BP, Niko seek arbitration over penalty for gas output decline

New Delhi: British energy giant BP and Niko Resources of Canada have served arbitration notices on the government, joining partner Reliance Industries in the fight against the levy of penalties for KG-D6 gas production falling short of target.

BP and Niko filed separate arbitration notices earlier this week, a move that will help them benefit from revised natural gas prices in the next financial year, sources privy to the development said.

The two firms were faced with a situation where the near-doubling of the gas rate to about USD 8 per million British thermal units from the next financial year would not accrue to them.

BP and Niko have taken an almost similar line as RIL in its 2012 arbitration against the levy of a USD 1.8 billion penalty for output dropping to a 10th of the targeted 80 million standard cubic meters a day.

Sources said the two firms, like RIL, maintain that the production sharing contract does not provide for a penalty in the form of denying costs incurred if output lags behind projections made in field investment plans.

The Cabinet had stipulated in December last year that the new gas rate would apply to all producers.

However, RIL, the contractor of the eastern offshore KG-D6 block, would have to furnish bank guarantees equivalent to the incremental revenue it would get from the new rate.

If it is proved the company deliberately produced less gas from the D1 and D3 fields in KG-D6, the bank guarantees would be encashed, depriving RIL of the additional revenue.

While RIL agreed to the condition, the Oil Ministry felt bank guarantees could not be taken from BP and Niko because they were not part of the arbitration process, sources said.

RIL, the operator of KG-D6 block with 60 percent interest, would get all the revenue after furnishing the bank sureties.

An option that was being considered for BP and Niko was to put their share of incremental revenue in an escrow account during the arbitration.

To break the impasse, BP and Niko, which together hold the remaining 40 percent in KG-D6, have now joined the arbitration process.

However, implementation of the new gas price has been deferred by the Election Commission until completion of the Lok Sabha polls.

RIL and BP say the decline in D1 and D3 gas output was because of unanticipated geological complexities such as a drop in reservoir pressure and ingress of water and sand.

RIL had dragged the ministry to arbitration in 2012, saying the contract does not provide for levy of a USD 1.8 billion penalty for output not being in line with the projected production profile.