Government runs into hurdles in recovering revenues from RIL-operated KG-D6 block

Government runs into hurdles in recovering revenues from RIL-operated KG-D6 block

NEW DELHI: The government’s move to recover part of a $2.4-billion penalty it has imposed on Reliance Industries (RIL) hit a roadblock after state-run GAIL India and Chennai Petroleum Corp (CPCL) told the oil ministry that they cannot collect revenues from RIL-operated KG-D6 block as they are not buyers of oil and gas from the field. 

Oil Minister Dharmendra Pradhan had told Parliament in July that the oil ministry had directed GAIL and CPCL to remit sale proceeds of oil and gas from RIL-operated D6 block in the government’s account. 

The episode is the latest in a long running saga. In 2011, the UPA government disallowed RIL from recovering part of its expenditure in developing the D6 block because of a steep fall in output compared to projected production targets. RIL has challenged the move in arbitration proceedings citing the production sharing contract (PSC) which, as per the company’s interpretation does not provide for such penal provisions. Further, India’s largest private sector company by revenues argues that the output drop compared to production plans is normal globally because of geological complexities. 

The government for its part blames the contractor for not drilling the planned number of wells. According to the Directorate General of Hydrocarbons (DGH), the accumulated penalty amount is $2.376 billion as on March 31, 2014. 

A GAIL India spokesman confirmed it could not act upon the government’s directive because they are merely a transporter and not the buyer of D6 gas. 

“This direction had come to GAIL around 6-7 months ago. GAIL had immediately replied to MoPNG (Ministry of Petroleum & Natural Gas) that GAIL is currently not buying any gas from RIL. RIL gas supplies to GAIL’s LPG plants were last supplied till June 4, 2013 and has been nil subsequently in view of reducing availability of KG-D6 gas. Accordingly, there were no monies due for remittance to RIL by GAIL from which such recoveries (as indicated) could be made,” the spokesman said in an email reply.

Industry experts said legally the government can’t withhold any amount because the matter is under arbitration. “Globally such geological surprises are common. Some fields may produce more than the estimated output, while some could not achieve the target. Besides, the PSC for KG-D6 block does not provide for such penalty,” one expert working for a global exploration firm said requesting anonymity. The oil ministry, CPCL and RIL did not respond to ET’s email queries. 

An Indian Oil Corp (IOC) executive said CPCL is currently not buying crude oil from RIL’s D6 block and hence is not in a position to execute the oil ministry’s directive. Email queries sent to IOC remained unanswered. CPCL is a subsidiary of IOC. 

According to DGH officials, RIL was earlier selling crude oil from its D6 block to CPCL on the basis of negotiated price and terms. After the government demanded better price, RIL invited competitive bids from all domestic refiners to purchase its D6 crude for the current financial year. RIL’s Jamnagar refinery emerged as the highest bidder, which offered $4-5 per barrel more for the crude compared to CPCL and bagged the contract.

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