DGH wants RIL to share marketing margin for approving spending

DGH wants RIL to share marketing margin for approving spending New Delhi: Oil regulator DGH has refused to approve Reliance Industries' spending on the flagging KG-D6 block unless the Mukesh Ambani-run firm shares with the government a part of the marketing margin it charges on sale of natural gas.

The Directorate General of Hydrocarbons (DGH) wants the government to get a share of the USD 0.135 per million British thermal units (mmBtu) marketing margin RIL charges over and above the government approved gas price of USD 4.205, sources privy to the development said.

It wants the marketing margin to be added to the gas sale price and thereby the profit-sharing between the contractor and the government to happen at USD 4.34 per mmBtu. At present, RIL and the government split profits at the gas sales price of USD 4.205 per mmBtu after deducting the project cost.

Sources said DGH in a note to the Oil Ministry made several changes in the accounts RIL submitted for 2010-11. It included USD 88.998 million, which the company got as marketing margin, in the revenue earned from sale of oil and gas from the KG-DWN-98/3 or KG-D6 block.

While RIL proposed a profit petroleum of USD 35.507 million to the government after deducting capital and operating cost from the revenue earned from sale of oil and gas during the year, DGH calculated the same at USD 36.406 million.

RIL has since the first time DGH opened the issue of marketing margin last year, strongly defended the levy saying marketing margin was to cover for risks and costs associated with marketing of gas and was levied beyond the gas delivery flange and as such, is not regulated by the Production Sharing Contract (PSC).

The PSC governs fixation of price of gas at the 'delivery point', the point at which an upstream operator transfers custody of gas to a marketing and transportation agency. That point for KG-D6 gas is Kakinada, in Andhra Pradesh, and the government had in 2007 approved a gas price of USD 4.205 per mmBtu at the delivery point.

RIL says the PSC does not provide recovering marketing and transportation cost from revenues earned from sale of oil or gas. Public sector firms like GAIL charge up to USD 0.18 per mmBtu as marketing margin and is not shared with the government.

Also, DGH differed with RIL on the value of crude oil produced from the MA oil field in the same KG-D6 block and estimated the revenue at USD 14.74 million.

Sources said after these changes, DGH calculated that USD 3.868 billion out of the USD 9.473 billion the company had spent on Dhirubhai-1 and 3 (D1&D3) gas fields as well as D-26 or MA oil field, remains to be recovered by RIL during the rest of the life of the field. This was lower than USD 4.215 billion that RIL calculated.

More importantly, DGH in the note stated that as per the Ministry's decision USD 457 million cost was inadmissible for 2010-11.

The Ministry had earlier this year decided to disallow over USD 1 billion of the spending RIL has so far incurred on D1&D3 as a punitive measure.

This was for failing to drill the committed wells that it said was the primary reason for production falling by over 55 per cent to 26 million standard cubic meters per day currently in past two years instead of rising to a planned 80 mmscmd.

RIL, however, blames geological complexities and sand and water ingress in wells for the fall in output and not failure to drill the committed wells.

PTI