Difficult to implement FinMin advice on RIL:DGH

Cabinet has decided to double natural gas prices to $4.2 per million British thermal unit from April 2014

Oil regulator DGH has cited practical difficulties in implementing finance ministry's suggestion that Reliance Industries should not be allowed to raise natural gas prices until it makes up for producing less than the projected output since 2010.

Within days of the Cabinet deciding to double natural gas prices to $4.2 per million British thermal unit from April 2014, the Department of Expenditure in Finance Ministry on July 4 sent an office memorandum to Oil Ministry asking it to examine if RIL can be asked to deliver the shortfall it owes at the old price of $4.2.

Asked by Oil Ministry to comment on the issue, the Directorate General of Hydrocarbons (DGH) on August 1 replied saying estimates of production outlined when investment plans are approved much before the field is put to production vastly vary with the subsequent targets approved annually by field oversight committee headed by DGH annually.

"In most cases, the projected production in the FDP (field development plan) and in the annual work programme would not be identical. This is because of the dynamic nature of exploration and production activities which need to be adapted to suit the ground realities and operational requirements," it wrote.

While the current production of less than 14 million standard cubic meters per day from RIL's KG-D6 field is way short of 86 mmsmcd target outlined in the 2006 field development plan, it would not be in wide variance with annual output target approved by Management Committee (MC) for 2013-14.

KG-D6, which started gas production in April 2009, touched a peak of 69.43 mmsmcd in March 2010 before unanticipated water and sand ingress shut wells after wells leading to output lagging the estimates outlined in 2006.

DGH said a decision would have to be taken as to which of the projected production figures - ones outlined in field development plan or annual budgets - would constitite targeted production.

"The PSC (Production Sharing Contract) gives full freedom to the contractors to submit revised field development plan or development work programme for approval due to various reasons which can be technical, legal, environmental or for any other operational reasons," it said adding once MC approves revised programs then all the production targets will correspondingly get revised.

"In such a scenario, calculating the shortfall quantities to be billed at the old gas price would become difficult due to the shifting nature of goal posts," DGH wrote.

DGH also highlighted difficulties in adhering to the production deadlines because of "various operational reasons".

The technical adviser of the ministry also found it difficult to monitor the actual output vis-a-vis targets because a block like KG-D6 can have multiple gas fields and some of them could produce more than target while others could be less, and accumulative figures for the entire block could be totally different than initial estimates.

Finance Ministry had on July 4 written that "Once Reliance overcomes technical difficulties of producing gas at the KG-D6 field, the government must ensure the company delivers the shortfall it still owes at the old price of $4.2 rather than getting the benefit of the new price."

"The 'shortfall' will essentially be the cumulative 'targeted production up to March 30, 2014 minus the actual cumulative production during the same period. However, there are certain difficulties in estimating both the targeted production as well as actual production," DGH wrote to the oil ministry.