KG Basin: Reliance Industries disallowed $380 million more in cost recovery

Disallowing cost recovery leads to more profits to be shared between RIL and the govt, the oil ministry sought $51.6 million as extra profit share for 2014-15


On a cumulative basis, the additional profit petroleum the government has sought so far has reached $246.9 million. Photo: Bloomberg
On a cumulative basis, the additional profit petroleum the government has sought so far has reached $246.9 million. Photo: Bloomberg

New Delhi: Reliance Industries Ltd (RIL) on Thursday said the government had disallowed the company from recovering a cost of $380 million relating to its Krishna Godavari basin gas production for 2014-15 for not meeting output targets.

Reliance said in a stock exchange filing that this takes the total cost recovery disallowed so far to $2.756 billion in a dispute that started in 2011 and is presently in arbitration.

Since disallowing cost recovery leads to more profits to be shared between the company and the government as per a formula in their contract, the oil ministry has demanded $51.6 million as extra profit share for 2014-15. On a cumulative basis, the additional profit petroleum the government has sought so far has reached $246.9 million. This represents 8.9% of the aggregate disallowed cost.

Profit petroleum refers to profits from gas production after recovering costs that is available for sharing between the contractors and the government.

“We also clarify that the government has already collected gross $81.7 million in gas pool account towards the aforesaid claim. We reiterate that all claims made by the government are denied by the contractor group,” said the RIL statement.

RIL said that every year, the oil ministry revises the total cost it proposes to disallow, adds it to figures of previous years and demands additional profit petroleum as government share, which the firm disagrees with.

Gas production from the Dhirubhai-1 and 3 gas fields in the KG-D6 block was to reach 80 million metric standard cubic meters a day (mmscmd) but actual production fell below the estimate and was only 35.33 mmscmd in 2011-12 due to water and sand ingress in some of the wells. It gradually tapered and is less than 10 mmscmd at present.

Oil minister Dharmendra Pradhan informed Parliament on 3 August 2015 that the disallowance of cost was computed based on the cumulative shortfall in production of gas vis-a-vis production estimates under the approved addition to the initial development plan.

The outcome of the arbitration proceedings will determine the further course of government action on the matter. Total expenditure in the KG-D6 block up to 31 March 2014 was $11.28 billion, Pradhan said.

The Reliance-BP-Niko Resources consortium’s gas production from the KG basin has gone through several controversies under a tight regulatory regime in which the price of gas produced, investments and gas field operations are strictly regulated.

Also, the Comptroller and Auditor General of India had in 2011 said the profit-sharing formula between the state and the companies was prone to what it called ‘front-loading’ of expenditure, which leads to delays in government getting its share of profits.

That led to several expert panels recommending a shift to a simple revenue-sharing formula for oil and gas exploration contracts from profit sharing, which the Narendra Modi government announced on 10 March for new blocks to be auctioned. Blocks already licensed, including KG-D6, continue to be governed by the previous formula.

The simpler regulatory regime and a more liberal pricing formula for gas trapped in deep water, ultra deep water, high pressure and high tension areas which was announced in March has revived investor interest in India’s gas fields in spite of the finance ministry initiating a gradual elimination of all tax exemptions including that allowed for the hydrocarbon sector.

Anish De, partner and head of the oil & gas practice at KPMG in India, said the government had recognised that without liberalising market access and pricing regime for exploration and production players, the sector will not be able to attract investments.

There is a considerable push through the new policies to free up the sector and encourage new investments, said De.

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