In today's Finshots, we examine the decade-long gas migration dispute between Reliance and ONGC and if a unitisation agreement could have prevented this mess.

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The Story 

The government wants Reliance Industries Limited (RIL) and its partners, BP and Niko, to pay $1.5 billion in compensation. And if you’ve been following the news, you’ve probably seen how the Delhi High Court recently overturned an International Tribunal’s ruling that had earlier cleared RIL of the burden of paying this hefty amount.

But this legal battle has been years in the making. And how did it all start? 

Well, it goes back to the New Exploration Licensing Policy (NELP), which opened up oil and gas exploration to private and foreign companies. These companies could now bid for oil and gas blocks in a competitive auction, which was, until then, the domain of state-run giants like ONGC and OIL. 

The first NELP bidding round in the year 2000 opened up a jackpot for RIL as it got its hands on one of the gas exploration blocks. And coincidentally, RIL’s block sat right next to the block awarded to the Cairn (which was later taken over by ONGC) in the Krishna-Godavari (KG) Basin.

PS: These gas fields lie deep under the sea in the Bay of Bengal, off the Andhra coast.

By 2009, RIL had begun digging wells and pumping gas from its awarded block, while ONGC had yet to start exploration. However, the real twist came when, in 2013, ONGC observed something anomalous. It suspected that the underground gas reservoirs in both blocks were connected, allowing gas to flow from ONGC’s block into RIL’s. And since Reliance had begun production first, it might have inadvertently extracted ONGC's gas as well.

Sensing a major issue, ONGC took the matter to the Directorate General of Hydrocarbons (DGH). After this, the dispute landed in court, which eventually, in 2015, ordered a probe by DeGolyer and MacNaughton (D&M). Their report confirmed that gas had indeed migrated from ONGC’s block into RIL’s fields and that Reliance had extracted and sold it.

Following this, the government set up the Shah Committee, which gave its verdict in 2016: while there was no criminal intent, it concluded that Reliance had unfairly benefited. Since RIL had gained $1.7 billion from gas extracted from its KG Basin block, the government felt it should pay back at least $1.55 billion in compensation.

Now, Reliance wasn’t going down without a fight. It challenged the compensation demand in international arbitration – and won. And for a moment, RIL might have breathed a sigh of relief, thinking that the matter was settled. But the saga wasn’t over, and just days ago, the Delhi High Court turned the tribunal’s ruling upside down, this time in favour of the Indian government. 

So, that’s the backstory. 

Now, all of this led us to wonder could this entire mess have been avoided in the first place? And that’s when we came across the concept of a "unitisation agreement”, the main talking point of today’s story.

Let’s understand this with a climactic scene from the 2007 film There Will Be Blood.

In the film, Eli, who’s desperate for money, approaches Daniel, a ruthless oilman, to sell a piece of his land that’s sitting atop vast oil reserves.

In response, Daniel exclaims: “If you have a milkshake, and I have a milkshake, and I have a straw that reaches across the room, I drink your milkshake! I drink it up!”

Simply put, Daniel mocks Eli, revealing to him that he has already drained all the oil beneath Eli’s land, without actually needing to buy it.

And this perfectly illustrates what was called the “rule of capture”, which was prevalent in the United States (US) in the 20th century. It stated that whoever extracts the oil first owns it, regardless of whether it migrated from another property. This means oil from one property can be extracted using wells on a neighbouring property and be owned; you just have to be quick!

Naturally, this led to some serious disputes as companies rushed to drill and extract the oil as fast and as much as possible before their neighbouring landowners did. And the result was over-drilling, poor planning, massive wastage and inefficient oil recovery.

And at its core, the Reliance-ONGC dispute also boils down to this same issue—gas migration. If an underground reservoir is shared across two blocks and one company starts extracting first, does that mean they own everything that flows into their wells?

Well, this is where the unitisation agreement comes into play. 

Look, oil and gas fields often transcend land and water boundaries, sometimes even creating conflicts between nations. And history is full of such cases. And unitisation helps solve this problem by treating shared reservoirs as a single entity. So instead of competing, companies or nations holding rights to different parts of the field combine their interests into a "unit". Production is then decided and shared based on a pre-agreed formula called tract participation (i.e., how much oil or revenue each party gets after selling it). 

The United Kingdom and Norway were among the first to embrace unitisation. In 1976 they signed the unitisation agreement for the Frigg gas field, which sprawled the maritime boundary between the two nations. They agreed to jointly develop and operate this field as a single unit, essentially setting a precedent of sorts for the world for handling such disputes. And they didn’t stop there. In 2005, they signed another agreement which outlined how they would collaborate and operate under the supervision of both nations' regulatory authorities.

Now, coming back to the Indian case of RIL vs ONGC—could India have avoided this mess? Maybe. The government or the Directorate General of Hydrocarbons (DGH) could have foreseen the possibility of gas migration and implemented a unitisation agreement in place before allocating the blocks to different parties. If that had happened, RIL and the government might have avoided this elaborate legal dispute, which is still sub judice, and saved involved parties from years of legal trouble.

Anyways, what’s our take? Should Reliance pay the government $1.5 billion? 

Well, that’s where things get tricky. As we saw, on the one hand, the "Finders, Keepers" rule suggests that whoever extracts the gas first owns it—just like in the old oil rush days. RIL started drilling before ONGC, and there was no unitisation agreement in place to dictate otherwise. By that logic, Reliance could argue that it did nothing wrong.

On the other hand, without a unitisation agreement, ONGC never had a fair shot at extracting gas from its own block. And expert committees have already proved that RIL extracted more than 11.2 billion cubic metres of gas from ONGC’s block, sold it, and profited from it. Then it’s only fair that RIL compensates the government or ONGC, yeah? Ethically and economically, ONGC had a claim to a share of that wealth. So maybe a fair resolution might not mean RIL paying the full $1.5 billion, but some compensation? And that again raises questions about regulatory oversight and whether clear rules should have been in place from the start.

What do you think? Please help us settle this debate!

Until then…

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