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Payment of Additional Profit Petroleum and Interest based on Arbitration Awards in Ravva JV

The document details the background of various arbitrations in Ravva Joint Venture and payments made thereon as per the awards. A total of US$ 76,879,691 (Rs. 334,56,50,564) has been made by ONGC to the Government of India towards Additional Profit Petroleum and interest based on Arbitration Tribunal awards in respect of Ravva Joint Venture.

Preface 

A Production Sharing Contract (PSC) was entered into on 28th October 1994 between Government of India (GOI), Oil and Natural Gas Corporation Ltd. (ONGC), Videocon Petroleum Ltd. (VTL), Command Petroleum (India) Pty. Ltd (predecessor to Cairn Energy India Pty Ltd. (CEIL) and Ravva Oil (Singapore) Pte Ltd. (ROS) for the purpose of carrying out Petroleum Operations with respect to the Contract Area (commonly referred as Ravva Oil & Gas field). Under the PSC, Command Petroleum (India) Pty Ltd (now Cairn Energy India Pty. Ltd.) has been appointed as the operator for carrying out exploration, development and production of petroleum on behalf of the contractor.

Concept of Profit Petroleum

As per the terms of  the PSC, the Volume of Petroleum produced and saved from the Contract Area is classified as "Cost Petroleum" and "Profit Petroleum".

"Cost Petroleum" is that portion of petroleum produced and saved from the Contract Area which the Contractor is entitled to take in order to recover the contract costs, including exploration costs, development costs and production costs incurred in the Contract Area.

"Profit Petroleum" is that portion of petroleum produced and saved from the Contract Area, which is over and above "Cost Petroleum". In other words, Cost Petroleum together with Profit Petroleum will be the total volume of Petroleum produced and saved from the Contract Area.

While Contractor is entitled for 100% of the Cost Petroleum, the Profit Petroleum is to be shared between contractor and the Government as per the terms and conditions of the PSC.

The term "Contractor" has been defined in Article 1.25 of the PSC as Companies and ONGC collectively.

The term "Companies" as defined in Article 1.19 of the PSC, shall mean all such companies (excluding ONGC) collectively, including their respective successors and assigns

"Profit Petroleum" is to be computed and shared between the Contractor and the GOI as per the methodology laid down in Article 16 read with Appendix-D of PSC. The share of Profit Petroleum for the Contractor and the Government for any given year depends on the Post Tax Rate of Return (PTRR) actually achieved by the Companies at the end of preceding year. As per Article-16 of the PSC, the Government share of Profit Petroleum increases progressively with the increase in PTRR achieved by the Companies.

Dispute in the methodology of Profit Petroleum Computation

As per the provisional calculation made by Operator, PTRR slab rate requiring surrender of Profit Petroleum to Government was triggered for the first time during the year 1999-2000. As per the Operator, in that year, the Companies collectively achieved a PTRR of more than 15%; hence the Government share of Profit Petroleum started accruing from the Financial Year 2000-01. A meeting of the Companies with DGH was convened on 11th April 2000 to discuss PTRR and address administrative matters connected with payment of Govt, share of Profit Petroleum. There was divergence in view points of DGH and the Companies on issues pertinent for deciding Profit Petroleum split between Govt, of India and Contractor.

As per Article 16.4 of the PSC, Government share of Profit Petroleum is to be determined for each quarter on an accumulative basis. Pending finalization of accounts, delivery of Profit Petroleum is to be based (a) on provisional estimated figures of Contract Costs, production, prices etc and (b) PTRR achieved at the end of the preceding year. These provisional estimates are to be approved by Management Committee. A final computation of Profit Petroleum based on actual costs, production and prices is to be carried out within 60 days of the end of each year. Necessary adjustment to the sharing of Profit Petroleum is to be agreed upon between the Government and Contractor as soon as practicable thereafter.

Although MC Resolutions are moved by Operator every quarter along with Profit Petroleum computations, the same have not been approved by the MC. This is because of absence of consensus with regard to methodology for computation of PTRR between the Companies and DGH. The major area of dispute as discussed in MC meetings:

ONGC was surrendering Profit Petroleum to the Government on a quarterly basis based on Operator's computation of Profit Petroleum submitted to JV Parties for approval. The payments are being made on "Provisional Basis" in view of divergence of view regarding interpretation of PSC provisions between the Government and the "Companies".

Reference of dispute to Arbitration

Persisting difference of perception of the PSC provisions between the Government and the "Companies" has led to Arbitration clause of PSC being invoked by the companies.

In August 2002 Cairn Energy India (Pty) Ltd., and Ravva Oil Singapore issued Notice of Arbitration to the Government of India. As per the Notice, the Claimants have sought relief as to proper interpretation of PSC provisions for following:

  1. Entitled to calculate PTRR on an individual basis

  2. Entitled to make allowance for notional Dividend Tax in calculating notional income tax for the purposes of calculating PTRR.

  3. Entitled to have Contract Costs incurred after the effective date which would have been payable by ONGC but for the Companies obligation to meet these costs as ONGC carry as referred to in Article 3.3 of the PSC taken into account in for the purposes of calculating PTRR.

  4. Entitled to recover Site Restoration Costs which have been accounted for in the Claimants ' accounting books pursuant to Article 15 of the PSC and to allow for such Site Restoration Costs for the purposes of calculating PTRR and entitled to recover payments made by a company into a separate bank account established by that company specifically for the purpose of providing a sinking fund for its share of Site Restoration Costs pursuant to Article 15 of the PSC and to allow such sums for the purposes of calculating PTRR.

  5. Entitled to recover the costs of materials which have been purchased or furnished in order to carry out work in the foreseeable future pursuant to Article 15 of the PSC and to allow, for such costs for the purposes of calculating PTRR.

  6. Not obliged to pay Royalty and Cess on the GOI's share of Profit Petroleum; and 

  7. Entitled to recover the costs of deposits made to various authorities and others, from time to time, for the purpose of Petroleum Operations under the PSC pursuant to Article 15 of the PSC and to allow such costs for the purposes of calculating PTRR.

In August 2002, Videocon Petroleum Ltd (VPL), formerly known as Petrocon India Ltd, also served notice of Arbitration on Government of India for resolving the following disputes:

  1. Whether (he PSC requires allowances/deductions to he made for Notional Dividend Tax payable (up to 01.04.2002) pursuant to Section 115 of the Income Tax Act, while calculating "Notional Income Tax" for the purposes of calculating the Post Tax Rate of Return (PTRR).

  2. Whether allowance/deductions in respect of Contract Costs incurred by VPL after the effective dale and which would have been ordinarily payable by ONGC, but for VPL 's obligations to meet these costs as ONGC Carry under the PSC, are to be made for (he purposes of calculation of Profit Petroleum as laid out in the PSC.

  3. Whether provisions made in the accounts of VPL on account of "Site Restoration Costs" and "Production Costs" for the proposes of meeting its obligations under the PSC would be considered for the purposes of making allowances/deductions for calculating Profit Petroleum.

  4. Whether VPL is permitted under the PSC to recover  the cost of material purchased or furnished by it for use in petroleum operations in order to carry out work in the foreseeable future, as Costs for Oil and Gas as defined in the PSC and is allowed for the purposes of calculation of Profit Petroleum under the PSC, to deduct the cost of such purchase or provision of such material from the date on which the said cost is incurred.

  5. Whether Royalty and Cess are payable by VPL with respect to the share of  the GOI in Profit Petroleum under the terms of the PSC.

  6. Whether deposits made to various authorities and others, from  time to time by VPL fur the  purposes of petroleum operations, would be costs recoverable under the PSC and allowable as deductions for the purposes of calculating Profit Petroleum as laid out in the PSC.

VPL also issued a notice to Arbitrate dated 30th July 2003 to GOI on the matter of its claim to receive its remittances to be received by VPL towards payment for sale of crude Oil after converting the U S Dollar amounts stated in the invoices by applying State Bank of India IT Selling rate on the date of payment mid not by applying the SBI IT buying rate.

The above matter was also brought under the purview of the same Arbitration Tribunal as was constituted for hearing other cases.

VPL was also engaged in two other arbitrations with GOI on the following issues:

Case No. 1:

For declaration that the PSC does not prescribe any due date for payment to GOI its share of Profit Petroleum and it should be further declared that the obligation to pay profit petroleum will arise only after final determination of the accounts and for a further declaration that GOI is not entitled to demand interest for alleged delay in Profit Petroleum

Case No.2:

Termination of PSC by GOI on issue of Debenture Trust.

ONGC did not participate in the Arbitration in the light of an earlier communication from MoP&NG which stated that as the major shareholder of ONGC, the Government's advice to ONGC is that they should not join arbitration proceedings against the Government.

Notice for non-payment of additional Profit Petroleum by GOI

In September 2002, MoP&NG issued Notice of non-payment of Profit Petroleum/Additional Profit Petroleum under Ravva PSC to the JV Partners including ONGC.  As per this Notice, the Additional Profit Petroleum payable to GOI by ONGC was indicated at US$ 81,820,870 for the period 1st April '99 to 30th June'02.

This Notice was examined internally in ONGC and communication was issued by Director (Offshore) to MoP&NG, The letter  states  "It is understood that other JV Partners have approached Government for appointment of an arbitrator on this issue, since it relates to interpretation of PSC clauses. Hence, ONGC requests GOI to keep the matter in abeyance till the fatal award of the arbitration and commits itself to make all payments as per award".

Arbitration awards

The following arbitration awards have been made:

In the Partial Award dated 12.10.04 in the case of CEIL & ROS and GOI, the arbitration tribunal allowed the Parties to arrive at the quantification of sums related to the issues until 12th April 2005.

As per the award, except the claim relating to ONGC carry and costs of deposit towards advance for purchase of goods and services, all other claims have been decided in favor of Govt. of India.

For one of the issues under arbitration viz "ONGC carry" which was decided in favor of the claimant, GOI appears to have challenged the Arbitration award. However, the award is silent regarding interest on delayed payment of Profit Petroleum, as the issue was not referred for arbitration.

In the further Partial Award dated 23.12.04, in case No. 1 between Petrocon India Ltd. and GOI, the claim of GOI for interest on delay in payment of Profit Petroleum has been upheld. The award interalia states at Page-66: "The respondent is entitled to interest on the payments which were delayed. Interest is to be calculated in terms of Article 1.73 of Appendix -C".

In Partial Award dated 31.3.05, in case No. 3 between Petrocon India Ltd. And GOI, the Arbitral Tribunal has decided " The PTRR will have to be calculated as per this award and the Respondent will be entitled to receive the shortfall plus interest at LIBOR plus 2%".

One of the issues decided in Petrocon's Partial Award dated 31.03.05 is regarding Exchange Rate applicability on the payments made by the refineries towards crude sales. The decision of the Arbitral Tribunal as given in Provisions of the award (Ch VII) reads as under:

"The claim relating to the rate of exchange which pertains to the period which falls beyond three years from 3rd July 2003 is barred by time. For the subsequent period the Claimant is entitled to receive all payments for Petroleum sold to the Government or its nominees after converting United States Dollars stated in the invoices by claiming the Stale Bank of India TT middle rate i.e., the average of the buying and the selling rate on the date of payment and consequently will he entitled to receive the difference between the amount paid and which will now fall due as a consequence of this decision together with interest at LIBOR plus 2 %".

DGH claim for Additional Profit Petroleum up to 31.03.04 on ONGC

Subsequent to the arbitration awards, DGH raised a claim of US$ 69,247,987 on ONGC towards Profit Petroleum dues up to 31st March 2004 on accrual basis. The letter states that the  arbitration award in respect of other issues (except ONGC carry cost) has become final and binding on ONGC and therefore, the amount of Profit Petroleum payable in terms of the award has become disc and payable by ONGC. But no claim of interest was made by DGH at this stage.

Accordingly, ONGC made payment of US$ 69,247,987 (equivalent to Rs. 300, 81, 32,555) on 22nd August 2005 as claimed by DGH.

Claim for Additional Profit Petroleum & Interest by DGH

In continuation to their earlier demands, DGH made a claim of US$ 7,666,180 towards additional Profit Petroleum along with interest as allowed in the partial award dated 31.3.2005 between VPL and GOT. The break up is as under:

Additional Profit Petroleum as on 31.3.05     :  US$ 863,810 

Interest up to 31.12.05                                          :  US$ 6,802,370

Total                                                                           :  USS 7,666,180

The DGH's letter states that the payment of Profit Petroleum together with interest is in terms of Arbitration Award dated 12.10.04 between CEIL and ROS Vs GOI and Partial Award dated 31.3.05 (Case No.3) between Petrocon India Ltd Vs GOI. The letter also mentions that GOI reserves its right to claim further interest due to delay in payment of the claimed amount of US$  7.666 million.

While drawing attention to Para 5.4 above, it is to be stated that as in the case of Petrocon (now Videocon Petroleum Ltd.), ONGC also has been receiving payments from the Refineries on the crude sales after converting the US Dollar billings at SBI TT Buying Rate. On a specific request from ONGC for the copies of Arbitration Award, DGH provided the copies of the Arbitration Award. After going through the partial award dated 31.3.2005 in Case No. 3 between Petrocon and GOI award, where the issue of exchange rate has been decided by the tribunal, it was felt the benefit of the decision regarding exchange rate applicability needs to be taken by ONGC as well. As per the workings made, the exchange rate claim from the refineries for payment made between 1.8.2000 to 31.3.2005 was arrived at Rs.21.27 crores (Rs.18 64 crores towards Principal plus Rs.2.63 crores towards interest upto 31.12.05).

DGH claimed for US$ 7,666,180 towards additional Profit Petroleum including interest was allowed by releasing Rs. 12.64 crores on provisional basis on 26.4.2006 after adjusting Rs.21.27 crores for Exchange Rate differential receivable from refineries. This was done as the award brings out that sales made to the Refineries are really sales made to the Government. Receipt of payment from the Govt, nominees cannot dilute the provisions of Art. 19 of the PSC (which requires sales to be made to Government).

DGH took exception to the adjustment of exchange rate differential dues from refineries against Profit Petroleum dues. DGH vide letter dated 20th June 2006 informed that the arbitration award in respect of exchange rate is being challenged by the concerned refineries and hence may not be concluded at this stage'. DGH further claimed that 'any amount due to ONGC on account of exchange rate difference on the sale invoices will have to be collected from the concerned refineries and cannot be adjusted from Profit Petroleum and interest on late payment of Profit Petroleum payable to the Govt' and requested ONGC to release the balance amount within 15 days.

Subsequently, on 27th June 2006, during telephone discussions between ONGC and DGH officers,  it was brought oil by DGH that MOPNG has categorically  stated that the payment on exchange rate difference should be made by the refineries to the companies and in case of failure to do so, it needs to be taken up with the refineries and that there is no link between Profit Petroleum payments and refinery payments. Further DGH has informed that no other JV partner has made the payment of Interest on Profit Petroleum except ONGC.

In the light of the above and the letter from DGH requesting for release of balance amount within 15 days, it was suggested to release the payment to DGH after obtaining approval of Competent Authority, in order to arrest the accumulation of interest on the balance amount due and to honor the commitment provided to MOPNG on the subject.

Accordingly, out of the balance due amount of Rs. 21.28 crores (Rs.33.92 crores total due minus Rs. 12.64 crores paid on 26th April 2006) an amount of Rs. 16.34 lakhs (equivalent to USD 30570 as Principal + USD 3906 as Interest) was adjusted being the sum paid by ONGC but not considered by DGH while making the claim, and the final net balance amount of Rs. 21,10,67,473 was paid to GOI on 14th July 2006.

While recommending the above payment, it was deliberated that:

Request for waiver of interest

In compliance with the above directions, a letter requesting DGH to waive the interest paid on additional Profit Petroleum amounting to Rs. 30.07 crores was sent to DGH by GGM-Chief JV (PSC) in July 2006.

Claims on HPCL, BRPL, IOCL

Claims totaling Rs. 33.91 crores towards dues on account of exchange rate differential (difference between SBI TT buying rate and IT middle rate i e. average of IT buying and TT selling rate) dues together with interest upto 30th June 2006 have been raised on HPCL, BRPL and IOCL.

Payments

Following payments to GOI, against the claims of DGH towards additional Profit Petroleum and Interest as per the decisions in the arbitration awards, have been made :

Claim Date

Amount Claimed

Amount Paid

Payment Date

In US$

Rupees

(In US $)

3.8.2005

69,247,987

300,81,32,555

69,247,987

22.8.2005

23.1.2006

7,666,180

12,64,50,536

2,858,285

26.4.2006

20.6.2006

Adjusted unit, of claim did. 23.1.2006

21,10,67.473

4,773,419

14.7.2006

Total

76,914,167

334,56,50,564

76,879,691

 

Note:

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