New Delhi: The government appears to have altered its stand on limiting the costs Reliance Industries Ltd (RIL) can recover from its investments in the D6 field in the Krishna-Godavari (KG) basin, with oil minister S. Jaipal Reddy saying on Friday that it would not try to change the terms of its the production-sharing contract (PSC) with the company.
“There will be no change in the PSC,” Reddy said on the sidelines of the third India-Africa Hydrocarbon Summit. “If there are changes, they will be from the 10th round of Nelp (new exploration licensing policy)…we will do nothing which will affect the pace and quantum of production at KG basin.”
His remarks come in the backdrop of RIL initiating arbitration proceedings in anticipation of the government’s reported move to restrict the cost recoverable by the firm for developing the KG D6 field depending on the level of utilization.
The production from the field has been below earlierprojections.
Interestingly, in response to a question about whether the PSC provides for restricting cost recovery, news agency PTI had cited petroleum secretary G.C. Chaturvedi on 22 November as saying “we are studying that”, and clarifying that the government would not hesitate “to amend the PSC if required”.
A spokesperson for RIL declined to comment.
Mint reported on 14 September that India’s solicitor general Rohinton F. Nariman had given an opinion to the oil ministry stating that RIL only be allowed to recover costs proportionate to the level of utilization of the field. On 9 November, Reddy accepted Nariman’s opinion.
The KG D6 block is also at the centre of a controversy after the Comptroller and Auditor General of India said in a report that RIL had breached some terms of its contract with the government.
“The move by RIL for arbitration is under our consideration. There is a provision in PSC for arbitration. Therefore, I see no problem in this. We need to seek advice and will expedite the process. The interpretation (of the PSC) will be among the issues for arbitration apart from the cost,” Reddy said.
The oil ministry had sought the views of the law ministry, which in turn passed on the request to Nariman, after RIL failed to meet its own target for gas generation in the KG D6 offshore block, despite having claimed associated costs as deductions before estimating the profit to be shared with the government. Such front-loading of the costs means the revenue to be shared with the government drops correspondingly.
File photo of sea exploration equipment KG-D6 basin
RIL had invested $5.69 billion (around Rs 29,700 crore today) in the block as of 31 March and recovered $5.26 billion.
Toning down the tough stance taken by the government, Reddy said, “I have no reservation at all about the pace of gas output on KG basin. If there are some points of dispute, they will be discussed.”
Gas production at KG D6, India’s largest gas reservoir located off the eastern coast, has been falling over the months. The legal opinion also noted that RIL hadn’t met production commitments to which it had agreed. The amendment to the initial development plan submitted by the firm projects a gas output of 61.88 million standard cubic metres per day (mscmd) from 1 July 2010, and 80 mscmd from 1 July 2011.
For the first half of fiscal 2012, gas output averaged 46.6 mscmd, according to an RIL investor presentation.
In his opinion given to the law ministry on 17 August, Nariman said: “The costs/expenditure incurred in constructing production/processing facilities and pipelines that are currently underutilized/have excess capacity cannot be recovered against the value of petroleum” by the company, and advised the government not to “allow cost recoveries on this account in future periods”.