Weary Reliance abandons KG-D6 over access rules

Pricing uncertainty was additional pain point

Mukesh Ambani-controlled Reliance Industries (RIL) on Wednesday decided to relinquish one of its Krishna Godavari basin gas discovery block, KG-D6, because of access restrictions imposed by the Defence Ministry.

RIL, which had made four consecutive gas discoveries with close to 500 billion cubic feet of in-place reserves in block, proposed immediate relinquishment, its minority partner Hardy Oil and Gas plc of UK said on Wednesday. On 23 December 2014, the D3 Management Committee considered a proposal from RIL, the operator of the D3 block, in which the company holds a 10 per cent interest, for the relinquishment of the block.

The proposal set out that as per the Government of India (GoI) notification O-22013/27/2012-ONG-D-V dated 10th November 2014, access restrictions have been imposed by the GoI and the operator recommended the relinquishment of the block with immediate effect under clause 3.1 (a), and (e) and 3.2, of the referenced government policy, Hardy Oil said.

RIL conveyed that the previously announced access restrictions imposed by the Defence Ministry rule out any further exploration/development activities in the impact zone area and inhibited the contractor from undertaking any further work and investment in the unrestricted area of the block due to the anticipated increase in cost and risk.

This untenable position was further compounded by the uncertainty of natural gas pricing following the GoI policy announced earlier in the year which imposed pricing at a significant discount to expectation of regional market pricing.

The relinquishment of the block will release Hardy from any further work programme liability including any further financial liability related to unfinished minimum work programme penalties. However, $22,033,290 of the company’s intangible assets, which are attributable to the D3 block, will be subject to write down in the current financial year.

Hardy holds 10 per cent stake in the block which is operated by RIL with 60 per cent interest. BP of UK has the remaining 30 per cent stake. Hardy Oil and Gas Plc is an upstream oil and gas company focused in India. Its portfolio includes a blend of exploration, appraisal, and production assets. It is the operator of the PY-3 oil field (shut-in July 2011) located offshore India's east coast in the Cauvery basin. Hardy also has interests in two other offshore exploration blocks in India’s Saurashtra, and Cauvery basins.

The production sharing contract for the D3 block was signed on September 23, 2005 and RIL subsequently carried out substantial work in the block in the exploration phase, spending more than $220 million. In doing so, the D3 joint venture completed nearly twice the amount of seismic activities in comparison to the minimum work programme, and drilled four of six committed exploration wells.