Oil ministry to seek opinion from law ministry, says has a month to get back to Reliance.
Reliance Industries Ltd (RIL) may be keen to resolve the cost recovery issue in its Krishna Godavari (KG)-D6 block through arbitration, the actual proceedings may begin only after a month or longer.
The petroleum ministry is in no hurry to reply to the arbitration notice sent by Reliance earlier this week. It will discuss the issue with the law ministry whose opinion on cost recovery based on capacity utilisation lies at the root of RIL action
Petroleum secretary GC Chaturvedi told Business Standard the arbitration notice grants a time of up to a month to respond and there was no hurry. He said the ministry was studying the notice and the opinion given by the law ministry on restricting cost recovery.
The government has been contemplating action against RIL, triggered by its failure to match projected gas output in the country’s biggest gas field. The RIL notice is a pre-emptive move it took after it learnt about the possibilities of a cost recovery through press reports.
The government has not sent any notice to the company. The latter had sought confirmation from the petroleum ministry that no such action was being taken and had not received any response in the matter.
A company statement issued on Monday said it would seek arbitration hearing at the earliest possible date. The company has asked the ministry in its notice to appoint arbitrators to decide on the issue.
RIL and the ministry have divergent views on cost recovery. It maintains that the production sharing contract (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/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.
All investments in the exploration, development and production of hydrocarbons from KG-D6 were made by Reliance and its foreign partners at their own risk, and not by the government.
Reliance and its partners are entitled under the PSC with the Government 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.
RIL has built facilities to handle 80 million standard cubic metres per day (mscmd) of gas production, but the fields are producing just about 41 mscmd. The ministry wants to disallow expenditure incurred in constructing production and processing facilities at the Dhirubhai-1 and -3 (D1 & D3) gas fields, which are currently under-utilised, in the KG-D6 block.
