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DGH raises penalty on RIL to $1.8 bn as gas supply from KG-D6 falls

The oil sector’s quasi-regulator has raised the penalty on Reliance Industries Ltd

Written by Amitav Ranjan | New Delhi | Published: August 7, 2013 1:54:30 am

The oil sector’s quasi-regulator has raised the penalty on Reliance Industries Ltd (RIL) to $1.8 billion to reflect the sharp fall in natural gas supply from Dhirubhai 1 and 3 gas fields in KG-D6 block.

“Directorate General of Hydrocarbons vide letter July 22,2013,has proposed for disallowance of cumulative cost recovery amounting to $1,797 million up to financial year 2012-13 towards creation of excess capacity,” says a DGH note.

This translates into a whopping $792 million loss for RIL in 2012-13 on account of non-reimbursement of costs as the petroleum ministry disallowed $1.005 billion up to 2011-12 on DGH’s advice.

The upstream regulator’s proposal is pending with the ministry and has not been conveyed to RIL yet.

“We have not heard anything on this issue from the government and since the matter is sub-judice,we would not comment,” said RIL spokesperson when asked if the company had been informed of the penalty.

Reliance has challenged the ministry’s last year order to disallow $1.005 billion as cost recovery and the matter is under arbitration. RIL and the government have appointed arbitrators to decide on the issue.

The Comptroller & Auditor General of India accused RIL of building surplus infrastructure in D6 block and the ministry later disallowed recovery of part of the field development costs from 2010 onwards in proportion to the drop in gas volumes.

Gas output fell sharply from peak 62 million standard cubic meters per day (mscmd) in August 2010 to present average of 14 mscmd.

The DGH’s July 22 penalty assessment is culled from the revised field development plan (RFDP) submitted by RIL last August which also shows that the exploration firm has lowered its capital expenditure claims on both fields to $6.257 billion from the controversial $8.836 billion questioned by the CAG.

“The proposed RFDP does not envisage drilling of 28 (out of the 50) wells and associated completion facilities approved earlier in the Addendum to Initial Development Plan (approved on December 2006) amounting to $2.579 billion,” says the DGH note.

It says that RIL has “categorically stated that it is not possible to increase the production from the present level due to geographical complexities” and has warned that a “Do Nothing” scenario — meaning not investing in new compressors — at the facilities would result in D1 and D3 stopping supply gas from 2016-17.

RIL was required to drill,connect and put on production up to 40 wells in April 2013 for delivering 80 MSCMD of gas but it has so far drilled 22 wells and 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,nine 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.

The exploration firm has informed the DGH that it plans to complete the four wells that it drilled in 2010-12 and put them on stream by mid-2014.

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