The Oil Ministry had in a draft note to the Cabinet proposed that Reliance Industries be forced to sell gas from Dhirubhai-1 and 3 (D1&D3) gas fields in KG-D6 block at current rate of USD 4.2 till it is proved that the over 80 per cent fall output was due to natural reasons, or the firm makes up for producing less than target since 2010-11.
However, the glitch in the plan was how the government would make up for the difference between the current rate of USD 4.2 per million British thermal unit and the new rate of almost USD 8.4 that is to become applicable for all domestic gas from April 1 next year, if at a later date it is proved that the fall in output was actually due to geological reasons and Reliance Industries was not hoarding gas.
Sources said the veracity of charge that Reliance Industries was hoarding gas in anticipation of higher price can be provided either by taking legal recourse (arbitration) or by appointing a third party expert. These processes could take at least a year.
The government, they said, could have charged the higher price applicable from April 1 from consumers but paid Reliance Industries lower rates and keeping the difference in an escrow account till the hoarding issue is sorted out.
However, the production sharing contract (PSC) does not provide for such escrow accounts.
Alternatively, the government can allow Reliance Industries the increased price provided the company gives a bank guarantee for the incremental amount, which can be encashed if the hoarding charges were later proved to be true.
The second option would be a win-win for both sides and would also not impact investor sentiments, sources said adding that the Oil ministry has moved Cabinet with this option in a revised note.
The penalty in form of lower gas price is the second penalty that the Ministry is seeking to impose on Reliance Industries for failing to produce as per stated production targets. It has already levied USD 1.8 billion penalty for the same reason and the issue is before arbitration.
Gas output from D1&D3 fields has fallen to 10 million standard cubic metres per day from the 54 mmscmd peak achieved in March 2010.
Production has been lower than target since the latter half of 2010-11 fiscal and it should currently have been 80 mmscmd as per the 2006 investment plan.
Production from MA oil and gas field in the same KG-D6 block, too has fallen over 62 per cent but the ministry and oil regulator DGH have agreed with Reliance Industries's reasoning of geological complexity being responsible for the same and has approved the higher price for the same from April.