Canoro Resources: Transfer of Operatorship in the Amguri PSC

Earlier this month, we did a descriptive comment on the case of Canoro Resources v. Union of India (posts are here and here). 

To recap, the Government of India had terminated the Production Sharing Contract in respect of Canoro Resources as it had not obtained permission from the Government for an indirect assignment of participating interest. Canoro filed an application for interim measure under Section 9 of the Arbitration and Conciliation Act, 1996 for preventing the Goverment from not giving effect to the termination letter. The Delhi High Court rejected the application.

The Telegraph reports that the Delhi High Court has directed the Oil and Natural Gas Corporation Limited  (ONGC) to take over the operations in the Amguri Block. Now, this issue as to what happens after the PSC is terminated in respect of one party is important and may form precedent in future cases. 

The said news report suggests that the Ministry of Petroleum and Natural Gas had requested the court to for an interim measure ordering Canoro Resources to hand over the operatorship to Assam Company Limited, a partner to the consortium that consisted of Canoro Resources Ltd. (Canoro), Assam Company Limited (ACL) and Joshi Technologies International, with ONGC having the power to monitor the operations.

The High Court, however, passed an order asking ONGC to take over the possession of the Block and to operate the Block. the order can be obtained from this link. The next hearing is on 6 April 2011. We'll follow this case for the interesting issues that arise consequent to termination of the Production Sharing Contract.

The latest Model Production Sharing Contract published by the Government gives some indication:

"PROVIDED THAT where the Contractor comprises two or more Parties, the Government shall not exercise its rights of termination pursuant to Article 30.3, on the occurrence, in relation to one or more, but not all, of the Parties comprising the Contractor, of an event entitling the Government to terminate the Contract,

a) if any other Party or Parties constituting the Contractor (the non-Defaulting Party or Parties) satisfies the Government that it, or they, is/are willing and would be able to carry out the obligations of the Contractor.
(b) where the non Defaulting Party or Parties with the consent of the Government has/have acquired the Participating Interest of the Defaulting Party pursuant to the provisions of the Operating Agreement and has/have procured and delivered to the Government a guarantee or guarantees as referred to in Article 29.1 in respect of the Participating Interest of the Defaulting Party acquired by the non Defaulting Party or Parties.

 It is submitted that many Joint Operating Agreements (those agreements entered into between the members of the consortium forming the Contractor to govern their relationship inter se) do not contain detailed provisions in case such event happens. I am not sure if the Model JOA of the Association of International Petroleum Negotiators (2002) contains a provision governing such an event. JOAs ought to contain provisions to cover a situation where one of the parties is a defaulting party under the PSC.