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Setback to government in RIL gas case

The government claimed an additional $175 million as its profit share after the cost disallowance in 2016

By PTI in New Delhi

  • Published 9.10.19, 12:11 AM
  • Updated 9.10.19, 12:11 AM
Government says Reliance has not drilled target number of wells.
Government says Reliance has not drilled target number of wells. (Shutterstock)

In a setback to the oil ministry, the Supreme Court has dismissed its petition against an order seeking disclosure of documents that formed the basis for the levy of $3 billion penalty on Reliance Industries over KG-D6 natural gas output not matching targets.

A three-member international arbitration panel, hearing Reliance and its partner’s challenge to the government levying penalty because of unutilised capacity due to production not matching targets, had asked the ministry to share the documents that formed the basis for its actions.

The oil ministry first challenged the disclosure before the Delhi High Court, which on December 18, 2018 dismissed the petition. It then challenged it in the Supreme Court, which on August 5, 2019 dismissed it saying it was “not inclined to interfere” with the earlier order.

The government had between 2012 and 2016 disallowed Reliance and its partners from recovering the cost of $3.02 billion for KG-D6 output lagging targets. The penalty in the form of disallowance of recovery of certain costs was levied because the oil ministry and its technical arm DGH felt that the output lagged targets because the company did not drill the committed number of wells on the fields .

Sources said a three-member arbitration panel, constituted in 2015 to hear Reliance and its partner BP’s challenge to the disallowance of cost recovery, had asked the oil ministry to share a host of documents, including those “sent, received or created” that “set out the reasons” for the government decision.

Reliance and BP believe that there is no provision under the Production Sharing Contract (PSC) signed for the KG-D6 block awarded to them under the first bid round of New Exploration Licensing Policy (NELP) of targets for oil and gas production and disallowing cost if they are not met.

Under NELP (New Exploration & Licensing Policy), contractors are first allowed to recover all their sunk cost before sharing profits with the government. Disallowing a part of the cost would not just result in contractors having to absorb those expenses but also result in higher profit share from oil and gas produced to the government.

The government claimed an additional $175 million as its profit share after the cost disallowance in 2016.

The arbitration panel agreed to most of the 19 requests made by Reliance-BP for the disclosure of documents by the government. These included one for “disclosure of earlier formal but unpublished guidelines in effect between 1997 to October 2007 concerning the classification and/or recovery of general and administrative costs incurred by contractors under NELP PSC”.

The other requests of Reliance-BP granted by the arbitration panel included the ministry disclosing “July 2011 response to an enquiry from the government auditor (CAG)”, documents reasoning out decision not to approve revised field development plan that set out reasons for lower output in October 2013 and ones pertaining to the position the ministry took on the drilling of development wells. Reliance-BP say the output in KG-D6 block plummeted because of unforseen reservoir characteristics, including sand and water ingress.

Sources said the arbitration panel also granted Reliance-BP request for disclosure of documents that led to the ministry’s representative of KG-D6 block oversight panel to deny approval of work programmes and budget for the block in 2011-12 and 2012-13.

The Delhi High Court in its December 2018 order stated that the arbitration panel has “after examining the requests for discovery directed, wherever necessary, discovery of documents, both by the Union of India as well as the respondents/contractors (Reliance-BP)” following “the principles of natural justice”.