RIL move for arbitration on KG D6 gas shot down by govt
RIL move for arbitration on KG D6 gas shot down by govt
New Delhi: In a blow to Mukesh Ambani-led Reliance Industries Ltd (RIL), the Union government has declined to join the arbitration proposed by the company to resolve the dispute over the recovery of cost for developing the D6 hydrocarbon field in the Krishna-Godavari (KG) basin.
Consequently, RIL will either have to challenge the government in court, or accept the petroleum ministry’s proposal to deny the $1.24 billion (around Rs6,343 crore today) in costs that it had claimed, a move that could potentially squeeze the company’s profit.
The move by the petroleum ministry is based on a legal opinion given by India’s solicitor general Rohinton F. Nariman.
Mint has reviewed a copy of the opinion.
A law ministry functionary who spoke on the condition of anonymity said: “RIL would have to agree on the cost-recovery issue, or take recourse to a court of law."
RIL had initiated arbitration proceedings in anticipation of the government’s reported move to restrict the cost recoverable by the company for developing the KG D6 field depending on the level of utilization.
Mint reported on 5 January the petroleum ministry’s proposal to deny the company $1.24 billion in costs. The ministry plans to disallow RIL this cost recovery from the D6 block for 2010-11 and 2011-12. Instead, the sum may be added to profit petroleum for the respective years. Profit petroleum is the government’s share from hydrocarbon blocks.
While a petroleum ministry spokesperson declined comment, questions emailed to an RIL spokesperson remained unanswered till press time.
RIL issued a “notice of arbitration" on 23 November last year, in which it proposed to appoint former chief justice of India S.P. Bharucha as its arbitrator and asked the ministry to appoint the second arbitrator. RIL cited media reports suggesting the government’s move to restrict the cost recovery as a reason for its action. In response, the petroleum ministry sought time from RIL to respond on the issue and asked the law ministry’s opinion on whether the government could ask RIL to drop the arbitration proceedings.
Nariman, in his opinion dated 19 January, said, “The fact (is) that the recovery of cost petroleum is a continuous and an ongoing process and has to be effected in the manner contemplated in Article 15 of the PSC (production-sharing contract). To the extent the parties disagree on the contractor’s right to recover cost petroleum, it would give rise to a dispute...until and unless a party is aggrieved by the process of recovery of cost petroleum (under Article 15), it cannot be said that a ‘dispute’ that is to be referred to arbitration has arisen."
Nariman also added, “It is clear that this stage has not been reached in the instant case."
RIL last year offloaded 30% of its stake in 21 hydrocarbon blocks, including D6, to London-based BP Plc for $7.2 billion.
The ministry 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. Mint reported on 14 September that 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 S. Jaipal Reddy accepted Nariman’s opinion. The production from the field has been below earlier projections and is currently at 35 million standard cubic metres per day.
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 2011 and has so far recovered $5.26 billion.
appu.s@livemint.com
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