Govt disallows another $792 mn RIL investment in KG-D6 block

The government has disallowed an additional $792million investment that Reliance Industries claims to have made in the KG-D6 gas block, off the east coast of India, for failure to produce results.

In fact, Reliance Industries along with its partners BP and Nico Resources produce less gas from the once prolific KG-D6 fields than three years ago.

On 14 November, the ministry of petroleum and natural gas served notice on RIL disallowing $792 million of the cost incurred on the fields, government officials said.

This takes the total disallowance of investment by RIL in the KG-D6 gas field to $1.797 billion.

RIL claims to have spent $10.76 billion on prospecting and exploration in the field, but with negative returns during the past three years.

RIL has been reporting huge investments in the gas field but did not care to hit production targets amidst reports that the company has been deliberately keeping production low to inflate expenditure, which it can recover from sale of oil and gas as per the contract with the government.

This way, the company can also reduce the share of oil for the government under the production sharing contract.

It is obliged to share profits with the government only after recouping expenses.

However, it has been found that RIL and its partners BP plc of UK and Canada's Niko Resources did not drill the committed number of wells, which led to output dropping by over 80 per cent from the main Dhirubhai-1 and 3 (D1&D3) gas fields in the KG-D6 block.

D1&D3 fields have in the first four years of production (2009-10 to 2012-13) produced a total of 1.853 trillion cubic feet of gas, 1.196 Tcf short of 3.049 Tcf that RIL had committed to produce in the 2006 development plan.

Except for the first year, gas output at the KG-D6 field has lagged the target, as RIL opted to leave a greater part of the facilities untilised, government officials said.

While RIL has built facilities to handle 80 million standard cubic metres per day of gas from D1&D3, the present output is just 8.78 mmscmd.

As per the production sharing contract, gas production at the KG-D6 field should have reached 80 mmscmd last year itself.

RIL and its partners BP Plc and Niko Resources are allowed to deduct all of the capital and operating expenses from sale of gas before sharing profits with the government.

Creation of unutilised infrastructure impacts government's profit share and hence the disallowance of part of the investment.

RIL, meanwhile, is seeking international price parity for natural gas it sells in India and the government seems to be in a mood to allow a hike in the price of natural gas produced in the country.