Govt disallows $1.2-bn RIL cost recovery
Reliance Industries Ltd (RIL) and the government are set for a legal showdown, as the petroleum ministry today disallowed the company’s $1.2-billion cost recovery from its investment in the KG-D6 field. The country’s largest company has already taken the government to the Supreme Court over its failure to appoint an arbitrator on the cost-recovery issue.
The disallowed cost recovery would mean the government’s profit petroleum for FY11 and FY12 would rise by that amount. The ministry yesterday sent a notice to RIL, disallowing a cost recovery of $457 million for 2010-11 and $778 million for 2011-12 due to its failure to meet drilling commitments.
The ministry has held RIL responsible for violation of its committed work programme in the production sharing contract (PSC). In its letter, it alleged the company failed to fulfil “obligations” under the PSC and “deliberately and willfully caused breaches, which have led to immense loss and prejudice to the government and the people of India”.
Together with 6.5 mscmd of output from the MA oilfield in the same block, the KG-D6 output is around 34 mscmd as against the nearly 70-mscmd target (61.88 mscmd from D1 & D3 and eight mscmd from the MA field).
RIL confirmed the receipt of the notice but opposed the move. “We have followed the production sharing contract and development plans approved by the Directorate General of Hydrocarbons (DGH). The current behaviour of the D6 field was not envisaged by anyone, not even the DGH when it had approved the plans. Moreover, the production sharing contract does not mention the concept of ‘partial cost-recovery'," said an RIL spokesperson. However, the ministry letter to RIL states that “it is ironical that a development plan prepared and submitted by you taking into account your own projections is not being adhered by you”.
Under the New Exploration and Licensing Policy, the government first allows companies to recover their cost from revenue. The companies subsequently share a portion of the production with the government, termed as profit petroleum. Both the drilling programme and the share in profit petroleum are biddable components for the oil and gas blocks.
In a pre-emptive move, RIL had in November last year slapped an arbitration notice on the ministry, saying the PSC allowed for operators to recover 100 per cent of the capital and operating expenditure on oil and gas fields and it did not in any way link the cost recovery to production. The ministry has refused to join arbitration till now, saying there is no dispute. But the latest notice brings out the dispute over how much cost can be recovered. Since the government did not appoint an arbitrator, RIL moved the Supreme Court last month with a plea seeking the appointment of an arbitrator.
The letter signed by A Giridhar, joint secretary (exploration), states that RIL has till now spent $5.7 billion on the development of the Dhirubhai-1 and 3 (D1 & D3) gas fields in KG-DWN-98/3 (KG-D6), of which about $4.6 billion has been incurred on production facilities alone.
"It is brought to your notice that up to March 31, 2011, you have recovered a sum of approximately $5.258 billion from the petroleum operations in the D1 and D3 development area," the letter states. D1 & D3 are producing about 27.5 million standard cubic metres per day (mmscmd) as against 61.88 mmscmd committed by RIL in its $8.8-billion development plan for the fields.
The ministry says that lower than anticipated production has led to under-utilisation of the field facilities. Also, it blamed the fall in output from 53-54 mmscmd achieved in March 2010 to the drilling of less than the committed wells. RIL, under the approved field development plans, should have put 22 wells on production for 61.88 mmscmd of output by April and 80 mmscmd by the end of the year from 31 wells. The company has so far drilled 22 wells on the fields but has put on production only 18 wells. The other four have not been connected to the production system, as they contain uneconomical reserves. Of the 18 wells, six had to be shut because of high water and sand ingress and a fall in pressure. RIL believed the field had not behaved as predicted and so indiscriminate drilling would be a big drain on cost.
In its plea to the apex court, RIL said, “The costs incurred by the contractor, in the exploration, development and production of hydrocarbons, are fully recoverable as stipulated under the PSC. Expenses incurred by the contractor are based on activities that are approved by the management committee under annual work programmes and budgets presented by the contractor.”