DGH bats for additional penalty on RIL

Penalty of $781 million on Reliance Industries is for a production shortfall from its KG-D6 field

The department of hydrocarbons has recommended to the ministry of petroleum and natural gas for an additional penalty of $781 million on Reliance Industries (RIL) for a production shortfall from its KG-D6 field, taking its overall fine to $1.786 billion.

Responding to a letter by the ministry of finance 29 June regarding fixation of natural gas prices, the DGH also indicated that there are difficulties in determining the targeted production and hence 'calculating the shortfall quantities to be billed at the old gas price would become difficult.' In a letter dated July 4, the finance ministry had asked the petroleum ministry to examine whether it is possible to ensure that RIL delivers its current supply shortfall at the old price of $4.2 per million British thermal unit (mBtu) and does not get undue benefit of an increased price.

Replying to the issue over cost recovery and penalties to RIL, DGH replied that the present cost of disallowance is in addition to $1.005 billion in cost recovery already disallowed for output falling short of targets during 2010-11 and 2011-12.

On the suggestion by the finance ministry regarding ceiling on the price formulae as per the Rangarajan formulae to be applicable from April 2014, the DGH letter dated August 1 added that the government must take an appropriate decision on this.  According to estimates, the price could be raised to more than $8 an mBtu from April 2014 after taking into account the average of benchmarks like Henry Hub, National Balancing Point, the netback price at supply sources for Japan and the netback price of Indian LNG imports

It added that in determining the shortfall quantities, the nomination blocks will be at advantage as compared to the PSC blocks and in some cases the production itself may have been delayed due to various operational reasons. It further added that a block may have more than one gas producing field, resulting in different shortfall figures. 'In such cases, it would be difficult to arrive at common sale price for co-mingled gas when individual producing field may have different shortfalls and hence different prices,' it added.   

In the letter, it also mentions that RIL has already invoked arbitration against the government in respect of the first notice for 2011-12. The 2011-12 penalty was also based on principle of reduced production leading to a reduction in capital costs allowed since assets were under-utilised.  It highlighted that the PSC gives full freedom to the contractors to submit revised field development plan for approval of management committee due to various reasons — technical, environmental or operational.