LawMin backs OilMin on restricting development expenditure; PSC review possible.
The government will decide on restricting the expenditure that Reliance Industries Ltd (RIL) is allowed to recover from the investments made in the KG-D6 block in the next three-four weeks. The move has been triggered by RIL’s failure to match the projected gas output in the country’s biggest gas field.
Petroleum secretary G C Chaturvedi said the petroleum ministry had sought the law ministry’s opinion (on restricting cost recovery — now at 100 per cent — in proportion to the gas output). “We have received the opinion... we are considering it,” he told reporters here. RIL shares gained 1.04 per cent to close at Rs 795.05 on the Bombay Stock Exchange.
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.
“The law ministry does not quantify the amount... If at all, we will have to do that,” he said. Asked if the production sharing contract (PSC) that governs the agreement between the government and an operator provides for restricting cost recovery, Chaturvedi said, “We are studying that,” but added the government “will not hesitate to amend the PSC, if required”.
“If need be... If, suppose, the PSC is to be changed, we will do it,” he said. “We will decide (on the next course of action) in three-four weeks.”
RIL has made investments of around $5.8 billion in exploration and setting up facilities to handle 80 million cubic metres per day of gas production, but the fields are producing less than 42 mmcmd. The PSC allows the operator (in this case, RIL) to recover 100 per cent of its exploration and production costs and does not link cost recovery to output. Moreover, 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 field budgets. All the spending on KG-D6 has been approved by both the petroleum ministry and the upstream regulator (DGH).
However, the ministry wants to disallow the 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. Chaturvedi said his ministry would ask the law ministry why it had not pointed to specific clauses, if any, in the PSC while giving an opinion on limiting the cost recovery in KG-D6.
Experts say the move is certain to be challenged by Reliance and its new partner BP Plc and is likely to head for arbitration. Falling pressure and water incursion have pushed down output from the D-1 and D-3 fields in the D6 block from 54 mmcmd in March 2010 to less than 35 mmcmd now, as opposed to the targeted 61.88 mmcmd. A further 7.1 mmcmd comes from the MA oilfield in the same licence area.
