RIL moves apex court on KG-D6 arbitration

Having failed to get a response from the ministry of petroleum and natural gas for nearly five months, Reliance Industries Ltd (RIL) on Wednesday filed a plea in the Supreme Court to seek the appointment of an arbitrator in its dispute over the D6 block in the Krishna-Godavari basin.

According to a spokesperson, the company has sought an order appointing an arbitrator under section 11(6) of the Arbitration and Conciliation Act and article 33.5 of the production-sharing contract. “We had served a notice on the government in November 2011. We have approached the Supreme Court since we did not get any response,” he said.

In a pre-emptive move, RIL had sent an arbitration notice to the petroleum ministry in November 2011 over the issue of recovery of cost in the production of natural gas from the block. The company did not withdraw the notice even after the ministry said it had not decided anything on the issue and, therefore, there was no question of a dispute.

A top company executive had told Business Standard last week that even though there was no actual move from the government to restrict the cost-recovery, the recent turn of events pointed to the 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 had said.

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

The ministry of law had last year suggested the cost-recovery be allowed to the extent of facilities being used for current production.

Cost-recovery allows a company to deduct its cost from the 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 maintained the contract with the government contained no provision that entitled the government to restrict the costs recovered by the company by reference to factors such as the production level or the extent to which field facilities were utilised. The company has so far invested $5.8 billion in the block. In a press statement issued after serving the arbitration notice last year, the company had said it wanted clarity from the government before it invested more.

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 contract with the government to recover their full costs from the revenues generated by production from the block.