Govt weighs legal view on higher RIL gas price

This comes against the backdrop of company withdrawing from one of its arbitration cases with govt

The petroleum ministry will seek legal opinion on whether it can allow a higher price to Mukesh Ambani-led Reliance Industries Ltd (RIL), and its partners BP and Niko Resources, for natural gas from the KG-D6 block. 

This comes against the backdrop of the company withdrawing from one of its arbitration cases with the government.

The case relates to gas price for the D1 and D3 discoveries in the KG-D6 block. While the price for domestic natural gas for the April 1-September 30 period has been kept at $2.50 per million British thermal unit (mBtu), for deepwater blocks a higher price with a cap of $5.56 per mBtu is allowed. 

RIL and its partners were denied this price because of the arbitration proceedings.

“The government is evaluating the issue in the backdrop of the contractors withdrawing from the arbitration. However, other arbitration cases continue. We are set to take legal opinion on whether they can be allowed a higher gas price,” a source said.  

Ambani and BP Chief Executive officer Bob Dudley had announced Rs 40,000 crore worth fresh investments in the KG-D6 block last month after meeting Prime Minister Narendra Modi and Union Petroleum Minister Dharmendra Pradhan. 

RIL and its partners may have withdrawn from the arbitration because of a new government policy on marketing and pricing freedom for discoveries that are yet to commence commercial production. The guidelines deny contractors this freedom if there is an existing arbitration case related to pricing of that field.

There are other arbitration cases related to the KG-D6 block between the government and RIL. 

The company has initiated arbitration on a $1.55-billion penalty for producing Oil and Natural Gas Corporation’s share of gas in the KG basin. According to a D&M report, over 11.2 billion cubic metres of gas had migrated from ONGC’s idling KG fields.

RIL claimed it had worked within its block and had complied with all provisions of the production sharing contract. It issued a notice for arbitration to the government in November 2016.

In 2011, RIL had initiated arbitration anticipating the government would penalise it for not meeting output targets. Till March 31, 2015, the total cost recovery disallowed comes to $2.8 billion. However, production from the fields continued to decline over the years.

During the fourth quarter of 2016-17, the KG-D6 field produced 0.28 million barrels of crude oil and 23.4 billion cubic feet of natural gas, declining 15 per cent and 25 per cent, respectively, from the same quarter a year ago. According to RIL, this was on account of a natural decline coupled with water and sand ingress.

Arbitration Cases

• Gas migration issue 

A penalty of $1.55 billion was slapped on RIL and partners BP and Niko for commercially producing ONGC’s share of natural gas in the KG basin

• Penalty for not meeting targets

In 2011, RIL had initiated an arbitration process anticipating the govt would impose a fine on it for not meeting output targets. Following this, the govt started disallowing cost recovery

• Recovery of cost of existing gas fields 

The govt had disallowed, more than once, costs which the Production Sharing Contract entitles the firm to recover. It also demanded $247-mn govt dues, of which RIL share is $148 mn

• Tax dispute on PMT

A tax dispute over Panna, Mukta, Tapti fields was ruled in favour of govt

• Cases withdrawn

Disputes over price of natural gas and the govt order to relinquish 80% of KG-D6 block was withdrawn