Oil ministry refers BP, Niko status in RIL arbitration to law ministry

The ministry of petroleum and natural gas has been asked to give a legal opinion to ascertain if British energy giant BP and Canada's Niko can be parties in the arbitration initiated by their partner Reliance Industries against the government over the levy of penalties for the shortfall in KG-D6 gas production.

Since the company failed to raise gas output from the KG-D6 fields as stipulated in the production sharing agreement, the government  has disallows capital spending by Reliance Industries.

Now that the government has allowed doubling of the price of domestically produced gas, RIL has been asked to furnish a bank guarantee that could be encashed by the government if it is proved that the company deliberately curtailed gas production from the D1&D3 fields in KG-D6, depriving RIL of the incremental revenue.

RIL objected to the levy of a $1.8 billion penalty for output not being in line with projected production profile and dragged the ministry to arbitration last year, saying the contract does not provide for such penalty.

The near-doubling of gas prices to $8.22 per million British thermal units will kick in from next month, benefiting all gas producers in the country.

However, in the case of the main fields in the KG-D6 block, it would be conditional upon RIL furnishing a bank guarantee equivalent to the incremental revenue it will get from the new rates.

Sources said while RIL agreed to the condition, the exploration division of the oil ministry raised issues about BP and Niko Resources, which together hold 40 per cent in the KG-D6 block.

Since the arbitration against the government was started by the original contractor, Reliance Industries, a bank guarantee cannot be taken from BP and Niko that were not part of the 2012 arbitration notice slapped on the government.

However, BP and Niko separately wrote to the ministry, saying that RIL, in filing the arbitration notice, had acted as an operator representing the interests of all the KG-D6 constituents and that they were also part of the arbitration.

BP and Niko say that as a contractor to the production sharing contract (PSC) they are party to the arbitration and RIL has represented them.

The petroleum ministry has now sought legal opinion to ascertain if BP and Niko can become part of the arbitration with such mutual agreements.

RIL and BP attribute the decline in D1&D3 output to a 10th of the previously projected 80 million standard cubic meters per day to unanticipated geological complexities such as a drop in reservoir pressure and ingress of water and sand.

BP and Niko had previously submitted that the decision of the tribunal on the gas output issue would be binding on both of them.