The penalty in the form of disallowing costs incurred on the field will be for missing the target in 2013-14, a government source said. With this, the total costs disallowed will increase to USD 2.375 billion.
The government had previously issued a notice to Reliance Industries disallowing a total of USD 1.797 billion in costs for falling short of production during 2010-11 (USD 457 million), 2011-12 (USD 548 million) and 2012-13 (USD 792 million).
Reliance Industries, which disputed the levy and initiated arbitration against the government, did not respond to an e-mail seeking comment.
"A note is being put to Oil Minister Dharmendra Pradhan for disallowing cost recovery of USD 578 million in 2013-14. A notice will be sent to RIL once he approves it," he said.
Production from the main gas fields in the KG-D6 block has dropped to about a 10th of the planned 80 million standard cubic meters per day. The fall in output meant that facilities created at huge investment went unutilised.
The production sharing contract allows Reliance Industries 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.
The creation of excess or unutilised infrastructure impacts the government's profit share and this is sought to be corrected by disallowing part of the expenses incurred.
The source said the ministry believes that USD 115 million in additional profit share would have accrued to the government from disallowing the cost in 2013-14.
To recover this additional profit share, it has proposed that state-run companies deduct USD 115 million from payments due to RIL for crude oil and gas bought from KG-D6 block.
Once Pradhan approves, the ministry will instruct Chennai Petroleum and Hindustan Petroleum, which buy crude oil from the KG-D6 block, and GAIL India, which purchases KG-D6 gas, to remit USD 115 million deducted from payments to RIL and deposit the amount in a government account, the source said.
The move comes after RIL did not agree to deduct the disallowed costs from total expenses incurred before calculating the government's share of profit petroleum.
The government's profit share would rise by USD 195 million if all of the USD 2.375 billion of disallowed costs is deducted from expenses incurred.