In a softening of stand after being served an arbitration notice, the government today clarified the production-sharing contract (PSC) of Reliance Industries’ KG-D6 block would not be altered to restrict the recovery of costs incurred by the company in developing the block.
Petroleum minister Jaipal Reddy, whose tenure in the ministry has coincided with regulatory hurdles for RIL, said any changes in PSC would be only for future rounds of bidding. “There will be no change in the PSC (for KG-D6 with Reliance Industries Ltd),” Reddy told reporters on the sidelines of the 3rd India-Africa Hydrocarbon Conference here. “If there are changes (in the PSC), they will be introduced from future NELP rounds. They will have prospective effect,” Reddy said.
Petroleum secretary G C Chaturvedi had on November 22 stated the government would not “hesitate to even change the PSC, if required” to implement the move to restrict cost recovery.
Subsequently, RIL chairman and managing director Mukesh Ambani met Prime Minister Manmohan Singh and senior ministers in the government. Though Ambani’s agenda is not officially known, the company has been facing problems ever since an adverse report by the Comptroller and Auditor General was tabled in Parliament.
RIL on November 28 slapped an arbitration notice on the government, saying restricting of cost recovery to the capacity being utilised was illegal and against the PSC. The RIL notice came even before the government made any formal move. The company said it wanted clarity on the issue to make further investment.
Chaturvedi today said his ministry was referring the arbitration notice to the law ministry for advice before taking necessary action, such as the appointment of an arbitrator. “The move of RIL for arbitration is under our consideration,” Reddy said. “There is a provision in the PSC for arbitration in case of a dispute. Therefore, I see no problem in this. However, we need to consult and seek advice from others.” Reddy said his attempt would be to expedite the entire process. “The interpretation of the PSC (if it allows the restriction of cost recovery) will be among the issues for arbitration, apart from the cost,” he said.
RIL and the ministry have divergent views on cost recovery. RIL maintains the PSC contained no provision that entitled the government to restrict the costs recovered by the company by reference to factors like the production level or the extent to which field facilities were utilised. However, the ministry wants to disallow expenditure incurred in constructing production/processing facilities in the KG-D6 block that are currently under-utilised or have excess capacity because of falling output. The law ministry has backed the move but has not quantified how much of the $5.8 billion that Reliance has already invested should be disallowed.
RIL has built facilities to handle 80 million standard cubic metres per day of gas production, but the fields are producing just about 41.