While the contract provides for termination in case of a default by a contractor, the Oil Ministry under S Jaipal Reddy in May 2012 had slapped penalty of USD 1.005 billion on RIL for failing to produce natural gas in line with the pre-stated targets.
RIL disputed the order and initiated arbitration.
"In view of the contractual provision under the PSC, the government will not be able to terminate the contract on account of shortfall in production as the matter is pending before the arbitral tribunal," Moily said in his letter to the Prime Minister.
His letter came in response to charges by Kejriwal that the government was favouring RIL by nearly doubling natural gas prices from April 1, 2014.
The production sharing contract (PSC) does not have any explicit provision for penalties in case of default. A contract can only be terminated in case of a default.
Explaining the reasons behind raising natural gas prices from April, Moily said several gas fields of both RIL and state-owned Oil and Natural Gas Corp (ONGC) were economically unviable to produce at current rate of USD 4.2 per million British thermal unit.
"In choosing the basis for fixing the gas price, it is tempting to think that by choosing a lower price we are assuring consumers the same amount of gas supply at a lower price. The fact is that the price formula affects the investment that will be undertaken in exploration and production and therefore the total volume of gas likely to be produced," he wrote.
The Prime Minister's Office had forwarded to Oil and Petroleum Ministry a letter written by Delhi Chief Minister Arvind Kejriwal in which he has demanded that the decision to hike gas price extracted from KG basin be kept in abeyance till completion of a probe into the issue.
The PMO has asked the Oil and Petroleum Ministry for its views as soon as possible.
Kejriwal has alleged collusion between the government and Reliance Industries over the price issue and ordered a probe into it by Anti-Corruption Branch (ACB).
The FIR, filed by ACB, names Petroleum Minister M Veerappa Moily, Reliance Industries chief Mukesh Ambani, former Petroleum Minister Murli Deora and and retired Director General of Hydrocarbons V K Sibal.
After the FIR was filed yesterday, Kejriwal wrote a letter to Prime Minister Manmohan Singh, requesting him to keep in abeyance decision to hike gas price from April 1 till the probe in the case is completed.
In his letter, Kejriwal said he has ordered the probe after receiving the complaint that a few union ministers have taken a decision to double the gas price from 4.2 dollar to 8 dollar per unit to benefit Reliance Industries Ltd whereas the cost of gas production is less than USD 1.
The Chief Minister said hike in gas price will bring major hardships for the common man as it will result in hike in CNG prices as well as power production cost.
"You are an expert of economics. You can understand that this decision to double gas prices will have a cascading effect on the economy. On the basis of a complaint filed by four eminent people, an FIR has been filed by Anti-Corruption Branch. Through this letter, I request you to keep in abeyance the order on gas pricing till the time investigation is not completed in the case," Kejriwal wrote to Singh.