DGH for $792 mn more penalty on RIL

Oil regulator DGH has recommended an additional penalty of $792 million on Reliance Industries for producing less than the projected natural gas from its eastern offshore KG-D6 fields.

The Directorate General of Hydrocarbons last month recommended to the Oil Ministry that $792 million of the cost RIL has incurred in KG-D6 fields be disallowed for producing only an average of 26.07 million cubic meters per day of gas as against the target of 86.73 mmcmd in 2012-13.

This will be in addition to $1.005 billion in cost recovery already disallowed for output falling short of targets during 2010-11 and 2011-12, a top official said.

"DGH had in July 22 letter proposed for disallowance of cumulative cost recovery amounting to $1.797 billion ($1.005 billion for plus $792 million) up to FY 2012-13 towards creation of excess capacity," he said.

It blamed Reliance Industries Limited for not drilling its committed quota of wells leading to fall in production, resulting in a large chunk of production facilities lying unused or under-utilised.

RIL has built infrastructure to handle 80 mmscmd of output but is currently producing less than 14 mmscmd.

As per the production sharing contract, RIL and its partners BP Plc and Niko Resources are allowed to deduct all of the capital and operating expenses from sale of gas before sharing profits with the government.

Creation of excess or unutilised infrastructure impacts government's profit share and this is being sought to be corrected by disallowing part of the cost.

The official said the Oil Ministry is yet to act on the advice of DGH as the previous cost recovery disallowance notice is under arbitration.

RIL and its partners have so far made $5.768 billion investment in developing the Dhirubhai-1 and 3 (D1&D3) gas field in KG-D6 block and another $1.74 billion in the MA oilfield in the same area. Another $1.774 billion has been spent as production expenses or operating cost.

The ministry had in May 2012 slapped a notice disallowing $457 million of cost till 2010-11 and $1.005 billion till 2011-12.

The average gas production from KG-DWN-98/3 (KG-D6 block) during the current year should have been 86.92 mmcmd as per the approved field development plans for D1, D3 and MA fields in this block, which are currently on production.

The output has dropped after hitting a peak of about 62 mmcmd in August 2010.

The production has fallen as half of the wells on D1&D3 and a third of those in MA field have shut due to water loading/sand ingress.

Additionally, DGH blames RIL for not drilling all of its committed 31 wells on D1&D3.

RIL on the other hand attributes the fall to substantial variance in reservoir behaviour and character than previously predicted sharp decline in pressure and early water production in some wells.