RNRL v RIL a Doctrinal Prelude

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RNRL v. RIL- A Doctrinal Prelude We hope to do a series on posts on the Supreme Court judgement (Reliance Judgment) in RNRL v. RIL natural gas dispute and our focus will be chiefly on Production Sharing Contracts and natural gas policy of the Government. This post is a doctrinal prelude to the analysis of the judgements, the main purpose being to place the Reliance Dispute in the context of the prevailing constitutional regime entitling the Union to regulate petroleum resources. Here, we seek to analyse the following concepts that have been the bases for both the judgements (Justice Sudarshan Reddy formed the minority and Justice Sadasivam and CJI KG Balakrishnan constituted the majority): 1. Ownership of Petroleum Resources 2. Association of Natural Gas & Ors. v. Union of India & Ors. 3. Public Trust Doctrine Ownership of Petroleum Resources: If you go to the website of the Directorate General of Hydrocarbons  and download the latest Model Production Sharing Contract , you will notice that the legal structure of PSCs for onshore (Exploration Blocks on land) and offshore Blocks (located in sea/ ocean) are a bit different. This is mainly because of the federal structure of the Indian polity as envisaged by the Constitution of India. Article 297 provides that : (1) All lands, minerals and other things of value underlying the ocean within the territorial waters, or the continental shelf, or the exclusive economic zone, of India shall vest in the Union and be held for the purposes of the Union.  (2) All other resources of the exclusive economic zone of India shall also vest in the Union and be held for the purposes of the Union. (3) The limits of the territorial waters, the continental shelf, the exclusive economic zone, and other maritime zones, of India shall be such as may be specified, from time to time, by or under any law made by Parliament.  Thus, the ownership of all natural resources, including hydrocarbons, in the territorial waters and exclusive econonomic zones would vest in the Union and shall be used for the purposes of the Union. But what about ownership of natural resources in onshore areas? There is no express provision of the Constitution vesting ownership on States of minerals found under lands within their boundaries. However, it may be noted that the right to minerals (including hydrocarbons in any form) in the States vest with the States. Many States have enacted laws vesting rights over minerals found within their territory with the State Government. For example, see S. 41 of the Punjab Land Revenue Act, 1887; S. 70 of the Karnataka Land Revenue Act; S. 69A of the Bombay Land Revenue Code, 1879 (as applicable to the State of Gujarat).Notwithstanding the same, the power to enter into contracts with regard to the

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RNRL v. RIL- A Doctrinal Prelude

We hope to do a series on posts on the Supreme Court judgement (Reliance Judgment) in

RNRL v. RIL natural gas dispute and our focus will be chiefly on Production Sharing

Contracts and natural gas policy of the Government.

This post is a doctrinal prelude to the analysis of the judgements, the main purpose being to

place the Reliance Dispute in the context of the prevailing constitutional regime entitling the

Union to regulate petroleum resources. Here, we seek to analyse the following concepts that

have been the bases for both the judgements (Justice Sudarshan Reddy formed the minority

and Justice Sadasivam and CJI KG Balakrishnan constituted the majority):

1.  Ownership of Petroleum Resources

2.  Association of Natural Gas & Ors. v. Union of India & Ors.

3.  Public Trust Doctrine

Ownership of Petroleum Resources:

If you go to the website of the Directorate General of Hydrocarbons and download the latest

Model Production Sharing Contract, you will notice that the legal structure of PSCs for

onshore (Exploration Blocks on land) and offshore Blocks (located in sea/ ocean) are a bit

different. This is mainly because of the federal structure of the Indian polity as envisaged by

the Constitution of India. Article 297 provides that :

(1) All lands, minerals and other things of value underlying the ocean within the territorial

waters, or the continental shelf, or the exclusive economic zone, of India shall vest in the

Union and be held for the purposes of the Union.  

(2) All other resources of the exclusive economic zone of India shall also vest in the Union

and be held for the purposes of the Union.

(3) The limits of the territorial waters, the continental shelf, the exclusive economic zone, and 

other maritime zones, of India shall be such as may be specified, from time to time, by or 

under any law made by Parliament. 

Thus, the ownership of all natural resources, including hydrocarbons, in the territorial waters

and exclusive econonomic zones would vest in the Union and shall be used for the purposes

of the Union. But what about ownership of natural resources in onshore areas? There is no

express provision of the Constitution vesting ownership on States of minerals found under

lands within their boundaries. However, it may be noted that the right to minerals (including

hydrocarbons in any form) in the States vest with the States. Many States have enacted laws

vesting rights over minerals found within their territory with the State Government. For

example, see S. 41 of the Punjab Land Revenue Act, 1887; S. 70 of the Karnataka Land

Revenue Act; S. 69A of the Bombay Land Revenue Code, 1879 (as applicable to the State of 

Gujarat).Notwithstanding the same, the power to enter into contracts with regard to the

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exploration and exploitation of minerals is with the Union, probably because of the fact that

Petroleum and related substances are resources that may be found only in specific

geographical regions in India (like Mumbai High, Gujarat, KG Offshore etc) but are

resources of national importance and no single State or a group of States should claim

monopoly overt them. Just imagine a situation where the Union has no right over oilproduced in, say Gujarat, or say KG region. Such a situation would result in few states

enjoying access to fuel while many parts of India would be denied effective access to fuel. In

order to overcome such a situation, Petroleum resources were placed within the domain of the

Union. This, it may be noted, was not an innovation attributable to the makers of our

Constitution. Section 100 r/w Entry 36 of Schedule VII to the Government of India Act, 1935

placed regulation of mines and oilfields within the Federal domain. Entry 36 read:

" Regulation of mines and oilfields and mineral development to the extent to which such

regulation and development under Federal control is declared by Federal Law to beexpedient in the public interest."

Association of Natural Gas & Ors. v. Union of India & Ors. 

In 2000, Gujarat enacted the Gujarat Gas (Regulation of Transmission, Supply and

Distribution) Act, 2000 to regulate transmission, supply and distribution of natural gas in the

interests of the general public and to promote gas industry in Gujarat, and for that purpose, to

establish a gas regulatory authority. In 2001, a reference was made by the President of India

under Article 143(1) of the Constitution of India, asking the Supreme Court to answer thefollowing questions:

1.  Whether natural gas in whatever physical form including Liquefied Natural

Gas (LNG) is a Union subject covered by Entry 53 of List I and the Union has

exclusive legislative competence to enact laws on natural gas. (sic ?)

2.  Whether States have legislative competence to make laws on the subject of 

natural gas and Liquefied Natural Gas under Entry 25 of List II of the Seventh

Schedule to the Constitution.(sic ?)

3.  Whether the State of Gujarat had legislative competence to enact Gujarat Gas

(Regulation of Transmission, Supply and Distribution) Act 2001.(sic ?)

Entry 53 List I read:

" Regulation and development of oilfields and mineral oil resources; petroleum and petroleum

 products; other liquids and substances declared by Parliament by law to be dangerously

inflammable."

Entry 25 List II read:

"Gas and gas works"

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Though a literal reading of the above entries to Schedule VII of the Constitution led to a

conclusion that natural gas would be covered under Entry 25 of List II, the Constitution

Bench of the Supreme Court, after going through various definitions of petroleum and the

nature of natural gas, held:  Natural Gas including Liquefied Natural Gas (LNG) is a Union subject covered byEntry 53 of List I and the Union has exclusive legislative competence to enact laws on natural

gas.

  The States have no legislative competence to make Saws on the subject of natural gas

and liquefied natural gas under Entry 25 of List II of the Seventh Schedule to the

Constitution.

  The Gujarat Gas (Regulation of Transmission, Supply & Distribution) Act, 2001, so

far as the provisions contained therein relating to the natural gas or liquefied natural gas

(LNG) are concerned, is without any legislative competence and the Act is to that extent ultra

vires of the Constitution.Notably, the Constitution Bench, of which the CJI KG Balakrishnan formed a part, held:

"For free and smooth flow of trade, commerce and industry throughout the length and 

breadth of the country, natural gas and other petroleum products play a vital role ".

Thus, the Supreme Court, even in 2004, was in favour of exclusive control of natural gas by

the Union. The Reliance Judgement on ownership of natural gas is an unequivocal reiteration

of the said position of the Supreme Court: that no other entity other than the Union has

control over natural gas.

The Association of Natural Gas judgement was a landmark judgement not because it laid

down something novel but because it reiterated the Union's unequivocal, absolute

 jurisdiction to regulate petroleum and natural gas. If we look at the existing laws regulating

the petroleum sector, they are heavily in favour of the Union. This has led to many federalism

related issues, especially relating to determination of royalty that the states would be entitled

to.

Public Trust Doctrine:The doctrine of public trust was first introduced into the Indian jurisprudence in MC Mehta v

Kamal Nath where it was held that certain natural resources are held by the state in trust for

the public and it would be unjust to let them to be harnessed for private gain. State merely

holds these resources on behalf of public.

The doctrine was borrowed from the American jurisprudence, which borrowed it from the

English common law, which in turn borrowed it from Roman law. While the Supreme Court

(and the lawyers who argued for its introduction) must be appreciated in introducing the

doctrine, we need not have had to draw the doctrine from American and the Roman Law forinspiration on state restrictions in dealing with natural resources. The history of the Indian

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sub-continent provides ample support that the doctrine of public trust existed even in ancient

India. For example, Arahat Mahinda, son of King Ashoka, and founder of Buddhism in Sri

Lanka, had admonished the King of Sri Lanka for hunting:

The land belongs to all the people and animals. The king is only the ruler and not the owner of this land . 

I am sure that considering the fact that the tribal king in ancient India was regarded as the

protector of cattle, the public trust doctine would have prevailed atleast in some points of 

history in the Indian Sub-continent. I leave it to legal historians in India (by the way, are there

any?) to find out if public trust doctrine prevailed in India. The point about studying Indian

legal history (or histories?) is that it would provide rich conceptions and other tools in dealing

with several problems that we face today. We should also look into Indian legal history and

also the legal history of other Civilisations to find how these people constructed law andsociety to provide answers to various problems.

Getting back to the public trust doctrine in present day India, in  Intellectuals Forum,

Tirupathi v. State of A.P. and Ors., the Supreme Court cast doubts on the inalienability aspect

of the public trust doctrine. It held that:

“...[T]he doctrine does not exactly prohibit the alienation of the property held as a public

 trust. However, when the state holds a resource that is freely available for the use of the

 public, it provides for a high degree of judicial scrutiny upon any action of the Government,no matter how consistent with the existing legislations, that attempts to restrict such free use.

To properly scrutinize such actions of the Government, the Courts must make a distinction

between the government's general obligation to act for the public benefit, and the special,

more demanding obligation which it may have as a trustee of certain public resources.” 

(Emphasis mine)

The Supreme Court, quoting, Joseph L. Sax, The public Trust Doctrine in Natural Resource

 Law: Effective Judicial Intervention, 68 Mich. L. Rev. 471-566 (1970) laid down the

following restrictions on the state regarding resources held in public trust:1.  the property subject to the trust must not only be used for a public purpose, but

it must be held available for use by the general public;

2.  the property may not be sold, even for fair cash equivalent

3.  the property must be maintained for particular types of use. (i) either

traditional uses, or (ii) some uses particular to that form of resources.

This is the legal background in which the Reliance dispute will be analysed.