Govt disallows another $579 mn of RIL’s KG-D6 block costs

The government has disallowed another $579 million of investments Reliance Industries claims to have made in the KG-D6 oil field in the east coast of India as production of natural gas from the once-prolific field plummeted to a trickle.

This takes the cumulative cost disallowed for production shortfall in the KG-D6 field, operated by Reliance Industries and its partners, BP and Niko Resources, to $2.376 billion.

Production from the KG-D6 field has steadily deteriorated over the past four financial years even as investment claims have mounted.

The management board of the KG-D6 field that includes the petroleum ministry and its technical arm, the Directorate-General of Hydroarbons (DGH) is not bound to accept investment claims unless the operator meets production targets.

The latest round of investment disallowance takes the total penalty on RIL for missing production target in the four fiscal years beginning 1 April 2010 to a cumulative $2.376 billion, petroleum minister Dharmendra Pradhan informed the Lok Sabha today.

The production sharing contract (PSC) allows RIL and its partners BP Plc and Niko Resources to deduct all capital and operating expenses from the sale of gas before sharing profit with the government.

RIL continued to show billions of dollars in investment in the KG even as gas production has been steadily declining

Investment claims will increase the share of profits for RIL and its partners while the government will lose its share. Disallowing non-productive investments will result in government's profit share rising by $195 million from 2010-11 to 2013-14, he said.

Pradhan said gas production from the Dhirubhai-1 and 3 gas fields in the eastern offshore KG-D6 block, which was targeted to be 80 million standard cubic meters per day has steadily declined to 35.33 mmscmd in 2011-12, 20.88 mmscmd in 2012-13 and 9.77 mmscmd in 2013-14.

This year the output is expected to be only 8.05 mmscmd.

The petroleum ministry, on 10 July, issued a notice disallowing $579 million in cost for output lagging targets in 2013-14.

The government had earlier disallowed a total of $1.797 billion in costs that RIL claims to have incurred in the KG-D-6 field, even as RIL kept on reducing output instead of raising production.

Pradhan said the issue is currently under arbitration. "The ministry of petroleum and natural gas has also raised a claim of additional profit to the tune of $115 million to be paid by the contractor, on account of disallowance of cumulative contract costs of $1.797 billion, till 2012-13," he said.

After including cost disallowance in 2013-14, the total additional profit petroleum claimed from RIL comes to $195 million, he said.

"GAIL and Chennai Petroleum (which buy oil and gas produced from KG-D6 block) have been directed to remit the sale proceed of crude oil / condensate / natural gas from KG-DWN-98/3 (KG-D6) block which falls due immediately into the government account so as to recover an amount of $115,263,612 at the rate of 50 per cent by each company and deposit the same with the government," he said.

The minister said RIL had put up production facilities to produce 80 mmscmd of gas but "has failed to adhere to the approved field development plan in terms of drilling and putting on stream the required number of wells."

The petroleum ministry and its technical arm DGH blames non-drilling of committed wells for the production lagging targets while RIL and its partners say unexpected geological complexities like sand and water ingress led to output fall.