Govt imposes $579 mn fresh penalty on RIL

The government imposed an additional penalty of $579 million on Mukesh Ambani-controlled Reliance Industries Ltd (RIL) for failing to meet the gas production target for its flagship KG-D6 block in 2013-14 as well, Petroleum Minister Dharmendra Pradhan said on Monday.

The fresh penalty, the first imposed by the new Narendra Modi-led government, is in addition to the existing fine of $1.80 billion slapped on the company for production shortfall in earlier years — $457 million for 2010-11, $548 million for 2011-12 and $792 million for 2012-13.

The penalty is in the form of disallowing costs incurred by RIL in the block. “A notice was issued on July 10, whereby a cumulative cost of $2.38 billion up to March 31, 2014, was disallowed. The issue is currently under arbitration,” Pradhan said in a written reply to a question in Parliament on Monday. The production-sharing contract (PSC) allows RIL and its partners, BP Plc and Niko Resources, to deduct all expenses from sale of gas before sharing profit with the government.

Disallowing part of the expenses incurred allows the government to recover the impact on its profit share due to creation of additional infrastructure by the company. “The ministry has also raised a claim of additional profit petroleum of $115 million to be paid by the contractor, on account of disallowance of cumulative contract costs of $1.797 billion, till 2012-13,” Pradhan said. After including the cost disallowance in 2013-14, the total additional profit petroleum claimed from RIL came to $195 million, he added.

The government has also directed state-run Chennai Petroleum Corporation (CPCL) and Gas Authority of India Ltd (GAIL) to deduct $115 million from payments due to RIL for crude oil and gas bought from KG-D6 block and deposit the amount in a government account. Pradhan informed Parliament the gas production target for the D1 and D3 fields was 80 million standard cubic metres a day (mscmd) but this fell from 35 mscmd in 2011-12 to 20 mscmd in 2012-13 and 9.7 mscmd in 2013-14.

The company has produced eight mscmd so far this financial year.

RIL had put up production facilities to produce 80 mscmd of gas but “failed to adhere to the approved field development plan in terms of drilling and putting on stream the required number of wells,” the minister said.

RIL had earlier gone for an arbitration after the petroleum ministry, then under S Jaipal Reddy, ordered that the company should not be allowed to recover $1 billion of its investments in the block because of falling production. This amount was subsequently raised by $800 million.

Reliance had challenged the order arguing the sovereign contract did not have provision for penalty for failing to achieve output target and production fell due to geological surprises like water and sand choking production wells, and not due to shortcomings in work.