In a significant legal triumph, mining mogul Anil Agarwal’s Vedanta Ltd has secured a favorable outcome in an arbitration case against the government’s demand for increased payouts related to the Rajasthan oil and gas fields. The arbitration centered around the disallowance of ₹9,545 crore ($1.16 billion) in specific costs incurred by the company. This outcome comes as a resounding success for Vedanta and underscores the importance of contract terms in profit-sharing agreements between corporations and the government.
The Indian government’s claim for a larger portion of profit petroleum from the oil and gas fields in question hinged on the reallocation of specific costs within the block. A portion of the expenditure connected to the construction of a pipeline intended for evacuating oil from the Rajasthan block was deemed ineligible for cost recovery. This situation prompted the government to demand a higher share of profits, subsequently contested by Vedanta through an arbitration tribunal.
The underlying contract stipulated that companies could recoup their expenses prior to distributing profits based on a predetermined ratio shared with the government. When a portion of costs is invalidated, it results in amplified profits and, consequently, a larger share for the government. Vedanta’s contention against this demand has now been upheld by the arbitration award.
A statement released by Vedanta indicated, “The company has received an arbitration award dated August 23, 2023… upholding the contention of the company that additional profit petroleum, on account of Director General of Hydrocarbon (DGH) audit exceptions in relation to allocation of common development costs across Development Areas and certain other matters, is not payable as per terms of the Production Sharing Contract for Rajasthan Block.”
The arbitration award’s details, however, were not immediately disclosed. Vedanta acknowledged its receipt and stated, “The company is in the process of reviewing the award in detail and evaluating its financial impact.”
The amount in question, ₹9,545 crore, was outlined in Vedanta’s most recent annual report. This figure pertained to the adjustment made by the Director General of Hydrocarbon (DGH) in September 2022, which involved the government’s additional share of profit oil. This recalibration was based on the disallowance of certain shared costs and other audit exceptions. Vedanta was swift to challenge these recalibrations, citing a departure from the terms laid out in the Production Sharing Contract (PSC) and asserting their invalidity.
The arbitration process commenced in accordance with the terms of the PSC, and the final hearings and arguments concluded in September 2022. The arbitration award was eagerly anticipated by both parties, and Vedanta’s stance has now been validated.
Reports suggest that the DGH, acting as the nodal agency for upstream activities under the Ministry of Petroleum and Natural Gas, had initially raised the demand for an augmented share of profit oil back in May 2018. This demand came after disallowing ₹1,508 crore for the costs related to a heated pipeline constructed for transporting Barmer crude, and ₹2,723 crore for the reallocation of specific shared costs.
It is noteworthy that these costs were associated solely with Vedanta’s stake in the Rajasthan block, as the state-owned Oil and Natural Gas Corporation (ONGC) held a 30% interest in the same block. Notably, ONGC had agreed to shoulder the government’s claim if the contested costs were ultimately deemed non-recoverable.
The government’s response to the arbitration award remains uncertain. In previous instances, the government has contested and challenged arbitration awards that were not in its favor. As this case represents a significant interplay between corporate entities and the government’s revenue-sharing arrangements, its implications for future disputes of a similar nature are substantial.