Natural Gas Allocation and Utilisation in India: Matter Goes to Court

Reliance D 6*

Several newspapers in the last few days have reported petitions against the Ministry of Petroleum & Natural Gas, Government of India (MOPNG), for prioritizing the allocation of natural gas from the Reliance KG-D6 to specific industries. Essar Steel has, reportedly, filed a petition before the Delhi High Court against the order of the MOPNG dated April 21, 2011 (Direction) allocating gas from Reliance’s KG D6 Field to “priority” sectors such as fertilizers, power etc, and only after the demand in the sectors are met, to sectors such as steel, petrochemicals and refineries.The per day demand of priority sector seems to be around 47.6  million metric standard cubic meters per day (mmscmd). The Direction seems to empower Reliance to cut off supplies to non-priority sectors if the natural gas demand of the priority sectors has not been met. Consequently, Reliance Industries Limited (RIL) has reportedly cut off the natural gas supply to such non-priority sectors from this Monday (10.05.2011).

About 3.2 mmscmd gas was supplied from D6 to Essar Steel. However, of late, D6 field has not been producing enough natural gas, leading to strict directions from the Exploration & Production regulator-Directorate General of Hydrocarbons to RIL. This Direction is a possible consequence of the low production. Essar Steel challenged the Direction to RIL. Essar Steel had also asked for an interim stay on the direction of the MOPNG. However, the Delhi High Court refused to grant stay without hearing the Government. When the court asked for the contentions of the Government with the Additional Solicitor General, Mr A.S. Chandiok (ASG), the ASG asked for more time to review the decision of the Bombay High Court on a similar matter that arose out of petitions filed by Welspun Maxsteel and a few others.

Proceedings before the Bombay High Court:
The Direction was also the subject matter of a petition filed in the Bombay High Court by Welspun Maxsteel. Relevant portions of the impugned Direction dated April 21, 2011 reads as follows: 

“2. Under the Government's Gas Utilization Policy, allocations for KG D6 fields had initially been made for core sectors and subsequently, taking into account expectation of higher production, allocations had been made for non-core sectors. As the gas production from KG D6 fields has decreased to around 50 mmscmd, it is only natural that the said production be supplied firstly to core sectors and Ministry's direction vide letter of even number dated 30.03.2011 has been issued in this context. The said direction has been issued in pursuance of Government's Gas Utilization Policy under the provisions of the PSC. Hence, the said direction needs to be complied with.
3. The Hon'ble Supreme Court in its order dated 7.5.2010 in the RIL & RNRL case has held that the Government owns the gas till it reaches its ultimate consumer. Further, it has been held that the PSC shall override any other contractual obligation between the Contractor and any other party.”

It may be noted that he MOPNG has been deciding on the allocation of natural gas to different sectors for a long time. As regards natural gas from the D6 Field, Government had, though an EGoM (Empowered Group of Ministers), framed a policy, known as Gas Utilisation Policy (June 2008), for the allocation of gas to various sectors. The said policy also contained certain general directions for the allocation of natural gas in respect of all NELP (New Exploration Licence Policy) Production Sharing Contracts. Following are the features of the general guidelines:

• The marketing priorities for the sale of gas from NELP Blocks would be determined by the Government and the sale would be on the basis of pricing formula approved by it.
• Gas allocation to a particular sector would not mean reservation or quota to that particular sector. In case consumers of a particular priority sector are not in a position to take gas when available, the gas not taken would be first offered to other entities in that priority sector and if they are not in a position to take the gas, the gas not taken would go to the sector which is next in priority.
• The priority for gas supply would be applicable only to customers who are connected to the existing pipelines network. In the absence of a network, a small or marginal field could sell the gas to customers connected to or can be connected to (within a short period of three- six months) it.
• This prioritization would not affect the process of price discovery as all customers would participate in the price discovery process (as per the extant policy of the EGoM) and would be eligible for utilizing natural gas subject to priority.
• This guidelines would be reviewed after five years 

Apart from these general guidelines, the policy prioritized sectors for the utilization of the D6 gas. The priority sectors as per the policy are:

• Gas based urea plants
• Gas based LPG plants
• Liquid Fuel plants and power plants lying idle or underutilized
• City Gas distribution
• Gas based power plants

There are two sources of such power of the Government. One, the Production  Sharing Contract itself gives the Government the right to frame policies pertaining to marketing of natural gas. The relevant provisions in the latest (NELP IX) PSC are as follows: 

"21.1 Until such time as the total availability of Natural Gas from all Petroleum production activities in India meets the total national demand as determined by the Government, each Company comprising the Contractor, shall sell in the domestic market in India all of the Company’s entitlement to Natural Gas from the Contract Area.

21.3 For the purpose of domestic sale obligation, the Contractor shall have freedom to market the Natural Gas and sell its entitlement as per Government Policy for utilization of gas among different sectors. 
21.3.1 For purposes of Article 21, the Government may from time to time frame policy for utilization of gas among different sectors, both for Associated Natural Gas (ANG) as well as Non-Associated Natural Gas (NANG) which would cover issues relating to gas supplies to different consumer sectors."

The second source comes from the Constitution itself. Article 73 read with Entry 53, List I of Schedule VII. Entry 53 reads:

"Regulation and development of oilfields and mineral oil resources; petroleum and petroleum products; other liquids and substances declared by Parliament by law to be dangerously inflammable."

Now, in the Welspun Maxsteel case, it was argued that if no gas was supplied to the petitioners, their manufacturing process would come to a standstill and this would have a cascading effect on the economy. A two judge Bench consisting of Ranjana Desai & Ranjit More, JJ. were of the opinion that the Union of India has to hold a meeting with the petitioners to sort out their grievance. The Bench ordered the matter to be heard on May, 9, 2011. The order can be accessed from here. On May 9, the Vacation Bench consisting of Mridula Bhatkar & RG Ketkar, JJ heard the matter.In the said hearing, the counsel for Union of India stated that a meeting would be conducted on May 11 between the petitioners, representatives of other non-priority sectors affected by the decision of the Government, and the MOPNG and a decision on the matter would be communicated to the petitioners by May 19, 2011. The court adjourned the matter to May 23, 2011. The order can be downloaded from here.

It would be interesting to see what the MoPNG would do. We will keep our readers updated.

* Image from here.