More pain for Reliance till arbitration is over

The petroleum & natural gas ministry recently imposed an additional penalty of $792 million on Reliance Industries for missing the target for production of natural gas from its KG-D6 block, taking the total fine imposed on it since 2010-11 to $1.797 billion. 

But that’s not the end of trouble for the Mukesh Ambani-controlled firm - in fact, it’s far from it. The ministry is going to disallow a certain amount of cost recovery for the company every year, until, of course, the arbitration process on this is over.

Besides, a decision on appointing a third-party expert to look into the reason for a decline in production will be taken by the arbitrators.

“A decision on the fresh penalty would be taken by the arbitrators. However, till the arbitration process gets over, part of cost recovery from KG-D6 would be disallowed every year for the company,” a senior petroleum ministry official told Business Standard.

Earlier, the ministry had imposed a total penalty of $1.005 billion on the firm in 2010-11 and 2011-12 for production shortfall.

The arbitration process in this regard is stuck over appointment of the third member in the three-member panel of arbitrators. RIL and the government had, respectively, nominated former chief justices S P Bharucha and V N Khare, but the two sides were divided on whether or not the third arbitrator should be a foreigner.

The Supreme Court is to hear a case on this on January 7 next year.

Meanwhile, the ministry has moved a Cabinet note to allow RIL to raise the price of gas produced from its D1 and D3 fields by furnishing a bank guarantee. “This guarantee will be encashed if it is proved there was a deliberate hoarding of gas from D1 and D3 fields. However, the amount of this bank guarantee has not yet been finalised,” the official added. There were reports the company might be asked to furnish a guarantee of $135 million every quarter.

Earlier, there was a plan to cap the gas price for the firm at the current $4.2 a million British thermal unit (mBtu), but the Cabinet note proposes to allow the company to double the rate to $8.4 per mBtu from April 2014. Over the past four years, the total shortfall in production from the KG-D6 block has reached 154 million standard cubic metres per day (mscmd). While the production shortfall in 2010-11 stood at around 5 mscmd, it rose over the following years to 28 mscmd (2011-12), 55 mscmd (2012-13) and 66 mscmd (2013-14).

The total output estimate for the RIL blocks has come down from 10 trillion cubic feet (tcf) to 3.5 tcf. In July this year, the Directorate General of Hydrocarbons had recommended the additional fine on the company.

The company had earlier said the fall in production was due to a “substantial variance in reservoir behaviour and character being observed vis-à-vis the prediction. And, there seem to be reservoir constraints in achieving the gas production rates”.

REELING

Additional Penalty: On November 14, the petroleum ministry had slapped an additional penalty of $792 million on RIL, taking the total since 2010-11 to $1.797 billion

Earlier: In 2010-11 and 2011-12, the ministry had imposed a total penalty of $1.005 billion on the company

Arbitration: In the three-member panel, former chief justices S P Bharucha and V N Khare have been nominated by RIL and the government, respectively, but the process is stuck over the appointment of the third arbitrator

Production Shortfall: Over the past four years, the total shortfall in production from RIL’s KG-D6 has reached 154 million standard cubic metres per day