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.

Update on the Gas Allocation Issue

Business Standard has reported that the Bombay High Court has asked the Ministry of Petroleum and Natural Gas (MoPNG) to state whether they would be able to supply natural gas to Welspun Maxsteel and Ispat Industries. For those new to this blog and to the gas allocation issue, the Ministry of Petroleum and Natural Gas had directed Reliance Industries Limited, the operator of the Reliance D 6 Field, to supply gas only to select core sectors considering the shortage in supply of gas. Steel industries, which used natural gas, were denied supply of the same from the D 6 Field. Therefore, some steel companies had challenged the said decision before the Bombay and the Delhi High Courts. Recently, the Delhi High Court had asked the Empowered Group of Ministers (EGoM) to explain its position on the issue through an affidavit.

Yesterday, the Bombay High Court has asked the Government if it would be able to allow supply of gas to the petitioners, Welspun Maxsteel and Ispat Industries. This was consequent to the petitioners’ argument that the decision would result in closure of the plant and would also lead to a Rs. 1,000 crore loss of exchequer. Implying that the Government’s decision was harsh, Justice Shah is reported to have stated: “Sometimes government does not realize. If an industry shuts down, it is very difficult to revive”.

The dispute is definitely interesting to followers of the petroleum industry. So far in the history of Indian lex petrolea, the Government has been exercising virtually untrammelled powers as regards the petroleum sector. Even the courts have not questioned this. Examples are Association of Natural Gas Industries [(2004) 4 SCC 489] and Reliance decisions of the Supreme Court. However, it appears that the Bombay High Court seems to be of the view that the impugned decision is harsh, as the abovwe quote of Justice Shah would show.

The Government is fighting against these petitions before the Delhi as well as the Bombay High Courts. To prevent inconsistent decisions, it would be prudent for the matter to be transferred to either of these courts.

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.

What Cannot be Done Directly Cannot be Done Indirectly: Assignment of Participating Interests

In the last post, we had noted the principle what cannot be done directly cannot be done indirectly. In this post we explain the applicability of this principle in respect of assignment of participating interests in a production sharing contract in the light of the recent case of Canoro Resources Ltd. V. Union of India.

Canoro Resources Ltd. (Canoro), Assam Company Limited (ACL) and Joshi Technologies International (Joshi) were successful bidders for developing the Amguri Oil Field. Canoro held 60% of the participating interests in the Field and was the operator for the Field. (An operator is one who performs the actual activities of exploration/ development in the Block/ Field. An operating committee is formed consisting of all the contractor parties. The operating committee takes all the important decisions pertaining to the operations in the Block/ Field.)

The PSC in respect of Canoro was terminated by the Government of India for the reason that Canoro breached the provisions pertaining to assignment of participating interests.

Canoro entered into an Investment Agreement (IA) with MASS Financial Corporation (MASS). Some terms of the IA as provided in the judgement are as follows: 

• MASS agreed to make a private placement for 24,798,000 common shares and also to apply against the rights offering made by the [Canoro], equal to the total rights offering commitment, less the number of common shares purchased by the holders of rights pursuant to the exercise of rights under the rights offering.
• The petitioner agreed with MASS that the funds infused by MASS would be utilized at least to the extent of US$1,500,000/- to meet the expenditures relating to the Amguri condensate recovery and gas re-injection project.
• The balance of the proceeds from the equity financing were agreed to be used for working capital and in conjunction with the exploration and development of its oil and gas projects, such projects.
• On the private placement being made by MASS, the [Canoro] agreed to appoint two nominee directors of MASS on its Board of Directors.
• The Board of Directors shall be comprised of no more than five persons, and the said Board shall reflect the percentage of shareholding of MASS.
• After the private placement closing, the name of the petitioner was agreed to be changed to one approved by MASS.

During this investment process, Canoro informed the Government of India the private placement undertaken through the IA was not a material change in the status of the company. Further, Canoro stated that MASS did not control Canoro. Canoro also informed that it would conduct a rights offering and in case the rights holders did not subscribe, the same would be offered to MASS.

The Government issued a show cause notice as to why the PSC should not be terminated due to the fact that Canoro did not seek consent of the Government. During the course of exchange correspondences in regard to the show cause notice, Canoro contended that the shareholding of MASS became 53%. Not satisfied by the replies of Canoro, the Government terminated the PSC.

Canoro applied to the Delhi High Court under Section 9 of the Arbitration and Conciliation Act, 1996 to stay the termination of the PSC.

 Relevant Contractual Provisions: 

“29.1 Subject to the terms of this Article and other terms of this Contract, any Party comprising the Contractor may assign, or transfer, a part or all of its Participating Interest, with the prior written consent of the Government, which consent shall not be unreasonably withheld, provided that the Government is satisfied that:

(a) the prospective assignee or transferee is of good standing, has the capacity and ability to meet its obligations hereunder, and is willing to provide an unconditional undertaking to the Government to assume its Participating Interest share of obligations and to provide guarantees in respect thereof as provided in the Contract;

(b) the prospective assignee or transferee is not a company incorporated in a country with which the Government, for policy reasons, has restricted trade or business;

(c) the prospective assignor or transferor and assignee or transferee respectively are willing to comply with any reasonable conditions of the Government as may be necessary in the circumstances with a view to ensuring performance under the Contract; and

(d) the assignment or transfer will not adversely affect the performance or obligations under this Contract or be contrary to the interests of India. 29.2 In case of any material change in the status of Companies or their shareholding or the relationship with any guarantor of the Companies, the Company(ies) shall seek the consent of the Government for assigning the Participating Interest under the changed circumstances.”

"35.1 The parties comprising the contractor shall notify the Government of any material change in their status, shareholding or relationship of that of any guarantor of the companies, in particular, where such change would impact on performance of obligations under this contract."

Contentions of the Parties:

Petitioner:

• Canoro had the right under the PSC to allot 53% shareholding to MASS.
• Article 29.1 pertains to only assignment of participating interest. In this case there is no assignment of participating interest
• Article 29.2 is only applicable when there is a material change in the status of the company and when there is a change in the control would permission from the government be necessary.
• Article 29.1 uses the term “prior written consent”. This is absent in Article 29.2 which uses the term “consent of the Government”.
• Even direct assignment of participating interests cannot be unreasonably withheld as stated in Article 29.1
• MASS satisfies the conditions mentioned in 29.1(a) to (d)
• Induction of shares of MASS would not affect the performance of the obligations under the PSC.
• If Article 29 is read with Article 35, the result would be that the prior consent of the government is not necessary for change in shareholding.
• It was only after the show cause notice by the Government that the shareholding of MASS rose to 53%.
• The right of the Government to terminate the PSC is only regards the breach of Article 29.1 and not 29.2. Therefore PSC cannot be terminated without any cause.
• As per Article 31.6, the PSC cannot be terminated during the pendency of arbitration. Since the notice invoking arbitration was sent to the Government preceding the termination notice, the government has no right to terminate the contract
• Canoro stated that in view of the above absence of right of the government to terminate the PSC, there was a prima facie case. Further it was impossible to ascertain the damages in terms of money.

Respondent:

• What cannot be done directly cannot be done indirectly. If prior written consent is required for assignment of participating interests, prior consent would also be required in case of indirect transfer of participating interests.
• Article 29.2 read with the next two sub-clauses conveys the meaning that prior written consent is required in case of change of control of the company as per Article 29.2
• Article 29.3 requires the Contractor to submit the details of the “proposed” assignment or transfer.
• Article 29.5 states that no assignment or transfer would be effective until the approval of the Government is granted.
• Article 31.(e) refers to any interest in the contract and not merely participating interest
• Article 29.2 is breach not by an open market share issue but by private placement.
• The IA refers to all kinds of interests owned by Canoro including participating interests.
• This is a suitable case for lifting of the corporate veil.
• In the national interest, injunction should not be granted due to the reasons stated in the Reliance case.
• Even if the termination is held invalid, the petitioner can be compensated adequately by money
• Invocation of arbitration is invalid as attempts to amicable settlement is a condition precedent.

The decision of the Delhi High Court would be analysed in the next post.

More on the RNRL v RIL Judgement

We had two posts (access those from here and here) on the RNRL v. RIL case before the Supreme Court. We wish to delve further into the case.

In the last two posts, we had analysed the legal doctrines that were applied by the Supreme Court and had dealt with the politico-historical aspects of petroleum exploration. These historical reasons and the public trust doctrine (refer to previous posts- links above) made the Supreme Court "grant" enormous powers to the government to regulate the petroleum industry, especially considering fuel security and sovereignty issues. We were to deal with the significant restrictions that the minority judgement (MIJ) has imposed on the enormous power given to the government to regulate the petroleum industry (two judges formed the majority while one formed the minority).

The MIJ held that since the government holds control over the petroleum resources in trust, the restraints on the Union government (government) are the following:

1. The government cannot transfer title to such resources unless it receives just and proper compensation

2. The government shall not allow deprivation of such resources to users in different sectors/ industries.

3. The government shall frame a proper conservation policy taking into account domestic availability, need for balancing present and future needs and the country’s security requirements. Extraction of such resources shall be allowed only after framing of such policy

4. The government shall periodically evaluate equitable distribution of such resources between different sectors and regions

5. The government shall frame a proper utilization policy and shall disallow a contractor from extracting and distributing such resources without permission of the government

6. An end user shall not be given a guarantee of continued access to such resources without the period specified by the government.

The MIJ declared that any action of the government which fails to take into account the above principles would be violative of Article 14 of the Constitution. Now, it must be noted that the majority judgement (MAJ) contained no such restrictions. The MAJ granted virtually a carte blanche to the government as regards regulation of the petroleum industry but placed no restrictions on the government. This blawgger feels that restrictions like the above must be placed on the government so that the government regulates the sector not on the basis of political considerations but on the basis of sectoral needs. 

More on the Reliance judgement in another post.

RIL-RNRL Dispute

The Ambani Brothers have finally settled the gas dispute by signing a revised Gas Sales Master Agreement (GSMA). Readers may note that the Supreme Court had, on 7th May, ordered RIL and RNRL to renegotiate the GSMA and held, among other things, that:

"b) The EGOM has already set the price of gas for the purpose of the PSC. The parties must abide by this, and other conditions placed by the Government policy. The GSMA/GSPA deeply affects the interests of the shareholders of both the companies. These interests must be balanced. This balance cannot be struck by the court as the court does not have the power under Sections 391-394 to create new conditions under the scheme. In view of the same, RIL is directed to initiate renegotiation with RNRL within six weeks the terms of the GSMA so that their interests are safeguarded and finalize the same within eight weeks thereafter and the resultant decision be placed before the Company Court for necessary orders.

c) While renegotiating the terms of GSMA, the following must be kept in mind:
1) The terms of the PSC shall have an over-riding effect;
2) The parties cannot violate the policy of the Government in the form of the Gas Utilization Policy and national interests;
3) The parties should take into account the MoU, even though it is not legally binding, it is a commitment which reflects the good interests of both the parties;

d) The parties must restrict their negotiations within the conditions of the Government policy, as reflected inter alia by the Gas Utilization Policy and EGOM decisions."

[emphasis supplied]

Newsreports suggest that RIL and RNRL have finally entered into a GSMA in terms of the SC Judgement. You can access the news report of the Economic Times from here.

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?
Conclusion
Glossary

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.

RNRL v. RIL- A Doctrinal Prelude

We hope to do a series on posts on the Supreme Court judgement (Reliance Judgment) in RNRL v. RIL natural gas dispute and our focus will be chiefly on Production Sharing Contracts and natural gas policy of the Government. 

This post is a doctrinal prelude to the analysis of the judgements, the main purpose being to place the Reliance Dispute in the context of the prevailing constitutional regime entitling the Union to regulate petroleum resources. Here, we seek to analyse the following concepts that have been the bases for both the judgements (Justice Sudarshan Reddy formed the minority and Justice Sadasivam and CJI KG Balakrishnan constituted the majority):

1. Ownership of Petroleum Resources
2. Association of Natural Gas & Ors. v. Union of India & Ors.
3. Public Trust Doctrine

Ownership of Petroleum Resources:

If you go to the website of the Directorate General of Hydrocarbons and download the latest Model Production Sharing Contract, you will notice that the legal structure of PSCs for onshore  (Exploration Blocks on land) and offshore Blocks (located in sea/ ocean) are a bit different. This is mainly because of the federal structure of the Indian polity as envisaged by the Constitution of India. Article 297 provides that :

(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.

Thus, the ownership of all natural resources, including hydrocarbons, in the territorial waters and exclusive econonomic zones would vest in the Union and shall be used for the purposes of the Union. But what about ownership of natural resources in onshore areas? There is no express provision of the Constitution vesting ownership on States of minerals found under lands within their boundaries. However, it may be noted that the right to minerals (including hydrocarbons in any form) in the States vest with the States. Many States have enacted laws vesting rights over minerals found within their territory with the State Government. For example, see S. 41 of the Punjab Land Revenue Act, 1887; S. 70 of the Karnataka Land Revenue Act; S. 69A of the Bombay Land Revenue Code, 1879 (as applicable to the State of Gujarat).Notwithstanding the same, the power to enter into contracts with regard to the exploration and exploitation of minerals is with the Union, probably because of the fact that Petroleum and related substances are resources that may be found only in specific geographical regions in India  (like Mumbai High, Gujarat, KG Offshore etc) but are resources of national importance and no single State or a group of States should claim monopoly overt them. Just imagine a situation where the Union has no right over oil produced in, say Gujarat, or say KG region. Such a situation would result in few states enjoying access to fuel while many parts of India would be denied effective access to fuel. In order to overcome such a situation, Petroleum resources were placed within the domain of the Union. This, it may be noted, was not an innovation attributable to the makers of our Constitution. Section 100 r/w Entry 36 of Schedule VII to the Government of India Act, 1935 placed regulation of mines and oilfields within the Federal domain. Entry 36 read:

"Regulation of mines and oilfields and mineral development to the extent to which such regulation and development under Federal control is declared by Federal Law to be expedient in the public interest."

Association of Natural Gas & Ors. v. Union of India & Ors.

In 2000, Gujarat enacted the Gujarat Gas (Regulation of Transmission, Supply and Distribution) Act, 2000 to regulate transmission, supply and distribution of natural gas in the interests of the general public and to promote gas industry in Gujarat, and for that purpose, to establish a gas regulatory authority. In 2001, a reference was made by the President of India under Article 143(1) of the Constitution of India, asking the Supreme Court to answer the following questions:

1. Whether natural gas in whatever physical form including Liquefied Natural Gas (LNG) is a Union subject covered by Entry 53 of List I and the Union has exclusive legislative competence to enact laws on natural gas. (sic ?)
2. Whether States have legislative competence to make laws on the subject of natural gas and Liquefied Natural Gas under Entry 25 of List II of the Seventh Schedule to the Constitution.(sic ?)
3. Whether the State of Gujarat had legislative competence to enact Gujarat Gas (Regulation of Transmission, Supply and Distribution) Act 2001.(sic ?)

Entry 53 List I read:

"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."

Entry 25 List II read:

"Gas and gas works"

Though a literal reading of the above entries to Schedule VII of the Constitution led to a conclusion that natural gas would be covered under Entry 25 of List II, the Constitution Bench of the Supreme Court, after going through various definitions of petroleum and the nature of natural gas, held:

• Natural Gas including Liquefied Natural Gas (LNG) is a Union subject covered by Entry 53 of List I and the Union has exclusive legislative competence to enact laws on natural gas.
• The States have no legislative competence to make Saws on the subject of natural gas and liquefied natural gas under Entry 25 of List II of the Seventh Schedule to the Constitution.
• The Gujarat Gas (Regulation of Transmission, Supply & Distribution) Act, 2001, so far as the provisions contained therein relating to the natural gas or liquefied natural gas (LNG) are concerned, is without any legislative competence and the Act is to that extent ultra vires of the Constitution.

 Notably, the Constitution Bench, of which the CJI KG Balakrishnan formed a part, held:

"For free and smooth flow of trade, commerce and industry throughout the length and breadth of the country, natural gas and other petroleum products play a vital role". 

Thus, the Supreme Court, even in 2004, was in favour of exclusive control of natural gas by the Union. The Reliance Judgement on ownership of natural gas is an unequivocal reiteration of the said position of the Supreme Court: that no other entity other than the Union has control over natural gas.

The Association of Natural Gas judgement was a landmark judgement not because it laid down something novel  but because it reiterated the Union's unequivocal, absolute jurisdiction to regulate petroleum and natural gas. If we look at the existing laws regulating the petroleum sector, they are heavily in favour of the Union. This has led to many federalism related issues, especially relating to determination of royalty that the states would be entitled to.   

Public Trust Doctrine:
The doctrine of public trust was first introduced into the Indian jurisprudence in MC Mehta v Kamal Nath where it was held that certain natural resources are held by the state in trust for the public and it would be unjust to let them to be harnessed for private gain. State merely holds these resources on behalf of public.

The doctrine was borrowed from the American jurisprudence, which borrowed it from the English common law, which in turn borrowed it from Roman law. While the Supreme Court (and the lawyers who argued for its introduction) must be appreciated in introducing the doctrine, we need not have had to draw the doctrine from American and the Roman Law for inspiration on state restrictions in dealing with natural resources. The history of the Indian sub-continent provides ample support that the doctrine of public trust existed even in ancient India. For example, Arahat Mahinda, son of King Ashoka, and founder of Buddhism in Sri Lanka, had admonished the King of Sri Lanka for hunting:

The land belongs to all the people and animals. The king is only the ruler and not the owner of this land.

I am sure that considering the fact that the tribal king in ancient India was regarded as the protector of cattle, the public trust doctine would have prevailed atleast in some points of history in the Indian Sub-continent. I leave it to legal historians in India (by the way, are there any?) to find out if public trust doctrine prevailed in India. The point about studying Indian legal history (or histories?) is that it would provide rich conceptions and other tools in dealing with several problems that we face today. We should also look into Indian legal history and also the legal history of other Civilisations to find how these people constructed law and society to provide answers to various problems. 

Getting back to the public trust doctrine in present day India, in Intellectuals Forum, Tirupathi v. State of A.P. and Ors., the Supreme Court cast doubts on the inalienability aspect of the public trust doctrine. It held that:

“...[T]he doctrine does not exactly prohibit the alienation of the property held as a public trust. However, when the state holds a resource that is freely available for the use of the public, it provides for a high degree of judicial scrutiny upon any action of the Government, no matter how consistent with the existing legislations, that attempts to restrict such free use. To properly scrutinize such actions of the Government, the Courts must make a distinction between the government's general obligation to act for the public benefit, and the special, more demanding obligation which it may have as a trustee of certain public resources.”  (Emphasis mine)

The Supreme Court, quoting, Joseph L. Sax, The public Trust Doctrine in Natural Resource Law: Effective Judicial Intervention, 68 Mich. L. Rev. 471-566 (1970) laid down the following restrictions on the state regarding resources held in public trust:

1. the property subject to the trust must not only be used for a public purpose, but it must be held available for use by the general public;
2. the property may not be sold, even for fair cash equivalent 
3. the property must be maintained for particular types of use. (i) either traditional uses, or (ii) some uses particular to that form of resources.

This is the legal background in which the Reliance dispute will be analysed.

Supreme Court Judgement in RNRL v. RIL

The previous post in this blog contained a summary of the RNRL v. RIL Judgement. You can download the RNRL v. RIL Judgement which the Supreme Court delivered this morning from here. I got it from JUDIS.