RIL can't recover cost of unused facilities: Nariman

The Solicitor General of India (SGI) has held that Reliance Industries (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.

RIL has built facilities to handle up to 80 million standard cubic metres per day of gas but current production is less than 45 mmscmd, a phenomenon that oil regulator DGH blames on drilling of lesser number of wells than what the company had committed in 2006 when it won approval for investing $8.8 billion.

Sources privy to the development said the Directorate General of Hydrocarbons (DGH) had been pressurising RIL to drill the committed 22 wells by March 2011, so that Dhirubhai-1 and 3 fields can produce projected 61.88 mmscmd and MA field (also in the same block) another 8.1 mmscmd.

But when RIL, which was not confident of the geology after pressure at current 18 wells fell and some showed water ingress, refused, DGH proposed to allow only proportionate recovery of cost. On DGH insistence, Oil Ministry sought a view from the second highest law officer of the country.

SGI Rohinton F Nariman on August 17 opined that "the cost/expenditure incurred in constructing production/ processing facilities and pipelines that are currently underutilised/have excess capacity cannot be recovered".

The Production Sharing Contract (PSC), however, does not envisage such a move and if oil ministry is to order such a thing, RIL is likely to challenge it and may initiate arbitration proceedings.

Sources said no field development plan by any company anywhere in the world, including 40-50 put by state-owned Oil and Natural Gas Corp (ONGC), have gone exactly as per the plans put on paper because of uncertainty involved in behaviour of what lies several thousand feet below the earth.

ONGC had on about a dozen occasions changed field development plan for its prime Mumbai High oil and gas fields.

RIL is waiting for BP Plc, who has global expertise in deepsea exploration, to come on board before recommencing drilling at KG-D6.

Nariman in his opinion states that the government has "an arguable case" to stop RIL from recovering expenditure which had "resulted in excess capacity / under-utilisation of the asset created" on account of its failure to adhere to the 2006 approved field development plan.

According to the 2006 plan, RIL was to drill a further 11 wells by March 2012 to raise output to 80 mmscmd and sustain it at those levels for 9 years.

RIL has so far spent $5.693 billion and has already recovered $5.258 billion from sale of gas.

Nariman advised that to the extent RIL has already recovered capital expenditure from sale of gas, "the cost entitlement of the contractor can be reversed".

The Comptroller and Auditor General (CAG) in its report on KG-D6 field audit, which was tabled in Parliament earlier this month, had not commented on reasonability of RIL hiking the capital expenditure at the nation's biggest gas field from $2.4 billion proposed in 2004 to $8.8 billion estimate in 2006.

It, however, stated that with the gas output from KG-D6 falling to about 43 mmscmd, which is close to 40 mmscmd output level envisaged in the 2004 investment plan, raised "doubts if upgradation to 80 mmscmd with substantial increase in development cost (to $8.8 billion) was justified".

RIL submitted an initial development plan (IDP) for Dhirubhai-1 and 3 gas finds in May 2004 with capital expenditure of $2.4 billion. This was followed up with an Addendum to the IDP (AIDP) in October 2006 proposing $5.2 billion capex in Phase-1 and $3.6 billion in Phase-II.

"Most procurement activities were undertaken late in the line with the schedules of the IDP of May 2004. By contrast, activities in respect of items in the AIDP were initiated even before the submission/approval of the AIDP. Clearly, the development activities of the operator were guided by AIDP, rather than IDP," CAG had said in the report.