After slapping a hefty penalty of over USD 1 billion on Reliance Industries for failing to meet gas output targets,the Oil Ministry said the company’s five-month old arbitration notice on the issue was not valid and a fresh notice was required if it were to contest the fine.
Oil Ministry had on May 2 written to RIL disallowing USD 1.005 billion out of the USD 5.756 billion investment it had made on developing Dhirubhai-1 and 3 (D1&D3) gas fields in the Bay of Bengal deepsea block KG-DWN-98/3 (KG-D6) as current output of 27.52 million standard cubic meters per day was way short of the target of 80 mmscmd for this time of the year.
The fall in output,which the ministry blamed on RIL not drilling its committed quota of wells,had led to a large chunk of production facilities lying unused or under-utilised,a top ministry official said today.
RIL had anticipated such a move and had on November 23 slapped an arbitration notice on the ministry saying the Production Sharing Contract (PSC) allows operators to recover all their investment and cost recovery was no way linked to level of production.
The ministry,based on an opinion of the Solicitor General Rohinton Nariman,had rejected the arbitration saying no dispute had arisen. RIL last month moved Supreme Court seeking appointment of arbitrators.
“At that time there was no dispute. And this is not just us but even SGI saying so. Now that we have initiated the process of restricting cost recovery,they have a right to resort to dispute resolution mechanism as set out in PSC,” he said.
“But they (RIL) will have to issue a fresh arbitration notice. The previous one is not valid as that was issued based on apprehensions and on media reports of a possible action. If they want to contest our move,they will have to issue a fresh arbitration notice,” another top official said.
The ministry’s 7-page notice,signed by Giridhar Aramane,Joint Secretary (Exploration) in the Oil Ministry,that was faxed to RIL and its partner Niko Resources’ Mumbai offices,stated that USD 457 million of cost would be disallowed in 2010-11 and USD 1.005 billion in 2011-12.
The official clarified that the USD 1.005 billion was cumulative cost recovery disallowed and should not be seen as additional penalty.
The cumulative cost disallowed is higher than USD 778 million that the ministry had been previously contemplating.
The drop in reservoir pressure coupled with increased water and sand ingress has seen output from D1&D3 fall from 53-54 mmscmd achieved in March 2010 to 27.5 mmscmd last month,instead of rising to projected 80 mmscmd for current year.
The Ministry feels the drop in production had resulted in under-utilisation or creation of excess capacity and wants to disallow cost recovery in proportion to that.
The Production Sharing Contract (PSC) allows an operator to deduct all capital and operating expenses from the revenue it earns from sale of hydrocarbons — called cost recovery before sharing profits with the government.
Sources said the ministry had previously wanted to disallow USD 457 million of cost recovery for 2010-11 and USD 778 million of cumulative cost recovery in 2011-12. The Ministry and its technical arm,the Directorate General of Hydrocarbons (DGH) is to yet approve accounts for the four years – 2008-09,2009-10,2010-11 and 2011-12 and the amount of cost disallowed will be adjusted when they are finalised.
RIL had made a capital expenditure of USD 5.756 billion in D1&D3 development,of which about USD 4.57 billion was incurred on production facilities alone.
The notice states that against this RIL and its partners have so far recovered around USD 7.764 billion in capital and operating expenditure upto March 31,2012.
“While you have failed to observe and comply with the Amended initial development plan and are in breach of PSC,you have only been interested in recovery of your costs,which you are not entitled to under the PSC,” it said.
Interestingly,the notice has not been sent to BP,which last year bought 30 per cent interest in KG-D6 and 20 other blocks of RIL for USD 7.2 billion. RIL is the operator of KG-D6 block with 60 per cent stake and the balance 10 per cent is held by Niko.
D1&D3 are producing about 27.5 mmscmd as against 61.88 mmscmd committed by RIL in its development plan for the fields for 2011-12 fiscal. The output should have touched 80 mmscmd this year.
Sources said RIL as per the approved field development plans,should have put 22 wells on production for 61.88 mmscmd and 31 wells for 80 mmscmd this year.
But the company has so far drilled 22 wells on the fields but has put on production only 18 wells. The other four have not been connected to production system as they contain uneconomical reserves.
Of the 18 wells,six had to be shut because of high water and sand ingress and fall in pressure. RIL believed that the field has not behaved as predicted and so indiscriminate drilling would be a big drain on cost.
But the ministry held RIL responsible for violation of its committed work programme in the PSC and slapped cost recovery disallowing notice,they added.
Together with 6.37 mmscmd of output from MA oilfield in the same block,KG-D6 output is around 34 mmscmd currently.