Government slaps Rs 1,700 crore penalty on RIL, BP

NEW DELHI: The government has disallowed Reliance Industries and partners to recover $264 million of cost of developing KG-D6 fields for 2015-16 as the output from the field fell short of the target, according to sources familiar with the matter.
Reliance and partners BP and Niko are engaged in an arbitration with the government over dispute related to the amount that can be recovered as cost before the profit could be shared from KG-D6 fields between the companies and the state.Companies contend that the contract doesn’t provide for government disallowing cost for shortfall in targets.
The output from KG-D6 fields has remained far short of the targeted 80 million standard cubic metres a day (mmscmd) for years, and has now fallen to under 4 mmscmd. This has prompted the government to direct companies to not account for certain costs each year beginning April 2010.
Adding the $264 million disallowed as cost in 2015-16 to similar restrictions imposed in previous five years, the total cost recovery disallowed by the government comes to $3.02 billion. The government had disallowed $457 million of cost for 2010-11, $548 million for 2011-12, $792 million for 2012-13, $579 million for 2013-14 and $380 million for 2014-15. The amount for 2016-17 has not yet been calculated.
Disallowing such cost recovery results in enlarging the pie of profit available for sharing between the company and the government.
After accounting for the cost recovery restriction of 2015-16, the cumulative profit share claimed by the government from KG-D6 field has gone up to $175 million, according to sources. RIL, BP and the oil ministry declined to comment for the story.
To collect its share of additional profit, the government had directed GAIL, the state-run gas transporter, to take away all amount above $4.2 per million British thermal unit (mmBtu) for gas from KG-D6, and place it in a gas pool account.
The government collected $81.7 million through this mechanism between November 2014 and March 2016, but a fall in domestic natural gas price below $4.2/mmBtu from April 2016 brought collection to a halt.
The arbitration, currently underway between companies and the government, will finally decide if the latter is justified in disallowing cost recovery and claiming a higher share in profit.
RIL is engaged in multiple arbitrations with the government although it has recently withdrawn one related to gas price. It had also withdrawn an arbitration related to relinquishment of acreage in KG-D6 block last year.
While unveiling a Rs 40,000-crore plan to develop new fields in the KG Basin in June, RIL chairman Mukesh Ambani said he expected a fair outcome in arbitration cases.
The government recently issued a demand notice of $3.9 billion on RIL, ONGC and Shell following a favourable arbitration award related to Panna Mukta Tapti case. The companies called the demand premature. Two other cases relate to penalty for unfinished minimum work programme in KG-D6 fields and dispute over RIL allegedly producing gas from adjoining fields of ONGC.