Action likely to recover $1.85 billion disallowed expenditure

In a move that could spell fresh trouble for Mukesh Ambani-owned Reliance Industries Ltd. (RIL), the Petroleum and Natural Gas Ministry is understood to have given the green signal for a possible ‘arbitration' proceedings against the company to recover the $1.85 billion expenditure that has been disallowed in the KG basin D6 block.

Although there was no official word on the kind of action that is being contemplated by the Ministry, officials have confirmed that Petroleum and Natural Gas Minister Jaipal Reddy has given his concurrence for action against RIL on November 9 for claiming more expenditure than incurred for the field development plan (FDP) for the D6 block which has seen a sudden decline in its optimum production. The output from these fields has gone down to 35 million cubic metres per day (mcmd) from the projected 61 mcmd that the company had claimed while getting the Field Development Plan (FDP) approved by the Directorate General of Hydrocarbons (DGH).

“Decks have been cleared for action against RIL by disallowing expenditure incurred in constructing production/processing facilities at Dhirubhai-1 and 3 gas fields in the KG-D6 block that are now under-utilised/have excess capacity because of falling output. RIL had also failed to dig the required number of oil wells before the April 30 deadline. There is all likelihood that arbitration proceedings would be initiated against RIL in the coming days based on the opinion of Solicitor General Rohinton F. Nariman to recover government money and protect its interests in future,'' a senior official remarked.

Interestingly, Law Minister Salman Khurshid has also concurred with the opinion of the Solicitor General that $1.85 billion — out of the $5.694 billion FDP investment already made — should be disallowed to RIL and arbitration proceedings be initiated to recover the money belonging to the public Exchequer. An email to RIL spokesman seeking the view of the company on the issue failed to elicit any response.

The DGH and the Petroleum Ministry had asked RIL to drill the committed 22 wells by April, 2011, in the KG basin facility. However, RIL, which had already drilled 18 wells, refused to go ahead with the drilling of any further wells due to fall in gas production. The facilities at the KG basin have been constructed to handle up to 80 mcmd of gas but the current production has fallen to 25 mcmd. The DGH has blamed the current drastic fall in production on the failure of RIL to drill the adequate number of wells than what the company had committed in 2006 when it won approval for investing $8.8 billion. However, RIL evaded the issue on the pretext that pressure at current 18 wells fell and some showed water ingress. On this, the DGH proposed to allow only proportionate recovery of cost. On insistence of the DGH, the Petroleum Ministry sought a view from the second Solicitor General of India.

In his legal opinion dated August 17, Mr. Nariman had stated that: “The cost/expenditure incurred in constructing production/processing facilities and pipelines that are now under-utilised/have excess capacity cannot be recovered.''

Mr. Nariman, in his opinion, had stated that the government had an arguable case to stop RIL from recovering expenditure which had resulted in excess capacity/under-utilisation of the asset created'' on account of its failure to adhere to the 2006 approved field development plan. The D6 block has already come under the scrutiny of the Comptroller and Auditor General of India, which has stated that RIL had breached some terms of its contract with the government. It said while RIL submitted an initial FDP, involving expenditure of $2.4 billion in May, 2004, it made an amendment to the initial FDP in October, 2006, with an estimated capital expenditure of $5.2 billion for phase I and $3.6 billion for phase II.


‘KG basin issue: action against RIL soon’November 22, 2011

More In: Companies | Business