New Delhi: The Directorate General of Hydrocarbons (DGH) has recommended to the petroleum ministry that Reliance Industries Ltd (RIL) surrender a deep-water block in the Krishna-Godavari basin.
To be sure, this isn’t the company’s famed D6 block, where one of India’s largest gas finds was made, but the KG-OSN-2001/1 one. But the move, if it goes through, could be a setback to RIL, which has spent some money prospecting in the block.
The DGH decision came because RIL missed the deadline of 19 November to declare the block commercially viable. Instead, it did so only on 12 February.
Interestingly, RIL had written to the government in March 2008 seeking an extension in the deadline, but the latter hasn’t responded to that request. Mint couldn’t ascertain when DGH made its recommendation on the surrender to the ministry.
However, Mint has reviewed a 19 March letter from RIL to the ministry, stating why the block should not be taken away from it.
DGH is a government body that manages the country’s petroleum resources and falls under the purview of the ministry of petroleum, which has the powers to overturn the directorate’s decisions or ignore its recommendations.
The ministry is yet to take a decision on this matter.
“We have already recommended the relinquishment of the block to the ministry. RIL has made certain representations to the ministry. The ministry has to take a decision,” said a senior DGH official, who did not want to be identified.
A spokesperson for RIL declined to comment on the issue as did the joint secretary in charge of exploration at the ministry, D.N. Narasimha Raju.
Once a company makes a discovery in a block, it assesses whether the find is commercially viable. After this it submits a so-called “notice of declaration of commerciality” to DGH, which, after conducting its own tests, can either accept or reject the claim.
Subsequently, if the claim is accepted, the company prepares a development plan detailing development costs.
According to production sharing contracts (PSCs) that all operators (or company’s exploring blocks) sign at the time they are awarded the blocks, the government’s share from the hydrocarbon block, also known as profit petroleum, typically comes only after the company recovers all its costs.
Commercial production begins only after the development plan is approved by a management committee, comprising representatives from the government, DGH and the operator.
RIL, in its representation addressed to Raju, has cited the clause in the PSC under which a company can seek an extension in the exploration period by 30 months. The company had made a request to the government for the same on 10 March 2008, which according to the production sharing contract should have been extended till 17 September 2010. However, it received no confirmation regarding this.
In its 19 March communication, RIL said: “...with our having conducted the appraisal program within the 30 months period, it is in our view unfair and unjust that the DGH, who has been silent all along on our various requests for grant of extension and who has continuously been informed of the conduct of the appraisal program, should require us to relinquish the block.”
An expert said RIL had a case.
“The final outcome needs to be decided by the petroleum ministry keeping in mind that every situation that will evolve in an exploration programme can’t have a pre-decided framework in the PSC. (However) if the ministry decides that RIL has to relinquish the block, it will certainly impact RIL,” said Gokul Chaudhri, partner at audit and consulting firm BMR Advisors.
• Production sharing contract for the block came into effect on 3 April 2003
• First exploration phase ended on 17 March 2008
• No. of discoveries made during the first exploration phase: 3
• Notice of declaration of commerciality submitted by RIL: 12 February 2010
• Last date of notice of declaration of commerciality as per the production sharing contract: 19 November 2009