The government, which had earlier allowed Reliance Industries (RIL) to increase the exploration cost for the D6 block in the Krishna Godavari basin more than three-fold, will now try to restrict the company from recovering this enhanced cost from the sale proceeds, as the company has apparently failed on its promise to step up gas output in the government?s view.
Reduced cost recovery means a gain for the government as its share of profit petroleum would go up correspondingly. As per the profit-sharing formula discovered through bidding, the contractor and the government agree on the cost to be recovered from the project’s turnover and on the ratio of profit-sharing.
Key decisions such as cost escalation of an oil field are taken by a panel called the management committee, which comprises representatives of the company, the petroleum ministry and the director general of hydrocarbons (DGH), the upstream regulator.
The committee for the D6 field had earlier approved an increase in the exploration cost from $2.5 billion to $8.8 billion on account of ?increase in production volume, corresponding increases in production facilities and number of wells, and increase in global price level for exploration and production services.? The production from KG D6 block was expected to go up to 80 mmscmd.
However, output from the field has now declined to about 50 million metric standard cubic metres a day (mmscmd) from the 69.8 mmscmd target set by the government.
Therefore, when the management committee meets in early May, the government will attempt to restrict the cost recovery by linking it to the actual infrastructure put to use. The panel will also review the lower-than-expected gas production from the field. RIL has attributed its inability to meet the target to technical reasons, although the DGH is yet to accept it.
Meanwhile, the government has also asked the company to ensure that users in priority sectors like power and fertiliser get their entire share of allocated gas. Government sources said when priority sector users do not get their entitled share, the government’s subsidy burden goes up. Currently, the spot price of natural gas is around $11 per million British thermal units after the nuclear disaster in Japan, making it difficult for user industries to meet the shortfall through imports.