Govt move on KG-D6 cost-recovery illegal: RIL

As the Oil Ministry readies to take action against Reliance Industries for the fall in output from the KG-D6 gas fields, the Mukesh Ambani-led firm has warned that any attempt to limit cost-recovery is illegal and will be challenged in court.

The ministry and its technical arm, the DGH, are upset with RIL because production from the Dhirubhai-1 and 3 (D1 and D3) gas fields in the prolific KG-D6 block has fallen from 61 million cubic metres per day in March, 2010, to about 37 mmcmd, instead of rising to 61.88 mmcmd, as projected by the company when it got its $8.8 billion capital expenditure plan for development of the field approved in 2006.

The ministry has attributed the fall in output to non-fulfillment of RIL's commitment to drill 22 wells in the field.

RIL has so far spent $5.694 billion on the two fields and has recovered $5.258 billion from the sale of gas produced.

However, the ministry wants to limit cost recovery in the block in proportion to the slippage in output vis-a-vis the stipulated timeline, reducing RIL's entitlement to $3.405 billion.

The firm however feels such a move would be ultra vires, or beyond the ministry's powers, as the Production Sharing Contract (PSC) does not have any such provision and the $1.85 billion already recovered by RIL cannot be reversed.

"If the PSC were indeed to be re-written to link cost recovery to levels of production, it would also have to include provisions for allowing the contractor (RIL) to recover costs in excess of his investment in case he were to achieve a rate of production higher than that estimated at the time of capex approval," RIL Senior Vice-President (Commercial) B Ganguly wrote to the ministry on September 16.

RIL said production below the original estimates meant the company loses its right to recover its investment within the originally estimated timeframe, causing huge losses in terms of sunk capital. Besides, RIL has already suffered huge erosion of market cap due to news of the fall in production.

RIL said as per the PSC, all costs and production numbers provided in the field development plan (like the one approved for KG-D6 in 2006) are only estimates based on the understanding of the reservoir and the market prices at any given point of time and "such estimates cannot be construed as constituting a commitment under the PSC."

KG-D6 wells did not perform as per the FDP, as a severe drop in reservoir pressure and acute water ingress has already forced closure of two out of the 18 well drilled so far.

The Oil Ministry's views have been backed by Solicitor General of India that said RIL should not be allowed to recover the cost of facilities that remain underutilised due to lower than anticipated output at its KG-D6 gas field.