The government has told Mukesh Ambani-led Reliance Industries to withdraw its arbitration notice saying

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there is ‘no-cause’ for a legal battle between the two. RIL had served the notice in November 2011 alleging that oil ministry proposed to disallow $1.23-1.85 billion spent by RIL on Krishna Godavari (KG) D6 block.

The oil ministry, which had consulted law ministry, believed that the arbitration notice was based on "surmise and assumptions" and hence advised RIL to withdraw it. The oil ministry has sent a letter to RIL in this regard last week, said an oil ministry official, who did not wish to be named.

On November 28, 2011, RIL had said that it has started arbitration proceedings against government in order to recover complete cost spent on KG-D6 block. The private explorer also appointed former Supreme Court chief justice SP Bharucha as its arbitrator.

RIL’s move came on the heels of reports that oil ministry had decided to disallow expenses of $1.23-1.85 billion on the KG-D6 block. It proposed to link recovery of costs to capacity utilisation of infrastructure erected at block.

The private explorer has reported $5.69 billion spending on the block as on March 31, 2011. Of this, it has recovered $5.26 billion. However, management committee of the block is yet to approve the same.

“Oil ministry has sent a letter but there is no mention of any ‘amount’ government wants to recover. Also, government has said that we (RIL) should have given 90-days window before sending an arbitration notice, which we did not,” said an RIL official.

Till recently, oil ministry has said that it will act according to suggestions from law ministry. The ministry’s technical arm, directorate general of hydrocarbons (DGH), advised that expenses of $457 million for 2010-11 and $778 million for 2011-12 should be disallowed. According to DGH, except for first year of production (2009-10), the cumulative gas production is less than the AIDP approved rate during next two years.

DGH has observed that the contractor proposed production facilities in AIDP of D1 and D3 for 80 mscmd of gas with a provision for expansion to 120 mscmd. Accordingly, in onshore terminal (OT), modular units such as slug catchers, separators, dehydration trains, fiscal meters and utility equipment, were designed for 80 mscmd gas handling capacity while the common systems such as headers, flares, and drains, among others, were sized for 120 mscmd flow rates.

Spokespersons of oil ministry and RIL did not offer any comments on the development.