Fall in output: Penalty on RIL hiked to $1.46 billion

The oil ministry has hiked the penalty it wants to impose on Reliance Industries and its British partner BP plc for falling natural gas output from KG-D6 fields, by 18 per cent to $1.46 billion.

The ministry had previously wanted to disallow $1.235 billion expenditure that RIL had incurred on putting production facilities at the Bay of Bengal gas fields but in the 7-page notice it sent to the company on May 2, the cost to be disallowed was put at $1.462 billion, sources privy to the development said.

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The drop in reservoir pressure coupled with increased water and sand ingress has seen output from Dhirubhai-1 and 3 gas fields in the deepsea KG-DWN-98/3 or KG-D6 block fall from 53-54 million standard cubic meters per day achieved in March

2010 to 27.5 mmscmd last month, instead of rising to projected 80 mmscmd for current year.

The ministry feels the drop in pressure had resulted in under-utilisation or creation of excess capacity and wants to disallow cost recovery in proportion to that.

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The production sharing contract allows an operator to deduct all capital and operating expenses from the revenue it earns from sale of hydrocarbons -- called cost recovery -- before sharing profits with the government.

The notice signed by A Giridhar, joint secretary (exploration) in the Ministry of Petroleum and Natural Gas, says $457-million expenditure in 2010-11 and another $1.005 billion in 2011-12 will be disallowed for cost recovery on account of excess capacity and under-utilisation of facilities.

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Sources said the ministry had previously wanted to disallow $457 million of cost recovery for 2010-11 and $778 million of cost recovery in 2011-12.

The ministry and its technical arm, the Directorate General of Hydrocarbons is to approve accounts for the two fiscal.

Anticipating such a move, RIL has in November last year slapped an arbitration notice on the ministry saying the PSC allows operators to recover 100 per cent of the capital and operating expenditure and does not in anyway link the cost recovery to production.

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The ministry has thus far tried to brow-beat RIL into withdrawing the arbitration notice, saying that no dispute has arisen as yet but its notice of May 2 establishes there is a dispute over how much of cost can be recovered.

With the ministry refusing to appoint arbitrator to resolve the issue, RIL had moved Supreme Court requesting for appointment of arbitrators on behalf of the government.

Sources said the ministry letter stated that RIL has till now spent $5.693 billion on development of Dhirubhai-1 and 3 (D1& D3) gas fields in KG-DWN-98/3 (KG-D6), of which about $4.574 billion has been incurred on production facilities alone.

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"It is brought to your notice that up to March 31, 2011, you have recovered a sum of approximately $5.258 billion from the petroleum operations in the D1 and D3 development area," the letter stated.

D1&D3 are producing about 27.5 mmscmd as against 61.88 mmscmd committed by RIL in its $8.8 billion development plan for the fields for 2011-12 fiscal. The output should have touched 80 mmscmd this year.

The ministry says that lower than anticipated production has led to under-utilisation of the field facilities.

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Also, it blamed the fall in output from 53-54 mmscmd achieved in March 2010 to drilling of less than committed wells, they said.

Sources said RIL as per the approved field development plans, should have put 22 wells on production for 61.88 mmscmd and 31 wells for 80 mmscmd this year.

But the company has so far drilled 22 wells on the fields but has put on production only 18 wells.

The other four have not been connected to production system as they contain uneconomical reserves.

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Of the 18 wells, six had to be shut because of high water and sand ingress and fall in pressure.

RIL believed that the field has not behaved as predicted and so indiscriminate drilling would be a big drain on cost.

But the ministry held RIL responsible for violation of its committed work programme in the PSC and slapped cost recovery disallowing notice, they added.

Together with 6.37 mmscmd of output from MA oilfield in the same block, KG-D6 output is around 34 mmscmd currently.