Speedy Settlement

Arbitration and dispute resolution in the oil and gas industry

Oil and gas projects are complex by their very nature. Capital investments are high and gestation periods are long. There are multiple parties involved and contracts lack standardisation. Most of the project tender documents are not comprehensive, leading to information asymmetry between the contractor and the employer. As a result, the projects are quite prone to disputes and litigation. The disputes may arise due to a number of factors such as delays in project implementation or failure to comply with preset project standards.

Broadly, disputes in the oil and gas sector can be categorised based on where they occur in the value chain – upstream, midstream or downstream. These disputes could be a mix of technical and contract interpretation issues arising as a result of environmental claims, shareholder value related issues, regulatory issues, trade restrictions, price negotiation, among others. Each segment gives rise to its own set of distinctive issues. The number of entities involved, the international nature of these entities, and complexity in the activities performed throughout the oil and gas value chain certainly create the potential for disputes.

In the upstream segment, disputes broadly fall into three categories – disputes between investors and the host state; disputes between investors; and disputes between investors (typically via the operator) and third parties (for instance, oilfield services providers). This segment has been under tremendous pressure with operators and contractors reporting large reductions in earnings, increased losses, cancelled or delayed projects, cost cutting and a decline in exploration and production (E&P) activity. Most of the disputes in the upstream segment arise from a decline in oil and gas prices and the resulting commercial fallout. Currently, both production sharing contracts and revenue sharing contracts have an arbitration clause and disputes arising out of these contracts are settled by arbitration.

The midstream and downstream segments too have unique problems and disputes. These could relate to pipelines, right of way, processing facilities, refineries, petrochemical plants, price redeterminations and destination restrictions. Disputes over applicable tariffs or rates are also becoming increasingly common. However, in most of the cases, in a bid to minimise their losses, oil and gas companies are not willing to initiate litigation or arbitration unless there is no other alternative.

Existing regulatory framework

At present, the Ministry of Petroleum and Natural Gas (MoPNG) is in charge of regulating the upstream sector and the Directorate General of Hydrocarbons (DGH) performs technical advisory functions. The government has drawn up a comprehensive petroleum legislation that regulates various facets of the industry. The MoPNG is responsible for the administration of the petroleum legislation.

The DGH was set up in April 1993 under the administrative control of the MoPNG to promote sound management of domestic oil and gas resources, keeping in view environmental safety, and technological and economic aspects of upstream activities. The regulatory regime specific to the oil and gas industry primarily constitutes the Petroleum Act, 1934, the Petroleum Rules, 1974, the Petroleum and Natural Gas Rules, 1959, and the Oilfields (Regulation and Development) Act, 1948. These statutes and rules lay down the substantive and procedural requirements to be complied with for a private party to engage in E&P, refining, and import and distribution activities relating to petroleum products. In addition, the petroleum ministry, from time to time, announces various notifications and regulations that govern the procedural and policy norms for the sector.

In the downstream segment, the Petroleum and Natural Gas Regulatory Board (PNGRB), which came into existence in 2007, was empowered in 2010 to authorise natural gas pipelines and city gas distribution (CGD) networks under Section 16 of the PNGRB Act. The regulatory landscape for the CGD segment is increasingly being marked by the changing role of the regulator itself, with the PNGRB becoming more of a facilitator, releasing guidelines in response to long-standing issues of the industry. It is constantly engaging in discussions with CGD companies to evaluate the issues being faced and working towards resolving them.

Arbitration process: Need for speedy dispute resolution

The domestic oil and gas industry has been suffering on account of failures on the part of the parties involved to resolve disputes expeditiously and effectively. India is one of the few countries to have adopted neither a construction law nor a standardised form of contract for government agencies.

Litigation in the sector is generally governed by rules of the concerned public sector undertaking (PSU) awarding the contract or in the form of representations before an authority under the MoPNG. Generally, contracts with PSUs have an arbitration clause. However, before the initiation of arbitration, there are provisions for mediation and conciliation.

Further, contracts in the oil and gas industry often involve foreign companies. In such contracts, international arbitration is the best way to address contractual disputes that may arise as it gives the disputants the opportunity to participate in the nomination and appointment of the arbitral tribunal for resolving the dispute. The arbitration in these cases is typically an international commercial arbitration. In such instances, recourse to Indian courts is limited.

Over the past few years, various measures have been taken to speed up the arbitration process and reduce costs. On October 23, 2015, the Arbitration and Conciliation (Amendment) Act, 2015, came into effect, repealing the two decade-old Arbitration and Conciliation Act, 1996. The new act aims to make arbitration the preferred mode of commercial dispute settlement in India by making it viable and cost-effective, so as to make the country a hub for international commercial arbitration. The act permits arbitral awards to be made within 12 months from the date of reference, though parties may, by mutual consent, extend the period for another six months. The mandate of the arbitrator is to terminate the proceedings if the timelines are not adhered to, unless the time is extended by the court. The amendment also provides for “fast-track proceedings” under which parties can consent to resolving the dispute within six months with only written pleadings and without any oral hearing or technical formalities.

The fixed timelines for the completion of arbitration proceedings are expected to ensure that construction and infrastructure projects are not left in limbo for indefinite periods of time. This will also help infrastructure companies get loans from banks, as this is currently curtailed due to a fear of loans turning non-performing/ bad as a result of delays in project execution.

However, the arbitration process is still criticised for being costly, time consuming and ineffective. The problem of enforcement and execution of arbitral awards is also quite widespread. In India, there are a few prominent domestic institutions that conduct institutional arbitration such as the Indian Council of Arbitration, the International Centre for Alternative Dispute Resolution, and the Construction Industry Arbitration Council. However, so far, only a few cases have been handled by them.

Conclusion

Oil and gas projects across the globe often face disputes. Despite the introduction of a number of initiatives and measures to simplify the arbitration procedure, there are still many unsolved issues and challenges that continue to plague the arbitration ecosystem in India. The country lacks a pool of professional arbitrators. This lack of is also one of the key reasons that disputes continue to linger for years. Moreover, the high cost of the arbitration process too cannot be ignored. The exorbitant amount spent on proceedings seriously distorts the budgets of the concerned parties. These issues not only delay project implementation but also result in huge cost overruns. Thus, the country needs to establish confidence in its legal system and policies need to keep pace with the evolving economic changes and global trends.

Going forward, given the growing demand for crude oil and natural gas in the country as a result of their wide application in household and industrial activities, it is apparent that there will be major investments in this industry in the years to come. The government has recently revamped the regulatory framework in the upstream segment with a view to attracting more investments, and this is also in line with the government’s objective to facilitate ease of doing business in the oil and gas sector. However, not only will policy implementation be key, but policy review must also remain an ongoing process. Many issues are still unaddressed and certain segments have seen little action. Therefore, policymakers must think for the long term in order to create a favourable regulatory environment. w

Nikita Chhabra

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