Hard action against RIL based on SGI opinion: OilMin

With KG-D6 gas output lagging target by over 30%, the Oil Ministry is taking "scrupulous" action against Reliance Industries based on the advise of the Solicitor General of India, a top source in the ministry said.

"Reliance says the production has fallen because of geological reasons. It may be true but there are 50% observers who are not fully convinced with the reasoning," the source said.

RIL was to drill 22 wells on the Dhirubhai-1 and 3 gas fields in KG-D6 block by March 31, 2011 and 31 wells by March 31, 2012, as per the 2006 field development plan. But the Mukesh Ambani-run firm drilled only 20 wells till now, of which it has not put two of the wells on production yet.

The source said failure of RIL to comply with its commitments made the oil ministry seek legal opinion.

The SGI in its opinion quoted Section 3.2 of the Production Sharing Contract (PSC) that states, "... Amounts paid with respect to non-fulfilment of contractual obligations" can be disallowed for cost recovery.

"...The expenditure incurred which has resulted in excess capacity / underutilisation of asset created on account of failure of the contractor (RIL) to adhere to the field development plan would fall within the provisions of Section 3.2," SGI said.

RIL has built facilities at KG-D6 to handle 80 million standard cubic meters per day of gas output which was expected by April 2012 but production currently is just 40.6 mmsmcd.

"Excuse of geological uncertainty (for not drilling committed wells) does not wash with everyone," the source said adding as the ministry contemplated next move, RIL slapped an arbitration notice challenging the proposed move to disallow a part of $5.7 billion expenditure already made in KG-D6 by restricting cost recovery in proportion to production.

PSC for KG-D6, where drop in pressure in the wells and an increased water ingress lead to lower per-well gas output and halt in drilling pending more studies, allows operators to recover 100% of  expenditure on exploration and production before sharing profits from the field with the government. It does not link cost-recovery to output.

RIL and its new partner BP Plc of UK say new wells in KG-D6 can come up not before 2014. Incidentally, 2014 is also the year when the current $4.2 per million British thermal unit gas price for the block comes up for review.

Production from KG-D6 field had reached 61.5 mmscmd in March 2010. However, from December 2010, the production started declining.

The government had in 2006 approved an investment of $8.8 billion in two phases in developing Dhirubhai-1 and 3 gas fields in the KG-D6 block (Phase-I: $5.2 billion and Phase-II $3.6 billion).