RIL says may be forced to seek damages from govt

Claims denial of requisite approvals could contribute to further fall in output

Taking on the government, Reliance Industries (RIL) has said denial of approvals for capital expenditure (capex) at its KG-D6 fields could lead to a further decline in gas production and force the company to seek damages.

In a letter to the petroleum ministry last week, the company’s legal counsel, A S Dayal & Associates, said uncertainty resulting from the denial of approvals to the company’s capex programmes and budgets for FY12 and FY13 had an “adverse impact” on petroleum operations and could directly contribute to a further decline in production. “It is extraordinary, particularly given the government’s duties to the nation to maximise production, that you maintain your refusal to provide requisite approvals,” the letter stated.

The government has, however, blamed RIL for the decline in output, saying non-drilling of the required number of wells had led to the fall. The petroleum ministry said lower-than-anticipated production had led to under-utilisation of field facilities and restricted cost recovery.

According to the approved field development plans, RIL was scheduled to record production of 61.88 million standard cubic metres of gas per day (mscmd) from 22 wells by April, and 80 mscmd from 31 wells by the end of the year. However, though the company has drilled 22 wells in the fields so far, only 18 are used for production. The remaining wells have not been connected to the production system yet, as these contain uneconomical reserves. Of the 18 wells, six had to be shut due to high water and sand ingress and a fall in pressure.

RIL maintained the fields were not as predicted and, therefore, indiscriminate drilling would drain costs. The ministry, however, held RIL responsible for violating its committed work programme in the production sharing contract (PSC), slapping a notice disallowing cost recovery worth $1.2 billion last month.

In a pre-emptive move, RIL had, in November, issued an arbitration notice to the ministry, saying the PSC allowed operators to recover the entire capital and operating expenditure on oil and gas fields. It added the contract, in no way, linked cost recovery to production. So far, the ministry has refused arbitration, saying there was no dispute. However, the company’s latest notice brings out the dispute over how much cost could be recovered. Since the government did not appoint an arbitrator, RIL had, in April, moved the Supreme Court with a plea seeking the appointment of an arbitrator.

Though the company is open to holding a meeting to seek a negotiated resolution, its letter stated the preferred course now would be to seek a resolution through an arbitral panel.