New Delhi: In what could pose fresh problems for Mukesh Ambani-led Reliance Industries Ltd (RIL), India’s oil ministry may link recovery of costs to capacity utilization at the D6 block in the Krishna-Godavari basin, India’s largest discovered natural gas reservoir.

The ministry’s move is aimed at protecting the exchequer’s share of future revenue from the sale of gas from the block.

“On 9 November, petroleum minister S. Jaipal Reddy accepted the solicitor general’s opinion," a top government official said, speaking on condition of anonymity.

“The (oil) minister and I are on the same page," law minister Salman Khurshid said in a text message. “We feel ambiguities are best cleared by arbitration."

“I will neither deny nor confirm the news," Reddy said. An official spokesperson of the oil ministry declined comment.

File photo of sea exploration equipment at KG-D6 basin

Such front-loading of the costs means the revenue to be shared with the government reduces correspondingly. RIL had invested $5.69 billion in the block as on 31 March and recovered $5.26 billion.

“We have not received any such communication from MoPNG (ministry of petroleum and natural gas), therefore, (we) cannot comment," said an RIL spokesperson.

Based on the solicitor general’s opinion, as much as $1.85 billion—out of the $5.69 billion investment already made—will be disallowed and arbitration initiated to recover it from RIL, the Press Trust of India reported on Sunday, quoting people close to the development whom the news agency did not name.

Mint had reported Nariman’s suggestions on 14 September.

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".

In his opinion, Nariman suggested that the government recover from the company the revenue share related to the excess costs it has already deducted.

“The government will need to fully ascertain the time periods in which and the manner in which the contractor has already made recoveries, and may take recourse to the provisions of Article 15.11 for this purpose," Nariman opined. “In the event the contractor does not agree to reverse cost recoveries already made, the government will have to take recourse to the dispute resolution provisions set forth in Article 33 of the PSC (production-sharing contract)."

The legal opinion also noted that RIL hadn’t met production commitments to which it had agreed. The amendment to the initial development plan submitted by the firm projects a gas production of 61.88 million standard cu. m per day (mscmd) from 1 July 2010 and 80 mscmd from 1 July 2011.

“The company is currently producing 35 mscmd from the block," an oil ministry official said on condition of anonymity.

The D6 block is also at the centre of a controversy after the Comptroller and Auditor General of India said in a report that RIL had breached some terms of its contract with the government.

According to the government’s independent auditor, while the private company submitted an initial development plan involving expenditure of $2.4 billion in May 2004, it made an addendum to the initial development plan in October 2006 with an estimated capital expenditure of $5.2 billion for phase I and $3.6 billion for phase II.

The issue of cost recovery has also caught the statutory auditor’s attention. Mint reported on 11 October its concerns on the costs claimed by RIL to develop the D6 block.

The auditor said the government should attempt negotiating with RIL on costs and how they should be recovered only after a proper audit of the expenditure incurred by the company after 2008-09.

PTI contributed to this report.