1. Reliance Industries seeks damages for contract area being taken away

Reliance Industries seeks damages for contract area being taken away

Reliance Industries (RIL) has slapped a third arbitration notice on the government, this time seeking damages for taking away...

By: | New Delhi | Updated: February 11, 2015 1:09 AM
Reliance Industries, RIL, Reliance Industries Limited

In the new notice, RIL has contested the government order of October 2013 asking it to relinquish an area of 6,496.88 sq km out of the total contract area of 7,645 sq km in the KG-D6 block. (Reuters)

Reliance Industries (RIL) has slapped a third arbitration notice on the government, this time seeking damages for taking away a chunk of the contract area of KG-DWN-98/3 block (KG-D6) and violating terms of the production-sharing contract (PSC).

The latest notice of arbitration was given on January 14, two sources told FE. Already, RIL has slapped two arbitration notices relating to the KG Basin — the first in November 2011 (contesting disallowing cost recovery) and then in May 2014 (for not implementing new gas price). In addition, RIL has filed an arbitration on the Pann-Mukta-Tapti fields.

In the new notice, RIL has contested the government order of October 2013 asking it to relinquish an area of 6,496.88 sq km out of the total contract area of 7,645 sq km in the KG-D6 block. The firm has cited articles 3 and 4 of the PSC that grants the right to the contractor to retain any discovery area and any development area at the expiry of the explorations phases.

According to RIL, it spent more than $1.1 billion during the exploration period in prospecting for hydrocarbons in the block, including in the relinquished area. It said that the government order with respect to second-phase satellite fields was based on the erroneous premise that the contractor has failed to submit a development plan for these fields. In fact, RIL had submitted the field development plan for all nine satellite discoveries.

On the other hand, the petroleum ministry is of the view that its decision is as per the PSC and there is no case for arbitration. “The matter would be discussed with the solicitor general of India before a response is sent to the explorer,” another government official told FE.

RIL-Conflict

Under article 4.1 of the PSC, 25% of the block area must be relinquished after the first phase of the exploration programme is complete.

The PSC says from the second phase, the contractor is allowed to retain only the ‘discovery area’ but in this case, the contractor was allowed to retain the entire area.

Earlier, Parliament’s Public Accounts Committee had pulled up the petroleum ministry asking why its arm Directorate General of Hydrocarbons (DGH) that asked RIL to relinquish the area in May 2004 took a U-turn in 2005 by agreeing to treat the entire area as discovery area.

According to the article 1.39 of the PSC, the discovery area means that part of the contract area about which, based on discovery and results obtained from a well or wells drilled in such part, the contractor is of the opinion that petroleum exists and likely to be produced in commercial quantities.

The audit committee is of the view that the decision taken by the government is in violation of contractual terms laid down in the PSC and that RIL should have relinquished 25% of the contract area after June 6, 2004.

The petroleum ministry reviewed the issue of relinquishment of 25% of the block area at the end of phase I during 2007 and 2008.

Thereafter, the petroleum ministry came to the conclusion that based on the technical data provided and coverage of the entire block area by 2D seismic survey and the 10 wells drilled in the first phase being gas bearing, “on the basis of technical merits, it was not unusual to draw the inference to retain the total area”.

On June 6, 2004, DGH asked RIL to relinquish 25% of the block area before entering the second phase as laid under PSC’s article 4.1. However, the private explorer said hydrocarbons are likely to be produced in commercial quantities after an exhaustive exploratory and appraisal programme from the contract area.

On July 11, 2006, the management committee comprising representatives of RIL, the ministry and DGH informed the petroleum ministry that the entire area would be retained. Following this, the then additional secretary at the ministry held three meeting between November 2007 and April 2008.

On February 2, 2009, the petroleum ministry, citing articles 4.2 and 4.3 of the PSC and considering technical inputs, conveyed that the entire contract area of the block — KG-DWN-98/3 — has been accepted as the discovery area.

The KG-D6 fields began production in April 2009 and touched a peak of 69.43 million standard cubic metres per day in March 2010. Currently, the output is around 11-12 mmscmd. The total contract area of KG-D6 was 7,645 sq km. In October 2013, a chunk of it was relinquished and the present contract area is 1,148.12 sq km.

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