DGH recommends disallowing USD 800 mn from RIL cost

DGH recommends disallowing USD 800 mn from RIL cost

DGH recommends disallowing USD 800 mn from RIL cost

In fresh setback to Reliance Industries, oil regulator DGH has recommended shaving off over USD 800 million from the cost incurred by the company on its flagging eastern offshore KG-D6 fields.

The Directorate General of Hydrocarbons (DGH) recommended the reduction in view of production from the fields not matching the projections, sources with direct knowledge of the development said.

RIL in the accounts for 2011-12 submitted to DGH, claimed USD 4.215 billion as cost that is yet to be recouped from sale of oil and gas from the fields.

The company has till date spent USD 10.05 billion on the block, which it can contractually recover from sale of oil and gas and is obliged to share profits or spoils with the government only after recouping those expenses.

Sources said of the USD 4.215 billion cost that RIL stated was yet to be recovered, DGH made some deductions to put the contract cost that is to be recovered at USD 3.408 billion.

The cost recovery that DGH has disallowed is part of the USD 1.786 billion penalty it has recommended to be imposed on RIL for failing to produce pre-stated volumes of natural gas from KG-D6 fields.

Based on its suggestion, the government has already issued a notice to RIL disallowing USD 1.005 billion in cost for shortfall in production during 2010-11 and 2011-12. (USD 457 million for 2010-11 and the rest for 2011-12). The Mukesh Ambani-run firm has initiated arbitration against the levy.

The cost being disallowed now is part of that even though the matter is pending in arbitration, they said.

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.

DGH had in July recommended to the Oil Ministry that a further 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.

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.

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