No obligation in contract on production targets: RIL to OilMin

Refuting Oil Ministry charges on KG-D6 gas field output lagging targets, Reliance Industries has said there is no "obligation" in the contract to achieve certain levels of production and the government cannot levy penalty for not meeting indicative output levels.

"There is no obligation of the nature the Government now implies (i.e. an obligation to achieve certain target levels of production) anywhere in the Production Sharing Contract (PSC)," RIL's counsel wrote to the oil ministry on June 8.

In a 13-page letter, A S Daya & Associates point-by-point rebutted charges that the ministry had levied in imposing a penalty of over USD 1 billion for current output of 31.57 million standard cubic meters per day falling way short of the target of 80 mmscmd.
Refuting charges of violation of PSC, RIL's counsel stated that indicative output targets were given in USD 8.8 billion approved field development plan of 2006 "based on present day knowledge of the reservoir".

The Krishna Godavari basin reservoir has proved to be more difficult to exploit than previously predicted with high water and sand ingress in wells hampering production.
"There is no basis under the PSC to limit the contractor's recovery of its contract costs by reference to either the production levels achieved or the extent to which any facilities installed by the contractor may not be fully utilised," the letter said.

Oil Ministry says RIL did not drill committed wells which led to the fall in output and last month disallowed USD 1.005 billion of its cost already incurred saying lower production had led to under-utilisation of facilities.

RIL's counsel refuted the Oil Ministry stand that the company has breached terms of PSC and caused loss or prejudice to the Government.

The PSC, it said, envisages preparation of annual work programmes and Budgets and not the production of a defined quality of Hydrocarbons.

"The obligation under Article 10.9 (of the PSC) is to comply with Articles 10.11 to 1013 - which envisage the preparation of annual work programmes and Budgets - not the production of a defined quantity of hydrocarbons.

"The language of Article 10.13 is plain - the maximum quantity of production based on contractor's estimates (no the target quantity - much less the minimum quantity) is required to be approved by the (block oversight panel) Management Committee (MC) - with a view to ensuring that the development and production operations are consistent with Good International Petroleum Industry Practices," the counsel said.