Oil regulator DGH has recommended an additional penalty of USD 781 million on Reliance Industries,taking the total fine on the company for producing less than projected natural gas from KG-D6 fields to USD 1.786 billion.
The Directorate General of Hydrocarbons (DGH) last month recommended to the Oil Ministry that USD 781 million of the cost RIL has incurred in KG-D6 fields be disallowed for producing only an average of 26.07 million cubic meters per day of gas as against the target of 86.73 mmcmd in 2012-13.
This will be in addition to USD 1.005 billion in cost recovery already disallowed for output falling short of targets during 2010-11 and 2011-12,a top official said.
“DGH had in July 22 letter proposed for disallowance of cumulative cost recovery amounting to USD 1.786 billion (USD 1.005 billion for plus USD 781 million) up to FY 2012-13 towards creation of excess capacity,” he said.
It blamed RIL for not drilling its committed quota of wells leading to fall in production,resulting in a large chunk of production facilities lying unused or under-utilised.
RIL has built infrastructure to handle 80 mmscmd of output but is currently producing less than 14 mmscmd.
As per the production sharing contract,RIL and its partners BP Plc and Niko Resources are allowed to deduct all of the capital and operating expenses from sale of gas before sharing profits with the government. Creation of excess or unutilised infrastructure impacts government’s profit share and this is being sought to be corrected by disallowing part of the cost.
DGH,the official said,stated that after cost disallowance,RIL would be required to pay USD 114 million in additional profit petroleum to the government for 2012-13 in addition to USD 103 million that was already due.
The Oil Ministry is yet to act on the advice of DGH as the previous cost recovery disallowance notice is under arbitration.
While DGH made a case against RIL for not meeting the gas output projects,the regulator in a separate communication to the ministry took a diagonally opposite view on the issue of capping gas prices and the company being asked to deliver gas shortfall at old prices.
It said companies cannot be held against the projected output in a field development plan due to the dynamic nature of the exploration and production.
DGH Head of PSC Anurag Gupta on August 1 wrote that projected production in most blocks would not be identical with actual output “because of the dynamic nature of exploration and production activities which need to be adapted to suit the ground realities and operational requirements.”
RIL and its partners have so far made USD 5.768 billion investment in developing the Dhirubhai-1 and 3 (D1&D3) gas field in KG-D6 block and another USD 1.74 billion in the MA oilfield in the same area. Another USD 1.774 billion has been spent as production expenses or operating cost.
The Ministry had in May 2012 slapped a notice disallowing USD 457 million of cost till 2010-11 and USD 1.005 billion till 2011-12.
The average gas production from KG-DWN-98/3 (KG-D6 block) during the current year should have been 86.92 mmcmd as per the approved field development plans for D1,D3 and MA fields in this block,which are currently on production.
The output has dropped after hitting a peak of about 62 mmcmd in August 2010.
The production has fallen as half of the wells on D1&D3 and a third of those in MA field have shut due to water loading/sand ingress. Additionally,DGH blames RIL for not drilling all of its committed 31 wells on D1&D3.
RIL on the other hand attributes the fall to substantial variance in reservoir behaviour and character than previously predicted sharp decline in pressure and early water production in some wells.