Reliance Industries penalty: DGH may provide capex, opex relief to company in KG- D6 block case

The petroleum ministry’s technical arm Directorate General of Hydrocarbons (DGH) is likely to take into consideration capital and operational expenditure incurred by Reliance Industries (RIL) while computing the penalty being imposed on the firm in regard to its commercial production of gas migrated from state-run ONGC’s 98/2 area to RIL’s KG-D6 block. This means the penalty burden on RIL would be drastically reduced after adjusting for costs borne by it in drilling and production facilities as well as the operational expenses.

Unconfirmed reports suggest that natural gas worth R11,000 crore migrated from the PSU explorer’s block. However, FE couldn’t verify the authenticity of this figure.

ONGC had argued that quantification of “unfair enrichment” as borne out by the AP Shah panel has to be based on the monetary value of the migrated gas produced by RIL (the panel also said ONGC has no locus standi to bring a “tortious” claim against RIL and the penalty proceeds must go the government). Conversely, RIL argued that it is entitled to recover the expenditure made by it.

Industry watchers say the computation of penalty after taking into account costs would be complicated because while RIL claims to have invested over $9 billion to develop the east coast block, the Centre has disallowed costs to the tune of $2.76 billion till March 2015, saying production targets haven’t been achieved. Also, on June 3, the petroleum ministry had revised the profit petroleum penalty on RIL from $195 million as on March 31, 2014, to $246.9 million till March 31, 2015. It needs to be been seen whether DGH takes into account RIL’s capital expenditure minus the disallowed costs and profit petroleum penalty or includes them too.

Shah, a former Delhi High Court chief justice, in his report said the quantification of unjust enrichment can either be based on the monetary value of the migrated gas produced, and to be produced, by RIL or it can be the profit it earned, after taking into account costs and sales figures.

The Shah panel accepted the finding of a November 2015 study done by US-based consultant DeGolyer and MacNaughton highlighting that as much as 11.122 billion cubic metres of natural gas had migrated from ONGC’s 98/2 area to the adjoining KG-D6 block of RIL in the Bay of Bengal between April 1, 2009, and March 31, 2015, a chunk of which the Ambani firm commercially exploited.