Ministry slaps Rs7,000-cr penalty on RIL over low D6 gas output

For the first time, the petroleum ministry has officially disallowed Reliance Industries Ltd from recovering $1.2 billion (nearly Rs7,000 crore) in costs before sharing profits from the Krishna-Goavari D6 gas field with the government. This in effect means a loss of this amount to RIL.

The notice, served on Wednesday, says the company would not be allowed to recover from sale of gas the cost of its investments worth $457 million made in the field in 2010-11 and $778 million invested in 2011-12; due to the drastic fall in output and RIL's ''failure to meet drilling commitments''.

RIL has consistently cited technical reasons for the fall in output, saying gas finds are always chancy and such production slippages are unavoidable to geological reasons. It has cited similar reasons for not drilling more wells, saying this would be pointless as they could prove unproductive. However, the government has consistently refused to buy this argument.

Government contracts for auctioned oil and gas fields allow companies to fully recover their investments from sales. But RIL's case is unique as the company failed to achieve the target set for gas production from the KG-D6 field.

Gas volumes have dropped to 27 mcmd (million cubic metres per day) – less than half the 62 mcmd committed by Reliance while securing approval for its $8.8 billion investment plan for developing the field. Reliance has so far invested $5.6 billion and recovered nearly all of it.

Reliance is, of course, bound to challenge the notice. It had already served an arbitration notice on the ministry on 24 November 2011.

In its notice, the ministry has refused to join arbitration but said there is a dispute over how much of cost can be recovered because of the fall in gas production.

The Comptroller & Auditor General of India had, last year, criticised both Reliance and the government over the costly development of the KG gas field.