BackOil ministry may deny RIL cost claim
Oil ministry may deny RIL cost claim
PremiumRIL chairman Mukesh Ambani. File photo
New Delhi: India’s petroleum ministry has gone on the offensive in its ongoing dispute with Reliance Industries Ltd (RIL) and is proposing to deny $1.24 billion (around ₹ 6,585 crore today) in costs claimed by the company on the D6 field in the Krishna-Godavari (KG) basin, which could potentially put the squeeze on its profits.
Not only is it proposing to restrict the costs that the company can claim before working out the revenue share with the government in the D6 field in the KG basin, the ministry is also refusing to join arbitration proceedings that have been initiated by the company. D6, off the Andhra Pradesh coast, is India’s largest gas find.
Further, documents reviewed by Mint disclose that the ministry is of the opinion that “the claimant (RIL) has not made any effort to settle the dispute. As such, the arbitration is not entitled to be entertained", and has sought the law ministry’s view ahead of communicating this message to RIL.
“The expected communication will be addressed to RIL, the operator, Niko Resources Ltd, the contractor, and BP Plc," said a top-ranking government official requesting anonymity.
RIL last year offloaded a 30% stake in 21 hydrocarbon blocks, including D6, to London-based BP for $7.2 billion.
RIL had initiated 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.
“Since the matter is under arbitration we will not comment on the same," an RIL spokesperson said in an emailed response to questions.
An oil ministry spokesperson declined to comment. A spokesperson for BP declined to comment and questions emailed to Niko remained unanswered at press time. S.K. Srivastava, director general of hydrocarbons, declined comment.
The ministry’s objections are based on section 33.1 of the production-sharing contract: “The parties shall use their best efforts to settle amicably all disputes, differences or claims arising out of or in connection with any of the terms and conditions of this contract or concerning the interpretation or performance thereof."
The ministry also plans to restrict the recovery of costs incurred by RIL for the excess capacity created in block KG-DWN-98/3 and limiting such recovery of costs only to the extent of the infrastructure used. It has also sought the law ministry’s approval for this.
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, oil minister Jaipal Reddy accepted Nariman’s opinion. The production from the field has been below earlier projections.
The KG D6 block is at the centre of the controversy that erupted 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 oil ministry had then 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. RIL had invested $5.69 billion in the block as of 31 March and recovered $5.26 billion.
Gas production at KG D6 has been falling over the past few months.
Nariman’s legal opinion also noted that RIL hadn’t met production commitments that it had accepted. The amendment to the initial development plan submitted by the company 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. The gas output was around 38.61 mscmd till October.
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".
appu.s@livemint.com
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