Oil Ministry is moving Cabinet to deny Reliance Industries a higher price of gas produced from its main fields in the eastern offshore KG-D6 block till the dispute over the reasons for output not matching targets is resolved.
The Ministry wants the current rate of USD 4.2 per million British thermal unit to continue to apply for gas produced from Dhirubhai-1 (D1) and D3 fields even after expiry of the current term on March 31, 2014.
The government had in late June approved pricing of all domestically produced natural gas at an average of international hub rates and actual cost of LNG into India from next fiscal. The new rate, according to this formula, would be around USD 8.4 per mmBtu.
The new rates were to apply uniformly to gas from RIL fields as well as those of state-owned ONGC. Now, the Ministry wants the old rates to continue for D1&D3 fields but the new price would apply to all other fields in the KG-D6 block including the currently producing MA oil and gas fields.
“There is some technical dispute about the quantum of gas available in some discoveries in KG-D6 block and that is a technical dispute between RIL and Directorate General of Hydrocarbons (DGH). That matter needs to be resolved before we take a final decision applicability of new formula,” Oil Secretary Vivek Rae told reporters in New Delhi.
DGH believes output from D1&D3 fell to 10.12 million standard cubic metres per day from 53-54 mmscmd achieved in March 2010 because RIL did not drill its committed number of wells. More wells, it believes, would increase output.
RIL on the other hand blames unforeseen geological complexities for the fall in output and believes the reserves in D1&D3 are actually less than one-third of 10.3 Trillion cubic feet predicted two years before the field began output in April 2009.
Mr. Rae said the block oversight panel, called the Management Committee headed by DGH, will decide on the technical dispute - whether reserves are actually lower than those estimated earlier or drilling new wells can raise output.
RIL and its partners BP plc of UK and Canada’s Niko Resources has submitted a revised field development plan for D1&D3 to the MC detailing the lower reserves and the corresponding cut in expenditure from USD 8.8 billion proposed previously. If MC, which also has an Oil Ministry representative, accepts the RFDP it would mean that it has accepted RIL-BP’s arguments.
A similar RFDP for MA field, which has seen output halve to 3.5 mmscmd, was made by RIL-BP lowering the reserves and the MC accepted it. So, the new gas price will apply to MA field.
Mr. Rae said, “If necessary, we will even get in international experts to give their independent opinion and once it is resolved then all roads will be cleared either way.”
RIL-BP had in the revised field development plan (RFDP) lowered its two-phase capex plan for the D1 & D3 fields from USD 8.836 billion (proposed in 2006) to USD 5.928 billion.
In the original field development plan for D1&D3, RIL had projected an output of 61.88 mscmd from 22 wells in 2011-12 and 80 mscmd from 31 wells in each of the years after that.
The output has lagged the targets since 2011-12.
The idea of denying RIL the benefit of higher gas price was proposed by Finance Ministry which suggested to the Oil Ministry that RIL, which was to be a big beneficiary of rates rising to USD 8.40 per mmBtu, be made to sell the quantity it has failed to deliver as per its own targets during past three years at the current price of USD 4.2.
“Once Reliance overcomes the ‘technical difficulty’ of producing gas at the KG-D6 field, the government must ensure the company delivers the shortfall it still owes at the old price of USD 4.2 rather than getting the benefit of the new price,” it wrote.
RIL, which had hit a peak output of 69.43 million standard cubic metres per day from KG-D6 block in March 2010, is currently producing just 13.62 mmscmd (10.12 mmscmd from D1&D3 and 3.5 mmscmd from MA). This output is way short of 80 mmscmd target for this time of the year.