‘Investments are made by RIL, its partners at their own risk'

Taking the government by surprise, Mukesh Ambani-owned Reliance Industries Ltd. (RIL) is understood to have sent an ‘arbitration notice' to the Petroleum Ministry over its alleged move to disallow a substantial expenditure the company has made in the KG basin D6 block.

Official sources said that at a time when the Petroleum Ministry and the Directorate General of Hydrocarbons were busy discussing the action to be initiated against RIL on the matter, the company has slapped an arbitration notice, terming the government move to disallow around $1.85 billion expenditure as illegal and outside the Production Sharing Contract (PSC).

The notice asks the Oil Ministry to appoint arbitrators to decide on the issue. Although there was no official word on the development from RIL or the Petroleum Ministry, but sources confirmed the development.

RIL has facilities to handle 80 million metric standard cubic metres a day (mmscmd) of gas production, but the fields are producing just about 41 mmscmd due to a fall in pressure and water ingress. RIL had envisaged a gas output of 80 mmscmd by 2012 with an investment of $8.8 billion.

However, the current output is about half of the target and the company has so far invested only $5.8 billion. The Oil Ministry wants to disallow expenditure incurred in constructing production/processing facilities at the Dhirubhai-1 and 3 gas (D1 & D3) fields in the KG-D6 block, which are now under-utilised/have excess capacity because of falling output. Officials said three arbitrators were to be appointed to decide on the issue. The Petroleum Ministry and RIL would suggest the names of one arbitrator each, while there would also be a third judge appointed.

Costs to recover from revenues

PTI reports:

Meanwhile, RIL in a press statement said: “All investments in the exploration, development and production of hydrocarbons from KG-D6 were made by RIL and its foreign partners at their own risk, and not by the Government of India.”

It said RIL and its partners were entitled under the PSC with the Union Government to recover their full costs from the revenues generated by production from the block.

“The investment made in KG-D6 production facilities has been only partly recovered and the return on the investment so far is less than the cost of the capital,” the statement said.

“The PSC contains no provision which entitles the government to restrict the costs recovered by the company by reference to factors such as the level of production or the extent to which field facilities are utilised.”

RIL said to resolve the cost recovery issue, the company has begun arbitration proceedings to validate the stance adopted by the Oil Ministry by an independent tribunal.

“The company will seek a hearing in the arbitration at the earliest possible date and expects that the GoI will seek to do likewise in the interests of the energy sector in India and the investments therein,” the statement added.

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