Oil ministry bars RIL from $1.2-bn KG cost recovery

* Serves notice on RIL for allegedly not meeting output target

Written by ENS Economic Bureau | New Delhi | Published:May 4, 2012 12:55 am

The petroleum ministry has slapped a notice on Reliance Industries (RIL) restraining it from recovering about $1.2 billion of cost from its deepwater D6 block in the Krishna-Godavari (KG) Basin for allegedly failing to put the committed number of wells to production. The move,in anticipation of which RIL had moved the Supreme Court last month,could potentially dent the company’s margins.

The government wants to reduce the recovery of costs in sync with the utilisation of the infrastructure built. RIL,however,believes there is no provision for “partial cost recovery” in the production sharing contract. The company,which has built capacity for handling 120 million metric standard cubic metres (mmscmd) of gas,was expected to produce over 60 mmscmd by April and 80 mmscmd by the end of the year. The production is now hovering around just 34 mmcsmd. Flagging production led to utilisation of just over a quarter of the infrastructure the consortium had built.

The ministry’s notice disallows RIL from recovering $457 million for 2010-11 and $778 million for 2011-12. As per the approved field development plan,RIL should have put 22 wells on production by April but the company has done so only for 18 wells as it has found connecting more wells would not improve natural gas output. Now,the block produces about 34 mmscmd against the targeted 70 mmscmd.

Production from the D6 field has been declining over a period due to the change in reservoir conditions,forcing RIL to rope in global energy major BP as a 30 per cent partner on 23 oil and gas blocks including D6.

Anticipating the government move based on media reports,RIL recently moved the Supreme Court to direct authorities to appoint an arbitrator to resolve the dispute. Government sources said RIL’s pre-emptive action would be rendered irrelevant and it would now have to respond to the notice,perhaps with the approval of the court. The ministry’s notice says RIL has so far spent $5.69 billion on development of D1 and D3 gas fields in the block. Of this,RIL has recovered about $5.258 billion from sale of gas.

The oil ministry’s notice stems from the recent adverse observations made by the Comptroller and Auditor General of India about the management of the block. After securing statutory approvals,RIL had increased its capital expenditure from $2.39 billion to $8.8 billion for the D1 and D3 discoveries in the K G basin hoping production will go up. Higher capital spending lowers the government’s share of profits from gas sales unless production goes up commensurately. The CAG observed that the increase in capital expenditure for the block casts doubts on the robustness of the data and assumptions underlying the development plan.

RIL has maintained that as a contractor,it remains committed to complying with the PSC provisions and procedures including adopting good international petroleum industry practices. It is the operator and the partners,who bore the risk of making huge investments and not the government. Therefore,the operator is entitled under the contract to recover the entire cost from the revenues generated,the company had stated last November when reports surfaced about government’s move to restrict the company’s cost recovery.

FE

Dip in production

The government wants to reduce the recovery of costs in sync with the utilisation of the infrastructure built

RIL,however,believes there is no provision for “partial cost recovery” in the production sharing contract

As per the approved field development plan,RIL should have put 22 wells on production by April

But the company has done so only for 18 wells as it has found connecting more wells would not improve natural gas output

Now,the block produces about 34 mmscmd of gas against the targeted 70 mmscmd

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