Reliance clarifies on KG-D6 penalty

Reliance Industries Ltd (RIL) said on Wednesday that the government's move to disallow it recovery of certain costs relating to the D6 gas block in the Krishna-Godavari basin (KG-D6) did not amount to a penalty and was also not in line with the contract the two had signed.

In a statement issued on the BSE exchange on the penalty, imposed by the government for falling KG-D6 output, it said, “RIL and its partners believe the purported rationale of the government, in proportionately disallowing the cost in the ratio of actual production to the estimated production from D1-D3 fields in KG-D6 is not as per the Production Sharing Contract (PSC).”

The exchange had earlier sought a clarification from RIL on a news article saying the latter had been slapped with a new fine of $579 million. The company said media reports “apparently” misquoted the disallowance of cost recovery by the government as levy of fine or penalty.

Petroleum Minister Dharmendra Pradhan had on Monday told Parliament the government had issued a notice to RIL whereby a cumulative cost of $2.376 billion up to March 31 had been disallowed. “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,” he had said.

The PSC allows RIL and its partners, BP Plc and Niko Resources, to deduct all expenses from the sale of gas before sharing profit from the sale of gas with the government.

According to RIL, the government had in 2012 wrongfully sought to disallow cost recovery of investments made in the KG-DWN-98/3 block for 2010-11 and 2011-12. “The potential impact to the contractor is the additional payment of profit petroleum to the government, when and if the disallowed cost is added to the profit petroleum,” the company said in its clarification.

Profit petroleum is the term for the value of what is taken out and saved from the contract area, after deducting the cost. The government’s share of profit petroleum is currently pegged at 10 per cent, based on a formula prescribed in the PSC.

RIL added the company, along with BP and Niko, had commenced an arbitration process under the PSC terms  over the wrongful disallowance of cost recovery by the government in November 2011 and that the news item of disallowance of $579 mn related to 2013-14.