RIL setback to OilMin: GAIL, CPCL refuse to comply with KG-D6 order

In a setback to the petroleum ministry, gas utility GAIL and refiner Chennai Petroleum Corp Ltd (CPCL) have expressed their inability to deduct $115 million from the amount due to Reliance Industries (RIL) to make up for the additional profit petroleum from the flagging Krishna Godavari-D6 block.

Oil Minister Dharmendra Pradhan had last month told the Parliament that his ministry has disallowed RIL from recovering $2.37 billion invested to develop offshore Krishna Godavari gas fields as output has fallen drastically and was way below the promised volumes in past four years. Due to this cost disallowance, the ministry calculated that the government should have got an additional profit share of $115.26 million. To recover this, it directed GAIL India and CPCL to deduct this amount due to RIL, he had stated. However, both companies have expressed their inability to do so as no amount was pending against crude oil and gas they purchased from RIL, sources said. CPCL stated that it bought the crude oil produced from KG-D6 block from March 2009 to April 2014 but lost out on a tender floated by RIL from supplies thereafter.

RIL’s Jamnagar refineries quoted a better price and terms to bag the supplies. So, there was no amount due from which any deduction can be made, it wrote to the ministry. GAIL told the ministry it was allocated 2.59 million standard cubic meters per day of gas from KG-D6 block for making LPG but due to decline in production, supplies were reduced to zero in June 2013.

Also, the contract expired on March 31 this year. In the absence of gas supplies from KG-D6, there is no remittance by GAIL to RIL and hence no amount can be deducted, the state-owned firm told the Ministry. Sources said the options before the Ministry now include disputing the sale of crude oil from KG-D6 fields to Jamnagar refineries as related party transactions and getting CPCL to buy the oil again. Another option could be to ask fertiliser plants, which get almost all of the present output of 13 mscmd from KG-D6, to deduct $115 million from amount due against supplies.

While the first option may take some time before it can be actually accomplished, the second option may be difficult to implement, they said. Pradhan had in a written reply to a question in Lok Sabha on July 14 stated that the government has disallowed $579 million additional cost for output missing the targets.

With this, the total penalty on RIL for missing the target in four financial years beginning April 1, 2010 now stands at a cumulative $2.37 billion. Disallowing costs will result in government’s profit share rising by $195 million from 2010-11 to 2013-14, he had said, adding that of this, $115 million is being sought to be recovered through CPCL and GAIL.

The production sharing contract allows RIL and its partners BP Plc and Niko Resources to deduct all capital and operating expenses from the sale of gas before sharing profit with the government. Gas output from the Dhirubhai-1 and 3 gas field in the eastern offshore KG-D6 block was supposed to be 80 mmscmd but actual production was only 35.33 mscmd in 2011-12, 20.88 mscmd in 2012-13 and 9.77 mscmd in 2013-14.