In an unprecedented move, the Oil Ministry has sanctioned taking "scrupulous" action against Reliance Industries for natural gas output from its KG-D6 fields falling below the target.
Contrary to the Production Sharing Contract (PSC), the ministry has decided to disallow expenditure incurred in constructing production/processing facilities at Dhirubhai-1 and 3 gas fields in KG-D6 block that are currently under utilised/have excess capacity because of falling output.
Sources privy to the decision, taken by the ministry earlier this month, said that based on the Solicitor General's opinion, which was concurred by Law Minister Salman Khurshid, $1.85 billion -- out of the $5.694 billion investment already made -- will be disallowed and arbitration initiated to recover that from RIL.
MUST READ:PAC wants to question Mukesh on KG basin contracts
Oil Minister S Jaipal Reddy on November 9 instructed that "scrupulous" action may be taken against RIL.
Sub-surface issues like fall in pressure and water ingress have led to fall in output at D1&D3 from 54 million standard cubic meters per day, achieved in March 2010, to under 35 mmscmd currently instead of rising to the targetted 61.88 mmscmd.
As per the PSC, an operator has right to recoup or recover 100 per cent of the expenditure he had incurred on finding and producing from the revenues earned from sale of oil and gas before profits are split with the government.
Such expenditure is approved by the government not once but twice - first at the time of approving field development plan and then every year at the time of approving annual budget for the fields.
And to alter this cost recovery, an amendment to the PSC is required which can be done only by the Parliament.
SPECIAL:CAG puts governance in dock
Sources said the ministry's decision is unprecedented because it was accepted world-over that field behaviour is something that cannot be accurately predicted and operators cannot be held responsible for variations as evident from several fields of state-owned Oil and Natural Gas Corp (ONGC) that missed targets by miles.
Numaligarh Refinery was built and refineries at Bongaigaon and Barauni expanded in late 1980s based on projection of 11-12 million tons of output from Assam fields of ONGC and Oil India. ONGC's output never crossed 1.5 million tons against a target of 6-7 million tons, while OIL was better off producing 3 million tons as compared to 5 million tons target.
The shortfall was made up by diverting crude oil from eastern offshore Ravva fields.
Also, gas out from ONGC's western offshore field being way off the target led to the nation's first trunk pipeline from Hazira to Jagdishpur (HBJ) running half empty for years.
ONGC's Neelam field also produced only one-third of the targeted oil.
RIL had in September warned Oil Ministry of legal action saying the attempt to limit cost-recovery is illegal and ultra vires.
"If the PSC were indeed to be re-written to link cost recovery to levels of production, it would also have to include provisions for allowing the contractor (RIL) to recover costs in excess of his investment in case he were to achieve a rate of production higher than that estimated at the time of capex approval," RIL Senior Vice-President (Commercial) B Ganguly had written to the ministry on September 16.
Sources said the oil ministry is basing its action on Solicitor General of India's opinion that RIL should not be allowed to recover the cost of facilities that remain underutilised due to lower than anticipated output at its KG-D6 gas field.
SGI Rohinton F Nariman had in August opined that "the cost/expenditure incurred in constructing production/ processing facilities and pipelines that are currently underutilised/have excess capacity cannot be recovered".
"There is no provision under the Production Sharing Contract (PSC) that can limit cost-recovery to either production levels achieved by a contractor or to the extent that facilities are utilised under a development plan at any given point of time," RIL had written to Oil Ministry.
The Initial Field Development Plan (FDP) for the D1 and D3 gas fields in the KG-DWN-98/3 block (KG-D6) envisaged a capex of $2.47 billion at a peak production rate of 40 mmcmd from 14 wells.
Subsequently, RIL submitted an addendum saying the size of the gas reserves was twice the estimate of 5.32 tcf in the initial plan, at 11.3 trillion cubic feet. It proposed a $8.835 billion capex over two phases and envisaged a peak output of 80 mmcmd from 31 producing wells by April, 2012.
Commercial gas production from the D1&D3 fields commenced from April 1, 2009. In December, 2009, RIL tested its field production facilities at their full rated capacity of 80 mmcmd, during which an average gas rate of 77-80 mmcmd was maintained for a brief period of three days. The output included nearly 8 mmscmd from MA oilfield in the same block.
Sources said RIL has till now made $5.693 billion expenditure on D1&D3 development out of which about $4.365 billion has been on production facilities only. It has already recovered $ 5.258 billion up to March 31, 2011.