RIL may ignore OilMin advice on arbitration

Reliance Industries Ltd (RIL) is evaluating provisions of the Arbitration Act to take forward its claim, though the government has declined to join the arbitration proposed by it to resolve the cost-recovery issue in the Krishna-Godavari (KG)-D6 block.

In a pre-emptive move, RIL had sent an arbitration notice to the petroleum ministry in November 2011. It did not withdraw it even after being asked by the ministry.

A top company executive said though there was no “actual move” from the government to restrict cost recovery, the recent turn of events pointed to its intent of doing so. “The delays in permits and approvals on various key issues related to the block show there is a move to restrict cost recovery,” he said.

The government has been contemplating action against RIL, triggered by its failure to match projected gas output in the country’s biggest gas field. RIL is producing around 34 million standard cubic metres gas per day from its D6 block, half of what was envisaged by now as per the field development plan approved in 2006.

Cost recovery allows a company to deduct its cost from production before sharing it with the government. The higher the cost recovery, the lower is the profit share. Costs are approved by a management committee that has representation from the government, directorate general of hydrocarbons and the companies concerned.

RIL and the petroleum ministry have divergent views on cost recovery. RIL maintains the production sharing contract contained no provision that entitled the government to restrict the costs recovered by the company by reference to factors like the production level or the extent to which field facilities were utilised.

However, the ministry wants to disallow expenditure incurred in constructing production/processing facilities in the KG-D6 block that are currently under-utilised/have excess capacity because of falling output.

The law ministry has backed the move, but has not quantified how much of the $5.8 billion that Reliance has already invested should be disallowed.

According to RIL, all investments in the exploration, development and production of hydrocarbons from KG-D6 were made by Reliance and its foreign partners at their own risk, and not by the government. Reliance and its partners are entitled under the PSC with the government to recover their full costs from the revenues generated by production from the block. The investment made in KG-D6 production facilities has been only partly recovered and the return on the investment, so far, is less than the cost of the capital.