"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes must lead to the discovery of the right reasons, or better reasons than I have been able to give, and the cause is served just as well." -Mr. HM Seervai, Preface to the 1st ed., Constitutional Law of India.

Wednesday, May 26, 2010

RNRL v. RIL: Whose Gas is it Anyway? A Brief History of PSCs (Part I)

Early this month, following the RNRL v. RIL judgement, we had touched upon a few important legal aspects that formed the primary basis for the RNRL v. RIL Judgement. This post goes a step further in briefly analysing the history of petroleum exploration and its implications on the petroleum regulatory regime. If one reads the RNRL v. RIL Judgements (I use the plural because there are two judgements- the majority (MAJ) by Sathasivam, J. & Balakrishnan CJI and the minority (MIJ) by Sudershan Reddy, J.), one would notice the sizeable research that went into in writing both the judgements. Kudos to the judges, their legal research assistants, counsels and experts, and to the government for assisting the judges.

The petroleum industry were eagerly awaiting the judgement for several reasons. A few of them are:
The judgement would, in a very very BIG way affect government policies regarding energy, in general, and natural gas, in particular.

  1. Natural gas is the next big thing in the energy industry (It already has become so, I guess). We hear many gas based power plants coming up and existing power plants turning to natural gas for feedstock.
  2. The judgement would have tremendous impact on Production Sharing Contracts entered into between the Government and companies for exploration and production of petroleum (the term includes natural gas too)
However, the judgement will have profound impact not only on the petroleum industry in India (and consequently those industries that rely on natural gas as fuel such as power, fertilizer) but also on other industries such as mining etc. Hence, it is of utmost significance to read it closely.

To (unjustifiably) generalise, the decision has given a carte blanche to the government on laying down the law and regulating the petroleum industry. The MIJ also seems to be in the same page as the MAJ on the vast powers of the Union in regulating the natural gas industry but has, very very interestingly, laid down significant restraints on the exercise of such power by the Union. The MIJ has wonderfully analysed the petroleum industry, the history of production sharing contracts and the structure of petroleum regulation in India. The MIJ reads like a law review article. It is divided into give parts and a conclusion, arranged into a neat scheme, with several footnotes and a glossary. It is structured this way:

Part I: Prologue
Part II: The Factual Matrix
Part III: Summary of the Submissions of the Parties
Part IV: Whose Gas is it Anyway? Whether a Contractor becomes the Owner of the Gas?
Part V: Whose Company is it Anyway?

The Prologue begins with a couple of quotes, one from the Digest ordained to be complied by the Roman emperor Justinian I and the other by Dr. BR Ambedkar. The quotes seem to criticise the way in which the two stinkingly rich brothers entered into a private deal over a resource that essentially belongs to the nation and which ought to be used to "ameliorate the social and economic conditions in which our people live and suffer" and "to further the Constitutional goals".

In Parts II & III, the judge discusses the facts and the submission of the parties. We skip these for the time being. We go directly to Part IV as the contents of Part IV is the subject of discussion.

Regulation of Natural Gas Industry: What is striking about the MIJ is the analysis of the history, politics and economics of the petroleum industry, specifically, and of neoliberalism and privatization in general (Para 73). He has tried to place the Gas Dispute in the context of the problems that historically arose in the industry and the ways in which sovereign states reacted to them.The MIJ has identified nine kinds of mischiefs that have historically occurred:

(1) of oil companies not producing even after discovery and not relinquishing the area of exploration;
(2) of oil companies forming into pools and trusts to reduce production levels and keep the market prices at a high level;
(3) of oil companies financing armed revolutions and interfering in political aspects;
(4)of oil companies claiming ownership rights over the areas in which oil could be produced from;
(5) of oil companies claiming permanent rights to extract petroleum resources in-situ and taking the physical quantities away for marketing elsewhere;
(6) of under development of facilities for refining the petroleum and the Nation not having access to channels to market and distribute the resources;
(7) of deception by oil companies via low posted prices, and thereby reducing the royalty payments to the sovereign owners and reaping higher rewards in downstream activities that were also controlled by the oil companies;
(8) sovereign owners not having any rights to determine what levels of production can take place and without rights in management of petroleum operations; and
(9) joint off take agreements between oil companies and downstream divisions amongst them that controlled production, at an international level, keeping posted prices low so that even if sovereigns tried to take over the industry, they could be beaten down with production from elsewhere;

A survey into the history of petroleum exploitation would reveal that private parties, especially in the middle east, obtained huge areas of land for petroleum exploitation over which they claimed exclusive ownership. I recommend to readers this book which is an excellent survey of the history of the petroleum industry. Readers might also want to read this paper published by Oxford Energy on PSCs. According to the said paper, in 1901, the Shah of Persia (present day Iran) gave a Concession of 6,00,000 square km of land to William D'Arcy for a period of sixty years! The way in which this Concession was obtained is a fascinating story. The notable point in the story was that Britain seemingly gave its full support and backing to the Concession in view of its race with Russia for imperialistic dominance over Persia. In the traditional Concession Agreements, Vast geographical areas were given to the private entities (Foreign Oil Companies) and the ownership of the petroleum produced was vested with them. Due to several events post II World War, including events leading to the independence of several African, South American and Asian countries, the oil producing nations began to assert sovereignty over their natural resources including over petroleum.They started either nationalising the petroleum industry or renegotiating the Concession Agreements. Indonesia, in the sixties, popularised the concept of production sharing, where the ownership of petroleum was with the sovereign and the private entity was allowed to take a share (called as 'take') of the petroleum produced. Since then PSCs have become a popular instrument adopted by countries for allowing petroleum exploration and exploitation.

For these reasons, the MIJ points out that sovereign nations have arranged their petroleum legal regime to address these mischiefs. The MIJ emphatically states that the PSC that formed the subject of the Gas Dispute has to be seen in the context of these historical developments.

More on this, and on the constitutional and regulatory regime of petroleum exploration and exploitation in the future posts.

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