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Government to slap notice on Mukesh Ambani's RIL for falling KG-D6 output

The government will serve a notice on RIL for breach of contractual obligations in the D6 block, where gas production has fallen sharply, Reddy said.

, ET Bureau|
Updated: Feb 20, 2012, 12.54 AM IST
Government to slap notice on Mukesh Ambani's RIL for falling KG-D6 output
HYDERABAD: The government will serve a notice on Reliance Industries for breach of contractual obligations in the D6 block, where gas production has fallen sharply, oil minister Jaipal Reddy said, hardening his ministry's stand on the issue that has triggered an arbitration notice from Mukesh Ambani's firm.

"This is a very serious issue and the consequences are also going to be very serious," Reddy told reporters after visiting the block along with Reliance officials, including Executive Director PMS Prasad. Government officials said the minister went there only to familiarise himself with the block and that his visit was not related to next week's scheduled trip of the Public Accounts Committee of Parliament that is studying the CAG's report on the block.

Output from the D6 block in the Krishna Godavari basin in the Bay of Bengal was expected to rise to 80 million metric standard cubic metres a day (mmscmd) but after rising initially, it has fallen sharply, forcing power producers, fertiliser makers and other customers to turn to costly imports of liquefied natural gas (LNG).

"Reliance had promised to supply 70 mmscmd of gas from the D6 block of the Krishna-Godavari (KG) basin, wherein each mmscmd can support up to 210 MW of power generation. However, the supply of gas from RIL's D6 block has come down drastically to as low as 37 mmscmd so far this year. And it is projected to fall further to around 27mmscmd next year," he said.

RIL has initiated arbitration against the government following reports that the oil ministry would penalise it for the fall in output. It says that the production sharing contract clearly allows the operator to recover its entire cost from gas sales, but the government is considering restrictions on cost recovery as the output is lower than what was envisaged.

"The issue involves both technical and legal predicaments. Accordingly, we have consulted the law ministry and sought the Solicitor General of India's advice. We are serving notices on RIL. I cannot elaborate more than this at this stage," Reddy said.

Reliance has argued that output has fallen due to geological and technical complexities, while the government says the company should be blamed as it had not drilled as many wells it promised to. Global major BP's CEO Bob Dudley had told ET in an interview that simply drilling more wells would not boost production as the exercise was similar to putting more straws in a can of coke. BP has acquired a 30% stake in Reliance's blocks for $7.2 billion.

Government to slap notice on Mukesh Ambani's RIL for falling KG-D6 output

Reddy visited the block ahead of a scheduled visit of a team from the 22-member all party Parliamentary public accounts committee, headed by opposition leader Murali Manohar Joshi of the Bharatiya Janata Party.

Members of the PAC are evaluating the report of the Comptroller and Auditor General of India that alleged that both the petroleum ministry and its technical and regulatory arm, the DGH, had been lenient towards Reliance and other private companies involved in oil and gas blocks.

A senior petroleum ministry official told ET that the minister's visit was aimed at familiarising himself with the oil and gas fields and that "there is no specific agenda behind the visit and not related to the visit of PAC team to the KG basin".

An RIL spokesperson refused to comment on the minister's statement.

The ministry's decision to serve notices assumes significance in the backdrop of PAC questioning the top RIL executives recently on cost escalations in the D6 block and alleged contract violations.

India's Solicitor General Rohinton F Nariman is believed to have submitted his opinion to the oil ministry advising that RIL should be allowed to recover the cost that incurred in developing D6 only in proportion to the level of utilisation of the field. Reliance had so far invested $5.69 billion in the D6 block as of March 2011 and recovered $5.26 billion.

Responding to the media reports that the ministry was planning to restrict the amount of costs recovered by the company, RIL in its first ever official statement on issue had said, "All investments in the exploration, development and production of hydrocarbons from KGD6 were made by Reliance and its foreign partners at their own risk, and not by the Government of India. Reliance and its partners are entitled under the Production Sharing Contract (PSC) with the GoI to recover their full costs from the revenues generated by production from the block. The investment made in KG-D6 production facilities has been only partly recovered and the return on the investment so far is less than the cost of the capital."

Last year, CAG in its performance audit or hydrocarbon production sharing contracts report submitted to Parliament, had pointed out that RIL had breached certain terms of production sharing contract entered into with the government for the D6 block. In its report, CAG had come down heavily on both the petroleum ministry and the DGH for their failure to ensure adequate supervision of the production sharing process.

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