Govt to slap additional penalty of $578 mn on Reliance

The government plans to impose an additional penalty of $578 million on Reliance Industries for producing less-than-targeted natural gas from its eastern offshore KG-D6 block. 

The penalty in the form of disallowing costs incurred on the field will be for missing the target in 2013-14, a government source said. With this, the total costs disallowed will increase to $2.375 billion.

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The government had previously issued a notice to RIL disallowing a total of $1.797 billion in costs for falling short of production during 2010-11 ($457 million), 2011-12 ($548 million) and 2012-13 ($792 million). 

RIL, which disputed the levy and initiated arbitration against the government, did not respond to an e-mail seeking comment.

"A note is being put to Oil Minister Dharmendra Pradhan for disallowing cost recovery of $578 million in 2013-14. A notice will be sent to RIL once he approves it," he said. 

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Production from the main gas fields in the KG-D6 block has dropped to about a 10th of the planned 80 million standard cubic meters per day.

The fall in output meant that facilities created at huge investment went unutilised.

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. 

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The creation of excess or unutilised infrastructure impacts the government's profit share and this is sought to be corrected by disallowing part of the expenses incurred.

The source said the ministry believes that $115 million in additional profit share would have accrued to the government from disallowing the cost in 2013-14.

To recover this additional profit share, it has proposed that state-run companies deduct $115 million from payments due to RIL for crude oil and gas bought from KG-D6 block.

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Once Pradhan approves, the ministry will instruct Chennai Petroleum and Hindustan Petroleum, which buy crude oil from the KG-D6 block, and GAIL India, which purchases KG-D6 gas, to remit $115 million deducted from payments to RIL and deposit the amount in a government account, the source said. 

The move comes after RIL did not agree to deduct the disallowed costs from total expenses incurred before calculating the government's share of profit petroleum. 

The government's profit share would rise by $195 million if all of the $2.375 billion of disallowed costs is deducted from expenses incurred.