British energy firm BP and Niko Resources of Canada are likely to formally join their partner Reliance Industries' (RIL) arbitration against government levying penalties for KG-D6 gas production falling short of target.
Faced with a situation where the near double gas rate of $8 per million British thermal unit from next month not accruing to them, BP and Niko are said to be planning to formally issue a Notice of Arbitration (NoA).
Sources said the Cabinet had in December last year stipulated that the new gas rate will apply to all producers excepting eastern offshore KG-D6 block where the contractor, which is fighting government against levying penalties for output shortfall, will have to give bank guarantees equivalent to the incremental revenue it would get from the new rates.
If it is proved that the company deliberately produced less gas from the D1&D3 fields in KG-D6, the bank guarantee will be encashed, depriving RIL of the incremental revenue.
While RIL agreed to the condition, the Oil Ministry felt the bank guarantees cannot be taken from BP and Niko since they are not part of the arbitration, sources said.
In absence of BP-Niko not being part of arbitration, it was being mulled that their share of incremental revenues from the higher gas price can be put in an escrow account during the pendency of the arbitration.
RIL, which is the operator of KG-D6 block with 60 per cent interest, will however get all the revenues after furnishing bank sureties.
To break the impasse, BP and Niko, which together hold the remaining 40 per cent in KG-D6, separately wrote to the ministry. They said that RIL, in filing the arbitration notice, had acted as an operator representing the interests of all the KG-D6 constituents and they were part of the arbitration.
BP and Niko further stated that as a contractor to the production sharing contract (PSC) they are party to the arbitration and RIL has represented them as per the PSC and JOA (Joint Operating Agreement), sources said.
Sources said since the ministry is not convinced by the mere letter, BP and Niko may now formally join the arbitration after dashing off a NoA.
RIL and BP say the decline in current D1&D3 output to one-tenth of the previously projected 80 million standard cubic metres per day was purely 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 $1.8 billion penalty for output not being in line with projected production profile.
Also, BP and Niko had previously submitted that the decision of the tribunal on the gas output issue would be binding on both of them.