Reliance Industries Chairman Mukesh Ambani today said the company will not withdraw an arbitration it has initiated against the government for disallowing recovery of certain KG-D6 gas field costs – a punishment for gas output targets not being met.
“Our upstream business is in partnership with BP (of UK) and we want to constructively make sure that we are not going to withdraw our cost recovery arbitration,” he told company shareholders here.
The government has disallowed $2.756 billion of the cost RIL and its partners had sunk in the flagging Dhirubhai-1 and 3 gas fields in the eastern offshore KG-DWN-98/3 or KG-D6 block, for missing gas production target for five fiscal years beginning April 1, 2010.
The Production Sharing Contract (PSC) allows RIL and its partners BP plc and Canada’s Niko Resources to deduct all capital and operating expenses from the sale of gas before sharing profit with the government.
Disallowing costs results in government’s profit share going up. Consequent to disallowing USD 2.756 billion cost, the government has claimed additional profit petroleum of $246.9 million from the three.
RIL and its partners have challenged the cost disallowance through an international arbitration insisting that the output fall was not its doing but a natural phenomenon.
“And we are very confident of finding an acceptable solution. So we will work constructively, we will not give up our legal rights and we expect the results in consultation with our partner BP as we have to respect our partnership… and I want to assure you that business has long term value,” Ambani said.
Besides the cost recovery arbitration, RIL is also locked with the government in another arbitration over deferring of a natural gas price hike due to the company from April 1, 2014.
The company and BP are reportedly are keen to end that arbitration to get the advantage of getting market price for KG-D6 and other discoveries.
The government had mandated that any company seeking to get market price for natural gas produced from difficult areas like deepsea should withdraw all legal challenges raised over gas pricing policy. KG-D6, off the Andrha coast is a deepwater block, and so is NEC-25, another gas discovery block RIL-BP in Bay of Bengal.
A third arbitration over Oil Ministry decision to take away five of RIL’s KG-D6 block discoveries fell after the company failed to name arbitrators within the stipulated time.
RIL and its partner Niko Resources had in February last year challenged the ministry’s decision to take away 814 sq km of its eastern offshore KG-D6 area that contained five gas discoveries.
As per the dispute resolution mechanism set out in the Production Sharing Contract (PSC), an arbitration notice over a dispute has to be followed up within six months by naming arbitrators.
RIL and Niko did not name the arbitrator for the dispute settlement. Interestingly, BP which holds 30 per cent interest in KG-D6 block, had not signed on the arbitration notice.
Gas output from Dhirubhai-1 and 3 gas field in the Krishna Godavari basin KG-D6 block was supposed to be 80 million standard cubic meters per day but actual production was only 35.33 mmscmd in 2011-12, 20.88 mmscmd in 2012-13 and 9.77 mmscmd in 2013-14. The output has been around 8 mmscmd in subsequent years.
The output was behind target in 2015-16 as well and the government is yet to issue a cost disallowance notice for that.