Oil Min seeks legal opinion on levying $781 mn penalty on RIL

Oil Min seeks legal opinion on levying $781 mn penalty on RIL

Oil Min seeks legal opinion on levying $781 mn penalty on RIL

The Oil Ministry has sought legal opinion on levying an additional penalty of USD 781 million on Reliance Industries for failing to produce pre-stated volumes of natural gas from its flagging KG-D6 field in 2012-13.

Oil Secretary Vivek Rae said the government has already issued a notice to RIL for a USD 1.005 billion penalty for shortfall in production during 2010-11 and 2011-12. The Mukesh Ambani-run firm has initiated arbitration against the levy.

"We have already issued a notice for the penalty of USD 1 billion. For 2012-13, we are examining what needs to be done, whether the higher penalty is to be imposed and if so in what manner. We are seeking the advise of the Law Ministry right now," he told reporters here.

The Directorate General of Hydrocarbons had in July recommended to the Oil Ministry that USD 781 million of the cost RIL has incurred in KG-D6 fields be disallowed for producing only an average of 26.07 million cubic meters per day of gas as against the target of 86.73 mmcmd in 2012-13.

This will be in addition to USD 1.005 billion in cost recovery already disallowed for output falling short of targets during 2010-11 and 2011-12.

The arbitration has not begun because the two arbitrators appointed by RIL and the government are yet to agree on a neutral presiding judge for the proceedings.

CPI leader Gurudas Dasgupta has previously alleged that Oil Minister M Veerappa Moily was scuttling the arbitration proceedings but when RIL moved the Supreme Court seeking appointment of the third arbitrator at the earliest, he too moved the Apex Court seeking stay on the arbitration proceedings.

Officials said since arbitration proceedings on the previous penalty issue are yet to commence, it was thought prudent to seek opinion of the Law Ministry on levying further penalty.

DGH blames RIL for not drilling its committed quota of wells for the fall in production that has resulted in a large chunk of production facilities lying unused or under-utilised.

RIL has built infrastructure to handle 80 mmscmd of output but is currently producing less than 14 mmscmd.

As per the production sharing contract, RIL and its partners BP Plc and Niko Resources are allowed to deduct all of the capital and operating expenses from sale of gas before sharing profits with the government. Creation of excess or unutilised infrastructure impacts government's profit share and this is being sought to be corrected by disallowing part of the cost.

DGH, the official said, stated that after cost disallowance, RIL would be required to pay USD 114 million in additional profit petroleum to the government for 2012-13 in addition to USD 103 million that was already due.

RIL and its partners have so far undertaken USD 5.768 billion investment in developing the Dhirubhai-1 and 3 (D1&D3) gas field in KG-D6 block and another USD 1.74 billion in the MA oilfield in the same area. Another USD 1.774 billion has been spent as production expenses or operating cost.

The Ministry had in May 2012 slapped a notice disallowing USD 457 million of cost till 2010-11 and USD 1.005 billion till 2011-12.

The average gas production from KG-DWN-98/3 (KG-D6 block) during the current year should have been 86.92 mmcmd as per the approved field development plans for D1, D3 and MA fields in this block, which are currently on production.

The output has dropped after hitting a peak of about 62 mmcmd in August 2010.
The production has fallen as half of the wells of D1&D3 and a third of those in MA field have shut due to water loading/sand ingress. Additionally, DGH blames RIL for not drilling all of its committed 31 wells on D1&D3.

RIL on the other hand attributes the fall to substantial variance in reservoir behaviour and character than previously predicted sharp decline in pressure and early water production in some wells.