Govt moves to disallow more of Reliance-BP-Niko’s KG-D6 cost

New Delhi: The oil ministry has sought to disallow about $264 million of the exploration and production cost the consortium of Reliance Industries Ltd (RIL), BP Plc. and Niko Resources Ltd wanted to recover in 2015-16 from the revenue generated by their D6 block in the Krishna-Godavari (KG) basin.

The ministry cited below-target output from the field for disallowing the cost recovery, a person privy to the development said on condition of anonymity.

The government demanded extra profit share—called profit petroleum—from the field as lower cost recovery leaves the consortium with more profit on paper to be shared between the developers and the government, under a formula in their production sharing contract.

A second person aware of the development, a government official who also spoke on condition of anonymity, said disallowing part of the 2015-16 cost is in continuation of a move initiated in 2010-11 and was incremental in nature.

“The issue is in arbitration. These are not disputes in perpetuity. We do try and resolve differences of opinion within a time frame. We have walked the talk as far as opening up the hydrocarbon sector is concerned which has resulted in a sizable increase in investor interest,” said the person.

On 15 June, Reliance and BP announced their plan to invest a combined Rs40,000 crore in the D6 field to boost production over the next 3-5 years.

Emails sent to officials of Reliance and BP on Tuesday, a holiday for independence day, remained unanswered at the time of publishing.

The government had disallowed the consortium from recovering a cost of $380 million in 2014-15 for not meeting output targets.

Reliance said in its annual report for 2016-17 that the contract for the KG-D6 Block permits full “cost recovery” of its costs of exploration, development and production from the value of petroleum produced from the KG D6 Block.

“RIL on behalf of all contractor constituents—BP and Niko—served an arbitration notice on the government on 23 November 2011,” it said, adding that parties had made their submissions before the arbitral tribunal.

Gas production from the Dhirubhai-1 and 3 gas fields in the KG-D6 block was to reach 80 million metric standard cu. m a day (mmscmd) but actual production fell below the estimate and was only 35.33 mmscmd in 2011-12 due to water and sand ingress in some of the wells.

News agency Press Trust of India said the government had disallowed $457 million of cost for 2010-11, $548 million for 2011-12, $792 million for 2012-13, and $579 million for 2013-14.