DGH seeks $1.78 bn penalty on RIL for KG-D6 gas shortfall

The Directorate General of Hydrocarbons (DGH) has recommended additional penalty of $781 million on Reliance Industries Ltd for producing less than projected natural gas from the KG-D6 offshore block.

This takes the total disallowance of capital spending by the company on the KG-D6 block to $1.786 billion.

The oil sector regulator had, earlier, disallowed recovery of $1.005 billion of capital spending by RIL for failure to meet output targets during 2010-11 and 2011-12.

DGH had, on 22 July, again asked the ministry of petroleum and natural gas not to allow $781 million of the cost RIL claims to have incurred on KG-D6 fields for producing an average of 26.07 million cubic meters per day of gas as against the target of 86.73 mmcmd in 2012-13.

According to DGH, RIL had not drilled its committed quota of wells, which has led to the shortfall in production. The regulator said a large part of production facilities at the KG-D6 field also remain unused or underutilised.

Against an infrastructure built to handle 80 mmscmd of output, RIL is currently producing less than 14 mmscmd.

The production sharing contract with the government allows RIL and its partners BP Plc and Niko Resources to recover the entire capital and operating expenses from sale of gas before sharing profits with the government.

However, the expenditure has to be approved by the management committee of the KG-D6 field, which in addition to the company includes the petroleum ministry and sector regulator DGH.

The creation of excess infrastructure impacts government's profit share and the DGH is seeking to correct this by disallowing spending on the unutilised or idle parts of the infrastructure.

Once the petroleum ministry also agrees to the cost disallowance, RIL would be required to pay $114 million in additional profit petroleum to the government for 2012-13 in addition to $103 million already due.

The ministry of petroleum and natural gas is yet to act on the advice of DGH and the previous cost recovery disallowance is also under arbitration.