DGH warns oil ministry against unilateral change in production sharing contracts with cos like BHP Billiton

NEW DELHI: The Directorate General of Hydrocarbons ( DGH) has cautioned the oil ministry against unilaterally amending contractual terms and warned it against penalising operators such as BHP Billiton and Eni for not completing committed exploration works for want of defence and space clearances.

The upstream watchdog said the government can’t unilaterally amend production-sharing contracts (PSCs) for two blocks held by BHP Billiton in Mumbai offshore as the Australian explorer declined the defence ministry’s conditional and limited access to these blocks, government and industry sources said.


In a letter to the oil ministry, the directorate said, “The PSC is a mutually agreed document (by both the govt of India and the contractor) and one party modifying conditions and seeking to penalise the other party for noncompletion of committed MWP (minimum work programme) may not be legally tenable.” The government is demanding penalties worth millions of dollars from the contractor for not finishing the committed exploration works before it exits the blocks, sources said. DGH officials said the regulator would calculate penalty amounts only after the government takes a view on this matter.

Commenting on the penalty for not completing minimum work programmes (MWP) the company had committed before signing the contracts, the directorate said, “In view of the PSCs being silent on this issue, and study of the statutes and judicial pronouncements, it may not be legally tenable to impose the cost of unfinished MWP, in a case where such unfinished works was a result of the non-grant/conditional grant of clearances, imposed unilaterally on the operator.” “In this respect, the contractor may have an enforceable right of remedy against the government and there is a probability of the courts accepting the contractor’s claim in the event that the cost of unfinished MWP is imposed on the contractor by the government,” it said.

In a similar case, Italian energy major Eni has recently informed the government that it is exiting from the Andaman block and it asked the ministry to exonerate itself from paying any penalty for non-completion of committed works because of the government’s failure in giving regulatory approvals and denying it unhindered and safe access to the block, sources said.

The department of space could not give unconditional approval to the explorer because of its missions. Recently, Eni said in a letter to the oil ministry that it had decided to exit because “the basis on which the PSC was entered into no longer survives.” “The PSC stands frustrated” and “it has also been disabled from completing its MWP obligations”, sources said. BHP also faced similar problems soon after it signed the contracts with the government as the defence ministry denied access to the exploration blocks because of security reasons.