BP, Niko say they are part of RIL gas arbitration

With new gas price announcement being held hostage to technicalities, British energy giant BP and Niko Resources of Canada have told the oil ministry that they are party to the arbitration initiated by Reliance Industries on KG-D6 gas production lagging targets.

A market-based gas pricing regime is to kick-in from next month but the Cabinet in December conditioned its applicability to gas being produced from the main field in KG-D6 block to RIL furnishing a bank guarantee equivalent to the incremental revenues it will get from the new rates.

The bank guarantee will be encashed if it is proved in the legal proceedings, called arbitration that RIL deliberately produced less than targeted gas from D1&D3 fields in KG-D6.

RIL, which says the current D1&D3 output being a tenth of previously projected 80 million standard cubic meters per day was purely because of unanticipated geological complexities like drop in reservoir pressure and water and sand ingress, agreed to give bank guarantees, official sources said.

BP and Niko, which hold 30 per cent and 10 per cent interest in KG-D6 respectively, too agreed to give bank guarantees in proportion to their stake.

But the oil ministry, which had fined RIL as much as $1.8 billion for producing less than the target in the past three fiscals, says BP and Niko cannot be party to the issue as they have not "joined" the arbitration on gas output lagging targets.

RIL had last year dragged the ministry to arbitration saying the contract does not provide for levy of penalty for output not being in line with projected production profile.

Sources said BP and Niko now have written separate letters saying that RIL, in filing the notice of arbitration, had acted as an operator representing the interest of all the KG-D6 constituents.

Operator actions are agreed upon by the constituents as has been provided in the Clause 7.3 of the Production Sharing Contract (PSC) and Clause 4.5 of the Joint Operating Agreement for KG-D6 block, they wrote.

BP and Niko further stated that as a contractor to the PSC they are party to the arbitration and RIL has represented them as per the PSC and JOA, sources said.

Sources said the technicalities of submission of bank guarantee had been used by the Oil Ministry in not announcing the new price that will be applicable from April 1.

On January 10 the ministry had notified that all domestically produced natural gas will be priced at an average of international hub rates and price at which India imports gas in its liquid form (LNG).

Also, BP and Niko had previously submitted that the decision of the tribunal on gas output issue would be binding on both of them.