Given how the joint venture between Cairn, ONGC, Videocon and Ravva Oil has produced more than double the initial estimates of oil when the field was won by the consortium two decades ago?since then, the field has produced 240 mn barrels of oil and paid $8.2 bn to the national and state exchequers?the petroleum ministry?s $314 mn notice to the consortium is unfortunate. The case revolves around expenditure incurred prior to 1994 when ONGC was in charge of the field, as well as expenses made by the consortium later while developing the field. While the consortium members and the ministry have different views on the legitimacy of the costs and whether these had led to a lowering of the government?s profit-share, what is important is the consortium filed for arbitration on two occasions?the first went in its favour several years ago, and even the last appeal by the Indian government was dismissed by the Federal Court of Malaysia in 2011; the second case was also won in 2011 and the last appeal by the Indian government was lost just last month. With these victories, the consortium started deducting the $314 mn from payments to the government, which is what prompted the notice?the oil ministry?s argument is that an arbitration award needs to be enforced through an Indian court and that it plans to oppose this on grounds of it being violative of public policy.
This is where the government needs to quickly re-look the case since the matter goes beyond $314 mn. Fed up with delays in Indian courts, both local and foreign investors often prefer to build in arbitration clauses. But, as we just saw in the Reliance case, the government tends to drag its feet in even agreeing to arbitration and then in appointing arbitrators?it took Reliance 29 months to just get an agreement on the arbitrators. After this is done, and an award given, enforcing it can take years since the Indian Arbitration Act allows awards to be set aside on grounds of public policy, the stand the petroleum ministry is now taking.
Just last week, as part of its attempt to resolve the retrospective tax matter, the government decided to allow existing appeals to be sorted out by courts; as part of this process, it decided to accede to Vodafone?s demand for arbitration?the UPA simply refused to do this?and appointed its arbitrator. That was a move designed to give comfort to investors. The Ravva case, however, signals that even if investors win an arbitration case?just as Vodafone did in the Supreme Court one?there is no guarantee this award will be enforced. In one stroke, the petroleum ministry has highlighted the arbitrariness of India?s policy environment. That is bad news for a sector that is already plagued with uncertainty, ranging from environment and other delays, tax shelters such as those on natural gas getting withdrawn arbitrarily and, of course, the delay in hiking gas prices even though this is mandatory under the production sharing contracts. For the country, the implications are even worse.
