Govt stops issuing Reliance-BP penalty notices for KG-D6 gas output shortfall

NEW DELHI, May 22: The government has stopped issuing penalties on Reliance Industries and its partner BP plc for natural gas production from eastern offshore KG-D6 fields not matching the targets after the matter went into arbitration, according to an RTI reply by the DGH and sources.

While a challenge by Reliance-BP to the imposition of penalties in the form of disallowance of recovery of a part of the cost of incurred on the fields led to the government stopping issuing notices after 2016, a similar arbitration proceeding had not prevented it from selling shares, seizing dividends and confiscating tax refunds – totalling about USD 1 billion, to recover retrospective tax dues from Cairn Energy Plc of UK.

The government had between 2012 and 2016 disallowed Reliance from recovering the cost of USD 3.02 billion for KG-D6 output lagging targets, but no notice was issued after that even though production has plummeted to a fraction of the projections.

The Directorate General of Hydrocarbons (DGH) in reply to an RTI stated that in all, four notices were issued that disallowed recovery of a part of the cost incurred by Reliance-BP in producing gas from Dhirubhai-1 and 3 (D1&D3) fields; the last one being on June 3, 2016.

DGH in the RTI reply declined to share copies of the notices on grounds that the information was “commercial confidence of the third party” and said details cannot be disclosed because “the subject information is sub-judice before Arbitral Tribunal/Court of Law.”

While emails and text messages sent to Oil Secretary M M Kutty and DGH seeking comments remained unanswered despite reminders, sources said the notices were stopped as the issue was being heard by an international arbitration panel and it would have tantamounted to contempt of proceedings if the government were to go ahead and keep imposing penalties.

Emails sent to Reliance and BP soliciting comments too remained unanswered.

A three-member arbitration panel was constituted in 2015 to hear Reliance-BP challenge to disallowance of cost recovery.

This was said to have led to stopping of issuance of cost recovery disallowance notices to Reliance-BP, but the government sold Cairn Energy’s near 4.8 per cent holding in Vedanta Ltd, sized dividends due to it totalling Rs 1,140 crore (USD 164.2 million) and confiscated tax refund of Rs 1,590 crore (USD 249 million) when an international arbitration tribunal was hearing the British firm’s challenge to a move to impose Rs 10,247 crore tax retrospectively.

The cost recovery disallowance notices to Reliance-BP were issued as gas output lagged targets, a phenomenon that Oil Ministry and DGH have insisted was because of the company not drilling the committed number of wells on the fields.

The total penalty slapped till 2016, which was in the form of disallowing recovery of cost incurred for missing the target during six years beginning April 1, 2010, was USD 3.02 billion.

The Production Sharing Contract (PSC) allows Reliance and its partners BP PLC of the UK and Canada’s Niko Resources to deduct all capital and operating expenses from the sale of gas before sharing profit with the government.

Disallowing costs will result in the government’s profit share rising. The government claimed an additional USD 175 million as its profit share after the cost disallowance in 2016.

Gas production from Dhirubhai-1 and 3 gas field in the KG-D6 block in the Bay of Bengal was supposed to be 80 million standard cubic meters per day but actual production was only 35.33 mmscmd in 2011-12, 20.88 mmscmd in 2012-13 and 9.77 mmscmd in 2013-14. The output has continued to drop in the subsequent years and is now below 4 mmscmd.

Reliance-BP challenged the cost disallowance of the past years and have initiated international arbitration seeking dropping of the same on grounds that the PSC does not provide for any such punishment.

It had blamed unanticipated sand and water ingress for shutting down of one well after the after, leading to drop in production.

Reliance holds 60 per cent interest in block KG-DWN-98/3 or KG-D6 in the Bay of Bengal. BP has 30 per cent and Niko the remaining 10 per cent. (PTI)