DGH for disallowing RIL's $1.2 bn investment in KG-D6

DGH for disallowing RIL's $1.2 bn investment in KG-D6 New Delhi: Upstream regulator DGH has suggested USD 1.235 billion investment of Reliance Industries being disallowed over the Mukesh Ambani-run firm's failure to adhere to prestated drilling and gas production targets, but the Oil Ministry is yet to agree on the numbers.

The Directorate General of Hydrocarbons (DGH) in its recommendation to the Oil Ministry has suggested USD 457 million of the 'profit petroleum' accruing to RIL in 2011-12 should be disallowed and another USD 778 million in 2012-13.

Sources privy to the development said top officials of the ministry and DGH discussed the numbers at a meeting yesterday but there was no unanimity.

As per the 2006 field development plan, where capital expenditure in Dhirubhai-1 and 3 fields was hiked to USD 8.8 billion from USD 2.47 billion previously, RIL was to produce 61.88 million standard cubic meters per day of gas from 22 wells by April this year and 80 mmscmd from 31 wells by 2012.

But the Mukesh Ambani-run firm drilled only 20 wells till now, of which it has not put two of the wells on production yet. D1 and D3 fields are currently producing just over 40 mmscmd.

Sources said the Solicitor General of India (SGI) had opined that Section 3.2 of the Production Sharing Contract (PSC) that states, "... amounts paid with respect to non-fulfilment of contractual obligations" can be disallowed for cost recovery.

"...the expenditure incurred which has resulted in excess capacity / underutilisation of asset created on account of failure of the contractor (RIL) to adhere to the field development plan would fall within the provisions of Section 3.2," SGI had said.

RIL has built facilities at KG-D6 to handle 80 mmscmd of output.

Sources said based on the SGI opinion the DGH was asked to carry out an exercise to calculate the amount of investment which should be disallowed for cost recovery.

Since most of the USD 5.7 billion investment RIL has made on D1 and D3 fields has already been recovered, the DGH has suggested that the investment disallowed should be deducted from its profit share for the current and the next fiscal.
     
Anticipating such a move, RIL had on November 24 slapped an arbitration notice challenging the proposal.

PSC for KG-D6, where drop in pressure in the wells and an increased water ingress lead to lower per-well gas output and halt in drilling pending more studies, allows operators to recover 100 per cent of expenditure on exploration and production before sharing profits from the field with the government. It does not link cost-recovery to output.

RIL and its new partner BP Plc of UK say new wells in KG-D6 can come up not before 2014.

PTI