RIL faces $1.1-bn hit on KG-D6 revenue

Mukesh Ambani-led Reliance Industries Ltd (RIL) is staring at fresh trouble, with the petroleum & natural gas ministry, after a Comptroller and Auditor General (CAG) report, considering taking action against the company for hiring a floating production, storage and offloading (FPSO) vessel for its KG-D6 block.

According to sources close to the development, the auditor has already sought action-taken report from the ministry and the Directorate General of Hydrocarbons (DGH) twice over hiring of the FPSO. Earlier, CAG had questioned a $1.1-billion contract given to the Aker group for hiring the FPSO vessel, saying the rate of $107.5 million could not be justified.

CAG pointed out the vessel had cost the Aker group only $71.5 million. So, a person close to the development said, if an action was taken, RIL might not allowed to make a cost recovery for the value of the contract, "leading to a fine of some $1.1 billion".

MORE TROUBLE

• In 2011, CAG had indicated deficiencies in the award of a $1.1-billion order for a floating production, storage and offloading (FPSO) vessel to the Aker Group
• Action-taken report in this regard has already been sought twice from the ministry by CAG
• The battle between both parties started in Nov 2011, when RIL initiated an arbitration process pre-empting the petroleum ministry would penalise it for a drop in output from KG-D6
• In May 2012, the government slapped a fine of $1.005 billion for a decline in targets for FY11 and FY12
• In Nov 2013, the government disallowed a cost recovery of $792 million on the company
• Over the past four years, the total shortfall in production from the KG-D6 block has reached 154 mscmd

The ministry responded to a CAG query by asking what action needed to be taken against RIL, a stand criticised by the ministry's finance wing.

"CAG had asked for an action-taken report in November 2012. The ministry responded by asking what action should be taken. But, with CAG again seeking a response, the ministry is planning to disallow cost recovery on the FPSO contract," said an official close to the development. Ministry officials are of the view that the entire cost should be disallowed and "let the operator claim otherwise".

Though the decision on cost recovery does not require concurrence of the minister, a final call is usually taken after an informal political approval. Every year, an oversight committee finalises costs allowed to be deducted from the production revenue. After that, petroleum revenue is shared by parties in the contract. RIL had earlier initiated arbitration proceedings on a $1.797-billion cost recovery, since the government had disallowed certain expenditure incurred in the KG-D6 gasfield in view of falling natural gas production.

The apex court had recently appointed former Australian high court judge Michael Hudson McHugh as the third arbitrator to head the board of arbitrators to solve the K-G basin dispute.

The dispute between the government and the company started in November 2011, when RIL initiated an arbitration process pre-empting the petroleum ministry would penalise it for a drop in output from KG-D6. However, in May 2012, the government slapped a fine of $1.005 billion for drop in targets for 2010-11 and 2011-12. In November 2013, the government disallowed recovery of costs to the tune of $792 million.