In a major jolt to Mukesh Ambani, the oil ministry has imposed $1.46 billion penalty on Reliance Industries and its British partner BP plc for falling natural gas output from KG-D6 fields
The Ministry had previously wanted to disallow $1.235 billion expenditure that RIL had incurred on putting production facilities at the Bay of Bengal gas fields but in the 7-page notice it sent to the company on May 2, the cost to be disallowed was put at $1.462 billion, sources privy to the development said.
The drop in reservoir pressure coupled with increased water and sand ingress has seen output from Dhirubhai-1 and 3 gas fields in the deepsea KG-DWN-98/3 or KG-D6 block fall from 53-54 million standard cubic meters per day achieved in March 2010 to 27.5 mmscmd last month, instead of rising to projected 80 mmscmd for current year.
The Ministry feels the drop in pressure had resulted in under-utilisation or creation of excess capacity and wants to disallow cost recovery in proportion to that.
The Production Sharing Contract (PSC) allows an operator to deduct all capital and operating expenses from the revenue it earns from sale of hydrocarbons — called cost recovery — before sharing profits with the government.
The notice signed by A Giridhar, Joint Secretary (Exploration) in the Ministry of Petroleum and Natural Gas, says $457 million expenditure in 2010-11 and another $1.005 billion in 2011-12 will be disallowed for cost recovery on account of excess capacity and under-utilisation of facilities.
Sources said the ministry had previously wanted to disallow $457 million of cost recovery for 2010-11 and $778 million of cost recovery in 2011-12. The Ministry and its technical arm, the Directorate General of Hydrocarbons (DGH) is to approve accounts for the two fiscal.
Anticipating such a move, RIL has in November last year slapped an arbitration notice on the ministry saying the PSC allows operators to recover 100 per cent of the capital and operating expenditure and does not in anyway link the cost recovery to production.
The ministry has thus far tried to brow-beat RIL into withdrawing the arbitration notice, saying that no dispute has arisen as yet but its notice of May 2 establishes there is a dispute over how much of cost can be recovered.
With the ministry refusing to appoint arbitrator to resolve the issue, RIL had moved Supreme Court requesting for appointment of arbitrators on behalf of the government.