With an action imminent against it for dip in output from KG-D6 fields, Reliance Industries (RIL) has slapped Oil Ministry with an arbitration notice saying the move to disallow a part of its investment in India's largest gas field is illegal and violation of signed contract.
The ministry wants to punish RIL for acute pressure drop and water ingress bringing down output to about 34 million standard cubic metres per day (mmscmd) compared to 61.88 mmcmd target, by limiting the amount of expenditure it is allowed to recoup.
Sources privy to the development said RIL in November 24 notice stated that restricting cost recovery -- now at 100% -- in proportion to the gas output was against the Production Sharing Contract (PSC) it had signed for KG-D6 block in 2000.
The ministry and its technical arm DGH are calculating how much of the $5.693 billion expenditure RIL has incurred on building facilities, that can handle up to 80 mmcmd of output, can be disallowed.
Once through with the exercise, it would have sent a notice to RIL and its partners, UK's BP Plc and Niko Resources of Canada, seeking a reversal as the operator has already recovered $5.285 billion out of the expenses already made.
RIL would have challenged the move then, sources said adding the company swiftly moved to slap an arbitration notice to avoid any reversal of cost recovery based on the notice.
Under New Exploration Licensing Policy, under which RIL had won the KG-D6 block in the first bid round in 2000, allows operators to recover 100% expenditure on exploration and production before sharing profits from the field with the government. It also does not link cost-recovery to output.
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Such expenditure is approved by the government at two stages -- first when it gives approval to the field development plan and subsequently every year, when it approves annual field budgets.
All spending on KG-D6 has been approved by both the Oil Ministry and Directorate General of Hydrocarbons (DGH).
Stating that the notice asked the ministry to appoint arbitrators to decide on the issue, sources said government and RIL would suggest names for one arbitrator each on the three member panel.
The arbitration would happen in Delhi.
The notice says RIL was to invest $8.8 billion in two phases for producing 80 mmcmd of gas from April 2012. It has not entered in the second phase yet as lower pressure and thinner-than-expected reservoirs resulted in a drop in production.
Sources said RIL has till now made $5.693 billion expenditure on Dhirubhai-1 and 3 (D1&D3) gas fields in KG-D6 block out of which about $4.365 billion has been on production facilities only. It has already recovered $5.258 billion up to March 31, 2011.
Meanwhile, RIL in a press statement said: "All investments in the exploration, development and production of hydrocarbons from KG-D6 were made by RIL and its foreign partners at their own risk, and not by the government of India (GoI)."
It said RIL and its partners are entitled under the PSC with the GoI to recover their full costs from the revenues generated by production from the block.
"The investment made in KG-D6 production facilities has been only partly recovered and the return on the investment so far is less than the cost of the capital," the statement said.
"The PSC contains no provision which entitles the GoI to restrict the costs recovered by the company by reference to factors such as the level of production or the extent to which field facilities are utilised."
RIL said to resolve the cost recovery issue, the company has begun arbitration proceedings to validate the stance adopted by the Oil Ministry by an independent tribunal.
"The company will seek a hearing in the arbitration at the earliest possible date and expects that the GoI will seek to do likewise in the interests of the energy sector in India and the investments therein," the statement added.