, keeping in mind the principle that whatever benefit RIL received in
terms of the migrated gas is liable to be returned to the Central Government.

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8.6.5

Finally, on the issue of royalty, it is pertinent to state that it was

ONGCs case that the royalty passes on to the consumer, and that the
operators recover the entire royalty as part of cost petroleum under Article 15
of the PSC. The question of whether royalty or any tax has to be excluded
from such quantification of the unjust enrichment is a matter to be decided
by the Government of India.
8.6.6

To reiterate, the Committee has arrived at the following findings

in the present chapter:

a) First, the Government of India, and not ONGC, is entitled to claim
restitution from RIL for the unjust benefit it received and unfairly
retained. ONGC has no locus standi to bring a tortious claim against
RIL for trespass/conversion since it does not have any ownership rights
or possessory interest in the natural gas.
b) Second, in furtherance of the above, it is stated that whatever benefit
RIL received in terms of the migrated gas is liable to be returned to the
Government of India.
c) Third, on the issue of quantification of such unjust enrichment, the
Committee believes that the Government of India is best placed to take
a final decision on the same, in light of the limitations faced by the
Committee to assess the data and costs involved. It is also important
to note the limitations of the Committee in giving a figure to the final
value of the migrated gas produced by RIL during the term of its lease.
While the D&M Report has to form the basis for the migration of gas
up till 2015, subsequent migration of gas post-2015 has to be inquired
into by the Government of India.
d) With respect to royalty, the facts before the Committee in terms of
the contractors arrangement with the Government and with the
consumers, and whether the royalty had been passed on to the
consumers are unclear. This issue also has to be looked into by the
Government in greater detail.
8.6.7

In light of the Committees findings in these preceding chapters,

the Committee wishes to express certain views on the possible course of

future action.

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CHAPTER 9
FUTURE COURSE OF ACTION
9.1

The Committee is tasked with the reference to recommend the

future course of action to be taken on this issue in light of the findings

contained in the [D&M] report. In the Committees view, any future course of
action will involve implications for all key stakeholders, i.e., RIL, ONGC and
DGH. The Committee is also cognizant of the present circumstances, and the
limitations they pose on future possibilities regarding exploration and
development of the blocks in question. There is, for example, little or no gas
left in the blocks, therefore, ruling out the possibility of joint development in
the future. Gas balancing is also not possible, and the lease for the blocks is
coming to an end in 2019, thus, leaving very little that is possible to be done
from the point of view of gas production. This chapter makes its
recommendations in the light of this situation.
The Committee has arrived at certain key prima facie

9.2
conclusions:

a) First, the Committee finds that the 2003 Appraisal Report prima facie
reveals that RIL had prior knowledge about connectivity and continuity
of reservoirs.
b) Second, it appears that RIL did not bring the contents and findings of
the 2003 Appraisal Report to the notice of DGH, which is particularly
disconcerting, considering the obligations of contractors/operators to
make all relevant information pertaining to their block available to the
regulator.
c) Third, ONGC also had some form of prior knowledge about possible
continuity, but did not act promptly or with due diligence, and took up
the matter only six years after it first obtained relevant information.
The Committee believes that the allegations of prior knowledge on the
part of both RIL and ONGC must be enquired into further, with
particular emphasis laid upon the failure of both parties to present the
information they had to the DGH at the time they allegedly obtained
the information.

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9.3

This highlights concerns regarding the regime of disclosures in

the petroleum sector, and the promptitude with which parties are expected to
provide information to the regulatory authorities. The present case is a useful
opportunity for MOPNG and DGH to review and strengthen the disclosure
system itself. The Committee believes that the disclosure system could be
made more meaningful, to include, for example, penalties for deliberate
suppression of material information. If a party is found to have deliberately
not provided the DGH relevant information; or suppressed key data; or
omitted to present the full picture regarding exploration or development, it
must be prepared to face consequences, in the form of monetary penalties,
contractual restrictions, or other similar punitive action. Towards this, the
DGH must seek to craft and employ a strict disclosure regime applicable to all
supervised entities. Strict directives regarding disclosures can only be ensured
by the DGH, and the Government must, in turn, ensure that the DGH is
appropriately empowered to issue and enforce such directives.
9.4

During the course of the proceedings, the Committee was also

led to believe that the DGH, despite being the regulatory authority in the
sector, was helpless and entirely reliant on the operators not only for raw
data, but also for the interpretation of the data so provided. This is not a
desirable situation from any perspective for a regulator in an area involving
such complex technicalities. To address this issue, the DGH must look to
become more proactive in exercising its regulatory authority, whether it is in
the form of better vigilance, acquiring more incisive technical skills, or
stronger enforcement powers. The DGH must, in particular, ensure that it has
the adequate technical expertise and infrastructural wherewithal to conduct
regulatory operations in unhindered fashion. The presence of a strong,
empowered, vigilant and diligent regulator cannot be emphasised enough,
particularly in a sensitive and vital sector like petroleum.
9.5

Another issue that emerged during the course of the

proceedings pertains to the role of ONGC in the Indian oil and natural gas
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sector, which the Committee believes must be assessed with great scrutiny.
The long periods of alleged inactivity on the part of ONGC in this case
particularly must be examined further. For example, ONGC had some rights to
explore in the Godavari PML block in the KG basin since at least 1997, and
complete control over its blocks in the area since 2003. However, even today,
ONGC has hardly progressed beyond exploratory stage, and there is no
commercial production in either of its blocks under consideration. An entity of
its stature and relevance cannot be permitted to languish for a period of 15 to
20 years in a zone of opportunity. The Committee believes that the MOPNG
should make efforts to understand what steps may be taken to avoid a
situation like this in the future.
9.6

There was a useful suggestion from BP regarding the role of a

regulator, and that was with regard to the creation of a mechanism to

amicably resolve disputes among parties, as and when they arise. The
Committee concurs that the creation of such a mechanism will help reduce
the occurrence of disputes between parties, and allow for a smoother
functioning of the energy sector, which is ultimately in the interest of the
nation.
9.7

Having answered the TOR to the best of its ability, the

Committee will now summarise its findings and recommendations in the next
chapter.

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CHAPTER 10
SUMMARY OF FINDINGS AND RECOMMENDATIONS

10.1

According to the Office Memorandum (F. No. O-22013-

/17/2015-ONG.DV) of 15.12.2015, the Committees TOR were as follows:

a) To consider in depth the report submitted by D&M and recommend the
action to be taken by the Government thereon considering legal,
financial and contractual provisions including those contained in
Oilfields (Regulation and Development) Act, Petroleum and Natural Gas
Rules and concerned PSCs, etc.;
b) To recommend the future course of action to be taken on this issue in
light of the findings contained in the report;
c) To quantify the unfair enrichment, if any, to the contractors of the
adjacent block KG-DWN-98/3 and measures to prevent future unfair
enrichment to these contractors on account of gas migration and to
recommend action to be taken to make good the loss to
ONGC/Government on account of such unfair enrichment to the
contractors;
d) To consider the acts of omission and commission, if any, on part of the
stakeholders including RIL, ONGC, DGH and Government and give
recommendations on them.

A. Reference (a)

10.2.1 According to the Committee, the D&M Report appears to have been
commissioned under terms agreed upon by all the stakeholders in the present
dispute, crucially by RIL and ONGC. All the meetings with D&M had extensive
minutes, revealing that all proceedings were as transparent as possible. The
data to be shared was agreed upon in advance, and analyses, methodology
and results were jointly agreed upon throughout the process of conducting
the study. The D&M Report itself appears to be reasonable in its research,
methodology and conclusions drawn, and is hard to be faulted. The D&M
Report establishes connectivity and quantifies the gas that has migrated and
is likely to migrate within the time period covered by the Base Case and Case

105

1 Scenarios. In the circumstances, and with the information available at hand,

it is difficult for the Committee to believe that the manner in which the D&M
Report was arrived at was questionable. The Committee is unable to evaluate
in any further detail the concerns expressed by RIL about data asymmetry or
methodological limitations or uncertainty in the results, and the Committee
has not considered these concerns in any more detail.
10.2.2

The Committee accepts the D&M Reports findings that

connectivity between the reservoirs in KG-DWN-98/3, KG-DWN-98/2 and

Godavari PML blocks is established. Further, as per the calculations contained
in the report, from 01.04.2009 (when gas production commenced from KGDWN-98/3 block) till 31.03.2015, 7.009 and 4.116 BCM of gas had migrated
from Godavari PML and D1 discovery of KG-DWN-98/2 block respectively to
KG-DWN-98/3 block, of which, 5.968 and 3.015 BCM of gas was produced
from Godavari PML and D1 discovery of KG-DWN-98/2 block respectively,
through KG-DWN-98/3.
10.2.3

Additionally, the Committee notes that the D&M Report makes

two forecasts regarding gas migration. First, as per the Base Case forecast, as
on 01.01.2017, 7.519 and 4.377 BCM of gas would have migrated from
Godavari PML and D1 discovery of KG-DWN-98/2 block respectively to RIL's
KG-DWN-98/3 block, of which 6.549 and 3.395 BCM of gas would have been
produced from Godavari PML and D1 discovery of KG-DWN-98/2 block
respectively through KG-DWN-98/3 block. Secondly, as per the Case 1
forecast, as on 01.04.2019, 8.059 and 4.650 BCM of gas would have migrated
from Godavari PML and D1 discovery of KG-DWN-98/2 block respectively, of
which 7.065 and 3.846 BCM of gas would have been produced from Godavari
PML and D1 discovery of KG-DWN-98/2 block respectively through KG-DWN98/3 block.
10.2.4

Further, the D&M Report as well as the statements made by the

parties to the Committee point to the fact that gas production in the relevant
106

fields is likely to cease because of pressure depletion, and the fields are
expected to reach their technical limits for further gas production. Due to the
fact that only meagre reserves are left in the relevant fields, there is no
question of contemplating any kind of joint development, unitisation, or gas
balancing. The D&M Report appears to establish that there is practically no
development or further production that can be carried out by ONGC in its
fields in the current scenario.

B. Reference (c) and (d)

10.2.5

The Committee finds that RILs production of migrated gas and

retention of the ensuing benefits amount to unjust enrichment, since the PSC,
in the absence of an order on joint development under Article 12, does not
permit a contractor to produce and sell migrated gas. There is also no other
extra-contractual right granted to the contractor that enables it to produce
gas, regardless of its source. In fact, a contractor is limited by the gas that is
available in its clearly defined and demarcated contract area. In the present
case, Articles 10.15 and 11.2 of the PSC functioned as a prohibition on the
unilateral production of migrated gas, and the only remedy (exception)
available to the contractor was to approach the Government and get an order
for joint development. Since RIL did not pursue such a step, and it had not
been given the migrated gas as a gift or largesse, its actions had no lawful
justification and amounted to unjust enrichment.
10.2.6

On the question of knowledge, the Committee finds that it is

unable to draw final conclusions regarding RILs and ONGCs prior knowledge,
without any evidence being led before it. Nevertheless, certain observations
are warranted here. The Committee finds that the 2003 Appraisal Report

prima facie reveals that RIL had prior knowledge about connectivity and
continuity of reservoirs. It also appears that RIL did not bring the contents
and findings of the 2003 Appraisal Report to the notice of DGH, which is
particularly disconcerting, considering the obligations of contractors/operators
107

to make all relevant information pertaining to their block available to the

regulator. ONGC, on its part, also had some form of prior knowledge about
possible continuity in 2007, but did not act promptly or with due diligence,
and took up the matter only six years after it first obtained relevant
information. The Committee believes that the allegations of prior knowledge
on the part of both RIL and ONGC must be enquired into further, with
particular emphasis laid upon the failure of both parties to present the
information they had to the DGH at the time they allegedly obtained the
information.
10.2.7

On the question of unjust enrichment, the Committee concludes

that the Government of India, and not ONGC, is entitled to claim restitution
from RIL for the unjust benefit it received and unfairly retained. ONGC has no

locus standi to bring a tortious claim against RIL for trespass/conversion since
it does not have any ownership rights or possessory interest in the natural
gas.
10.2.8

The Committee also notes that the question of quantification of

unfair enrichment is to be decided by the Government of India, with the

principle that whatever benefit RIL received in terms of the migrated gas is
liable to be returned to the Government of India. The Committee faced
significant limitations in giving a figure to the final value of the migrated gas
produced by RIL during the term of its lease, due to the lack of data and the
Committees inherent technical limitations. While the D&M Report has to form
the basis for the migration of gas up till 2015, subsequent migration of gas
post-2015 has to be inquired into by the Government of India.
10.2.9

With respect to royalty, the facts before the Committee in

terms of the contractors arrangement with the Government and with the
consumers, and whether the royalty had been passed on to the consumers
are unclear. This issue has to be looked into by the Government in greater
detail.
108

C. Reference (b)

10.3.1

The Committee further notes that the present case is a useful

opportunity for MOPNG and DGH to review and strengthen the disclosure
system itself. The Committee believes that the disclosure system could be
made more meaningful, to include, for example, penalties for deliberate
suppression of material information. If a party is found to have deliberately
not provided the DGH relevant information; or suppressed key data; or
omitted to present the full picture regarding exploration or development, it
must be prepared to face consequences, in the form of monetary penalties,
contractual restrictions, or other similar punitive action. Towards this, the
DGH must seek to craft and employ a strict disclosure regime applicable to all
supervised entities. Strict directives regarding disclosures can only be ensured
by the DGH, and the Government must, in turn, ensure that the DGH is
appropriately empowered to issue and enforce such directives.
10.3.2

The DGH must also look to become more proactive in exercising

its regulatory authority, whether it is in the form of better vigilance, acquiring

more incisive technical skills, or stronger enforcement powers. The DGH
must, in particular, ensure that it has the adequate technical expertise and
infrastructural wherewithal to conduct regulatory operations in unhindered
fashion. The presence of a strong, empowered, vigilant and diligent regulator
cannot be emphasised enough, particularly in a sensitive and vital sector like
petroleum.
10.3.3

The Committee further believes that the role of ONGC in the

Indian oil and natural gas sector must be assessed with great scrutiny. The
long periods of alleged inactivity on the part of ONGC in this case particularly
must be examined further. For example, ONGC had some rights to explore in
the Godavari PML block in the KG basin since at least 1997, and complete
control over its blocks in the area since 2003. However, even today, ONGC
has hardly progressed beyond exploratory stage, and there is no commercial
109

production in either of its blocks under consideration. The Committee believes

that the MOPNG should make efforts to understand what steps may be taken
to avoid a situation like this in the future.
10.3.4

The

Committee

also

notes

and

concurs

with

the

recommendation made by BP regarding the creation of a mechanism to

amicably resolve disputes among parties, as and when they arise. Such a
mechanism will help reduce the occurrence of disputes between parties, and
allow for a smoother functioning of the energy sector, which is ultimately in
the interest of the nation.
10.3.5

The Committee is strongly of the view that manner in which the

present matter will be handled by the MOPNG can chart the course of the
future of the Indian energy industry and market in more ways than one.

[Justice Ajit Prakash Shah]

110