The country’s biggest private sector petroleum company, Reliance Industries Ltd (RIL), has sent an arbitration notice to the ministry of petroleum and natural gas over its move to disallow some of the expenditure incurred in the KG-D6 gas field in view of falling gas production.
The government has been contemplating action against RIL after it came under pressure following an adverse Comptroller and Auditor General (CAG) report. Petroleum secretary G C Chaturvedi had said on November 22 that his ministry was studying the opinion of the law ministry that cost recovery should be brought in line with gas output. “If the production sharing contract (PSC) is to be changed, we will do it,” Chaturvedi had said.
P M S Prasad, executive director of RIL and head of its petroleum business, had earlier told Business Standard that “a signed contract could not be rewritten on a one-sided basis at will. It is a contract signed between the Government of India and Reliance”.
A company statement issued on Monday said it would seek arbitration hearing at the earliest possible date. Besides, it maintained that the PSC 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. “To finally resolve this cost recovery issue so as not to hinder future investments in this block, the company has begun arbitration proceedings against the Government of India to have the company’s entitlement to recover its costs, and the validity of the stance adopted by the ministry of petroleum and natural gas, finally determined by an independent tribunal,” said the statement. The company had earlier sought confirmation from the ministry but did not receive any response. 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 (DGH) and the companies concerned. In the arbitration notice, RIL said that the move to limit the amount of expenditure the company could recoup from its flagging KG-D6 fields was illegal and outside the PSC’s purview.
Explaining the production profile and the facilities built by the company, Prasad said: “If we take proportionate capacity, the question is at what point of time do we compute utilisation. I produced 80 mscmd to test facilities. I produced more than 60 mscmd for a year and a half. Today, I am producing 45 mscmd. How will they do this — is it based on three days I produced 80, or one-and-a-half years when I produced 60, or on Monday, when I am producing 45? What is the basis and where is it written?”
He further added that all the facilities were set up on the basis of reserves certified by independent oil and gas experts, whose view was accepted by DGH and the government. “No one questioned the validity of those figures at any point until now, which is after actual production. That is called judging by the benefit of hindsight. It is not the way these contracts are written and that is not the way cost recovery can be limited. Any such action would only result in unnecessary legal disputes on what is a fully settled matter under the PSC.”
The RIL action assumes significance as the government has not sent any notice to it as yet. The company has asked the ministry in its notice to appoint arbitrators to decide on the issue. Interestingly, Cairn India, the other private company besides RIL that has started hydrocarbon production in the recent past, was also involved in an arbitration with the government on the issue of cess, but conditions imposed on it for clearing a takeover by Vedanta Resources saw the company bowing to government decision.
RIL has built facilities to handle 80 mscmd of gas production, but the fields are producing just about 41 mscmd.
“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 GoI. Reliance and its partners are entitled under the PSC with the GoI 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,” the company said in the statement.
The ministry wants to disallow expenditure incurred in constructing production and processing facilities at the Dhirubhai-1 and -3 (D1 & D3) gas fields, which are currently under-utilised, in the KG-D6 block. On the building of capacities, Prasad said: “You do not build something that you do not need. We are not used to throwing away our shareholders’ money. Certainly, there is flexibility. When you design a facility, you make sure that all future production from the block can be tied in easily. Our facilities were entirely in line with our production estimates and we still hope that production will go up.”
In tune with the overall market revival, the company’s share price on the Bombay Stock Exchange on Monday rose 3.85 per cent to close at Rs 783.