RIL’s KG basin compensation bill could be over $1.3 billion

The compensation is likely to be calculated at the prevailing gas price in 2009-15 without any allowance for production cost

Without allowing for costs, the benefit of gas from ONGC’s field that went to RIL works out to over $1.3 billion.
Without allowing for costs, the benefit of gas from ONGC’s field that went to RIL works out to over $1.3 billion.

New Delhi: The oil ministry is set to ask Reliance Industries Ltd to pay the government over $1.3 billion for allegedly drawing about 8.9 billion cubic metres (BCM) of gas that flowed into its deep-water block in the Krishna Godavari basin from the neighbouring field of state-owned Oil and Natural Gas Corp. Ltd.

The Justice A.P. Shah panel, which went into ONGC’s claim that the fields of the two companies were connected, said in his report submitted to oil ministry on 31 August that the government should quantify the ‘unfair enrichment’ that allegedly accrued to Reliance due to flow of gas from ONGC’s field to Reliance’s during the six years from 2009.

The compensation will be calculated at the then prevailing gas price without any allowance for cost of production, said a government official involved in the deliberations, who asked not to be named.

Without allowing for costs, the benefit of gas from ONGC’s field that went to Reliance works out to over $1.3 billion, taking gas price of 4.2 per million British thermal unit (mBtu) that prevailed for most of the 2009-15 period. The price was increased once towards the end of the period by the government, which could drive the compensation a bit higher.

One BCM, a unit of volume, of gas accounts for 35.7 trillion Btu, a unit of energy which is used in gas pricing.

Emails sent to Reliance and ONGC on Friday evening remained unanswered at the time of publishing. Reliance is expected to make a statement after it receives any communication from the government.

“It is simple arithmetic of quantum of gas produced (by Reliance) which flowed from the adjacent connected field (of ONGC) and the price of gas that prevailed at that time. Recovery of cost of production from revenue is permitted only for gas that belongs to the field licensed to the contractor concerned,” explained the government official cited above.

This is despite the fact that Reliance’s contract with the government for the KG D6 block is based on profit sharing. Under the profit-sharing regime, companies vie for contracts based on how much cost they can recover and how much profit they can share with the government at different rates of production.

The Shah panel also said whatever benefit the company received in terms of the migrated gas was liable to be returned to the government of India, not to ONGC, which the panel said had no ownership rights over the natural resource. The ministry then asked the upstream regulator the Director General of Hydrocarbons (DGH) to calculate the compensation. The government is likely to finalise the figure shortly.

While making the recommendation, Justice Shah relied on the estimate of gas flow between the fields arrived at by DeGolyer and MacNaughton, the US-based consultancy jointly hired by the companies.

The government has since revamped the hydrocarbon licensing regime to cut down litigation and to improve the ease of doing business. Before new oil and gas blocks will be auctioned under the new Hydrocarbon Exploration Licensing Policy (HELP) cleared by union cabinet on March 10, the oil ministry will launch a massive communication drive to make investors aware of the contractual provisions, which could help in reducing litigation.

“The new revenue sharing regime under HELP, which replaced the earlier profit-sharing formula in oil and gas contracts, does not require cost approvals and is less prone to interpretations and subjectivity in decision making,” said Anish De, partner and head of oil and gas, KPMG in India. De said that having a quick dispute resolution mechanism for industries across sectors will help in improving the ease of business in the country.