‘Fresh arbitration notice needed if it were to contest the fine'
Smacked by a hefty penalty of over $1 billion for its failure to meet gas output targets, Reliance Industries on Friday hit back at the Oil Ministry saying there was no provision in the contract to disallow any part of its investment in KG-D6 fields in Bay of Bengal.
Stating that the company had on May 2, 2012 received a communication disallowing certain investments it had made in developing the deep sea KG-D6 fields, RIL said: “There are no provisions (in the Production Sharing Contract) that entitle the Government to disallow recovery of any contract cost as defined in the PSC."
The Oil Ministry had on May 2, 2012 written to RIL disallowing $1.005 billion out of the $5.756 billion investment it had made on developing Dhirubhai-1 and 3 (D1&D3) gas fields in the Bay of Bengal deep sea block KG-DWN-98/3 (KG-D6) as current output of 27.52 million standard cubic meters per day was way short of the target of 80 mmscmd for this time of the year.
RIL on November 23, 2011 issued an arbitration notice under the provisions of the PSC on “wrongful denial of cost recovery on the ground of lower production or under utilisation of facilities. RIL maintains that any such attempt by the Government is unwarranted and violative of the PSC.”
“However, since no arbitrator has been appointed by the Government for nearly five months from the Arbitration Notice, RIL has filed a petition in the Supreme Court, under Section 11 of the Arbitration Act, for appointment of an arbitrator on behalf of the Government by the Court,” the statement said.
The Oil Ministry, which blamed RIL for not drilling its committed quota of wells to a large chunk of production facilities lying unused or under-utilised, on the other hand says that RIL’s five-month old notice is not valid as there was no dispute at that time and the arbitration notice was issued on apprehensions and media reports.
If RIL wants to contest the restriction now imposed on cost recovery, it will have to issue a fresh notice, a top Ministry official said.
“RIL continues to maintain that a contractor is entitled to recover all of its costs under the terms of the PSC and there are no provisions that entitle the Government to disallow recovery of any contract cost (capital or operating expenditure) as defined in the PSC,” a RIL statement said.
“The Government’s (May 2, 2012) communication articulates the very issues which are subject matter of the notice of arbitration issued by RIL and these issues will be resolved through arbitration process stipulated under the PSC which has been initiated by RIL,” it added.
The Ministry’s 7-page notice, signed by Giridhar Aramane, Joint Secretary (Exploration) in the Oil Ministry, stated that $457 million of cost would be disallowed in 2010-11 and $1.005 billion in 2011-12.
The official said $1.005 billion was cumulative cost recovery disallowed and should not be seen as additional fine.
The cumulative cost disallowed is higher than $778 million that the Ministry had been previously contemplating.