Govt move to force old gas price for KG-D6 gas illegal: RIL

Oil Ministry is proposing that old rates apply to KG-D6 block till it proved that RIL had proved less than targets only because of geological factors

Lashing out at a move to force it to sell gas from main KG-D6 fields at old rate of $4.2, Reliance Industries said the "illegal" action runs contrary to the signed contract and will stifle private investment in oil and gas hunt.

While the Cabinet has approved doubling of gas price from April 1 next year, Oil Ministry is proposing that old rates of $4.2 per million British thermal unit apply to gas from D1/D3 and MA fields in eastern offshore KG-D6 block till it proved that RIL had proved less than targets only because of geological factors.

In a strongly worded letter, RIL on September 3 wrote to Oil Minister M Veerappa Moily saying the signed Production Sharing Contract (PSC) does not bind a contractor to indicative production numbers.

"Neither the PSC nor the field development plan (or investment proposal) even suggest that a shortfall in production can be considered a breach for which penalties can be levied," RIL Executive Director P M S Prasad wrote.

RIL, he said, has on numerous occasions asked Government to appoint an independent and industry renowned third party technical expert to verify performance of the fields and see if the company was hoarding gas to get benefit of higher price.

While no expert has been appointed till date, an "illegal" action with no precedent in the country or in the international petroleum industry practice was being purportedly considered, he said.

Prasad said any move to penalise it on allegations of hoarding gas made by certain vested interests having little familiarity with techno-commercial operations of oil and gas industry will be against the PSC.

The PSC provides for all reserves and production numbers provided in a field plan are only estimates derived on basis of reservoir understanding at a given point of time.

So RIL's estimate of 80 million standard cubic meters per day of gas output from KG-D6 for the current year was based on geological understanding in 2006 which is far removed from actual operations where rapid sand and water ingress shut half the wells and brought down output to less than 14 mmscmd.

Prasad said it was not for the first time that a field has not performed up to its anticipation and cited examples of ONGC and OIL, who were never questioned for shortfalls.

"The action being proposed by its very nature discriminatory. Any move to penalise RIL for failure to produce so called 'committed' quantities of gas is violative of the PSC, unfair and prejudicial to the interests of the contractor besides being in breach of the contract," he said.

Prasad said such a move would "shatter investor confidence" and "stifle further private investments in exploration" as companies will see it as government reneging its commitment in a signed contract.

"The NELP (New Exploration Licensing Policy) provided certain assurances to private investors who were invited to risk their capital in the exploration and production business in India - principal among them being 10% cost recovery and freedom to market oil and natural gas in the domestic markets at market prices," Prasad said.

The proposed action of new gas rates not applying to D1/D3 and MA fields from April 1 "run the danger of demolishing the entire legal and contractual edifice of commitments enshrined in teh PSC as well as the terms of NELP offer," he said.

Such a move would "shatter investor confidence and stifle further private investment in exploration and in efforts to revive and sustain the production in challenging fields such as D1&D3," he added.

RIL sought an assurance from Moily that the government would not indulge in acts of discrimination and reneging on its commitments.