Govt slaps $579m additional penalty on RIL

The government has slapped an additional penalty of $579 million on Reliance Industries for producing less than targeted natural gas from its KG-D6 block, Oil Minister Dharmendra Pradhan said today.

With this, the total penalty on RIL for missing the target in four fiscal years beginning April 1, 2010 now stands at a cumulative $2.376 billion, the Minister informed the Lok Sabha today.

The penalty is in the form of disallowing costs incurred. The Production Sharing Contract (PSC) allows RIL and its partners BP Plc and Niko Resources to deduct all capital and operating expenses from the sale of gas before sharing profit with the government.

Disallowing costs will result in government's profit share rising by $195 million from 2010-11 to 2013-14, he said.

In a written reply to a question, Pradhan said gas output from the Dhirubhai-1 and 3 gas field in the eastern offshore KG-D6 block was supposed to be 80 million standard cubic meters per day but actual production was only 35.33 mmscmd in 2011-12, 20.88 mmscmd in 2012-13 and 9.77 mmscmd in 2013-14.

This year the output has been only 8.05 mmscmd.

His ministry on July 10 issued a notice disallowing $579 million in cost for output lagging targets in 2013-14.

The government had previously issued a notice to RIL disallowing a total of $1.797 billion in costs for falling short of production during 2010-11 ($457 million), 2011-12 ($548 million) and 2012-13 ($792 million).

Pradhan said the issue is currently under arbitration.

"The Ministry of Petroleum and Natural Gas has also raised a claim of additional profit petroleum to the tune of $115 million to be paid by the contractor, on account of disallowance of cumulative contract costs of $1.797 billion, till 2012-13," he said.

After including cost disallowance in 2013-14, the total additional profit petroleum claimed from RIL comes to $195 million, he said.

"GAIL and Chennai Petroleum (who buy oil and gas produced from KG-D6 block) have been directed to remit the sale proceed of crude oil/condensate/natural gas from KG-DWN-98/3 (KG-D6) block which falls due immediately into the Government account so as to recover an amount of $115,263,612 at the rate of 50 per cent by each company and deposit the same with the government," he said.

The Minister said RIL had put up production facilities to produce 80 mmscmd of gas but "has failed to adhere to the approved field development plan in terms of drilling and putting on stream the required number of wells."

His ministry and its technical arm DGH blames non- drilling of committed wells for the production lagging targets while RIL and its partners say unexpected geological complexities like sand and water ingress led to output fall.

Pradhan said his ministry has issued notices to RIL on May 2, 2012, November 14, 2013, February 2, 2014, and July 10, 2014, and advised it to comply with the approved $8.8 billion investment plan for D1&D3 fields to meet the targets of gas production.

It has also been asked to "forthwith remedy the default and to remit the additional profit petroleum of $195 million cumulative up to 2013-14," he said.

"The contractor of the block KG-DWN-98/3, RIL, has invoked arbitration against the action of the Ministry of disallowing the cumulative development costs. The government has also appointed its arbitrator and the issue is currently under arbitration," he said.

Stating that RIL had not adhered to the PSC provisions, the Minister said actual gas production has been less than capacities created at huge cost, resulting in under- utilisation of facilities and creation of surplus inventories.

"The government has issued notice for proportionate disallowance of cost of production facilities based on the cumulative shortfall in gas production vis-a-vis Addendum to the Initial Development Plan (AIDP)," he said.

In the AIDP, RIL had committed to invest $8.8 billion in developing D1&D3 field and producing 80 mmscmd of gas.

"The contractor (RIL) was repeatedly asked to adhere to the approved AIDP," Pradhan added.

The PSC allows RIL and its partners BP Plc and Niko Resources to deduct all capital and operating expenses from the sale of gas before sharing profit with the government.

The creation of excess or unutilised infrastructure impacts the government's profit share and this is sought to be corrected by disallowing part of the expenses incurred.

The move to ask Chennai Petroleum, which buys crude oil from the KG-D6 block, and GAIL India, which purchases KG-D6 gas, to deduct $115 million from payments due to RIL, comes after the company not agreeing to deduct the disallowed costs from total expenses incurred before calculating the government's share of profit petroleum.

The government's profit share would rise by $195 million if all of the $2.376 billion of disallowed costs is deducted from expenses incurred.

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