Bombay High Court Decides the Natural Gas Allocation Dispute

We have been following the Natural Gas allocation dispute over the past two months. For the uninitiated, check out the previous posts from here, here, here, here, here and here. The dispute was pending before the Bombay High Court for some time. On 8 July 2011, the Bombay High Court has decided the dispute in favour of Union of India. In this post, we summarize the judgement of the judge bench of the High Court consisting of Mohit S Shah, CJ. & Girish Godbole, J.Before that, we briefly note the events that led to the case.

12.07.10        The Ministry of Petroleum and Natural Gas (MOPNG) wrote to Reliance asking it to make pro-rata cuts in the supply of natural gas to all its customers when the production from Reliance Industries Limited’s (RIL) D 6 field was not sufficient to cater to all its customers.

30.03.11        Letter from MOPNG to RIL & Niko (NECO) Ltd. (Niko) noted that there was a marked decrease in the production of natural gas from the D 6 field which has led to substantial cuts in the natural gas quantities supplied to its customers. MOPNG stated that reduction in supply of natural gas (a) had subsidy implications on the fertilizer industry and (b) affected power plants, the domestic gas (Liquid Petroleum Gas & City Gas Distribution) sectors which in turn affected large number of people throughout India. The letter, therefore, directed RIL to supply gas to meet the demand from these sectors. The communication provided further that in case the existing production was insufficient to meet the demand of the sectors, cuts were to be imposed in the particular order among these sectors.

21.04.11          Letter from MOPNG to RIL &Niko (NECO) Ltd. (Niko) reiterating that the direction of the government vide letter dated 30.03.2011 needs to be complied with. The letter noted that in the RNRL v. RIL judgement the Supreme Court had noted that Government owned natural gas till it reached the consumer.

Against this direction, Welspun Maxsteel Ltd (Welspun) and Ispat Industries Ltd (Ispat) filed a writ petition in the Bombay High Court and claimed the following relief:

a) a writ, order or direction in the nature of certiorari calling for the records pertaining to the directives issued by [Union of India-UoI] to RIL and Nikovide letters dated March 30, 2011 and April 21, 2011 [hereinafter referred to as the “Impugned Directives”] and after examining the legality and validity thereof, be pleased to quash the impugned Directives;

b) issue a writ, order or direction in the nature of mandamus directing UoI to conduct an exhaustive investigation into the affairs of RIL and Niko in respect of the extraction of natural gas from the KG D6 fields and to issue appropriate directions to ensure that the maximum production levels from the KG D6 fields are attained;

The interim directions of the Bombay High Court have been covered adequately in the previous posts (here and here). The decision of the Bombay High Court is summarized below.

• The Petitioners (Welspun Maxsteel & Ispat Industries) contend that once the MOPNG made firm allocation of natural gas and asked the Petitioners to enter into Gas Sale and Purchase Agreements (GSPA) with the Contractor (RIL & Niko), curtailment in the supply of natural gas cannot be done. As has been held by the Supreme Court in the case of RNRL v. RIL, ownership of natural gas is vested with the Union of India (UoI), which holds the scarce natural resources in public trust. In the same case, the Gas Utilization Policy of the UoI has been held to be in conformity with the Constitution. Significantly, the decision holds that the UoI has the power "regulate and distribute the manner of sale of natural gas through allotments and allocation which would subserve the best interests of the country." The judgement also states unequivocally that the Production Sharing Contract would "override any other contractual obligation between the contractor and any other party”, including the Gas Sale and Purchase Agreement (GSPA).
• The Petitioners argue that the EGOM's (Empowered Group of Ministers) Policy has been entirely overhauled by the MOPNG. A perusal of the decisions of the EGOM shows that the EGOM had accorded high priority to certain sectors such as fertilizer etc (Core Sectors). Also, as per the decisions of the EGOM, firm allocation to steel plants such as those of the Petitioners would be only after demand from the core sectors were met. Therefore, there is no basis in the Petitioners' contention. Similarly, the contentions of the Petitioners that the MOPNG does not have any power to curtail the supply if the daily production is above 40 mmscmd must fail. In fact, all EGOM decisions empower the MOPNG "to take decisions regarding the supply of natural gas to sectors/individual customers consequent to gas being available on account of short offtake, delay and any other unforeseen circumstances." (Emphasis in the original) The EGOM has laid down the broader policy regarding the determination of core and non-core sectors, the overall principles regarding supply allocation and distribution and has empowered the concerned Ministry, the MOPNG, to implement its decisions in public interest.
• The Petitioners rely on the doctrine of promissory estoppel. According to them, since the EGOM decided on the allocation to the steel industry and when firm allocations were made to the petitioners, the government cannot curtail the supply of natural gas in view of the doctrine of promissory estoppel. The Petitioners contention cannot be upheld. Natural gas is a scarce resource and the decision taken by the MOPNG was in public interest. It has been recognised in several decisions of the Supreme Court, including in Shrijee Sales vs Union of India, Kasinka Traders vs Union of India, M. P. Mathur Vs. DTC and State of West Bengal Vs. Niranjan Singha, that there can be no promissory estoppel against public interest
• In proceedings pertaining to judicial review of administrative action, courts do not review the merits of the decision but merely review the decision making process. The Petitioners have, in effect, asked to court to sit on appeal over the decision of the MOPNG, which is not possible.

[On 18.05.2011, the MOPNG considered the submissions of the Petitioners and others in detail and passed a detailed order reiterating its position in the Impugned Directions. The High Court held that the decision was supported by "reasons which are cogent, germane, in consonance with the policy and law and cannot be termed as arbitrary."]

The court, while concluding, clarified that they were not deciding on the second prayer of the Petitioners (conduct an exhaustive investigation into the affairs of RIL and Niko in respect of the extraction of natural gas from the KG D6 fields) and asked the Petitioners to put forth their grievance before the UoI.

By the way, the court wrongly referred to natural gas as CNG (Compressed Natural Gas). What is explored is natural gas. Natural gas is found alongwith certain impurities. The same is sent through pipelines to a Gas Processing Plant, which basically removes the impurities and is sent further, usually through pipelines. Natural gas is compressed and used in pressurized tanks as fuel.