KG-D6 Case: Supreme Court Declines Oil Ministry’s Request To Stay Sharing Of Documents On Reliance Penalty
Flames burn from gas venting pipes on the oil platform (Photographer: Angel Navarrete/Bloomberg)

KG-D6 Case: Supreme Court Declines Oil Ministry’s Request To Stay Sharing Of Documents On Reliance Penalty

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The Supreme Court has dismissed the Oil Ministry's petition against an order seeking disclosure of documents that formed the basis for the levy of $3 billion penalty on Reliance Industries Ltd. over KG-D6 natural gas output not matching targets.

A three-member international arbitration panel, hearing Reliance and its partner BP Plc's challenge to the government’s penalty, had asked the ministry to share an array of documents.

The Oil Ministry first challenged the disclosure before the Delhi High Court, which on Dec. 18, 2018 dismissed the petition. It then moved the Supreme Court, which on Aug. 5, dismissed the plea saying it was "not inclined to interfere" with the earlier order.

RIL-BP’s Contention

The government had between 2012 and 2016 disallowed Reliance and its partners from recovering the cost of $3.02 billion for KG-D6 output lagging targets. The penalty was levied because the Oil Ministry and its technical arm - the Directorate General of Hydrocarbons - felt that the output lagged targets because Reliance did not drill the committed number of wells on the fields and created excess capacity.

Sources said a three-member arbitration panel, constituted in 2015, had asked the Oil Ministry to share a host of documents, including those “sent, received or created” that “set out the reasons” for the government’s decision.

Reliance and BP believe that there is no provision under the Production Sharing Contract for oil and gas production targets and disallowing costs if they are not met.

Mukesh Ambani, chairman and managing director of the Reliance Industries Ltd., arrives for the company’s annual general meeting in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)
Mukesh Ambani, chairman and managing director of the Reliance Industries Ltd., arrives for the company’s annual general meeting in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Also read: Reliance Industries Seeks $5.4 Minimum Price For New Gas From KG-D6

NELP Regime

Under the New Exploration Licensing Policy, contractors are first allowed to recover all their sunk costs before sharing profits with the government. Disallowing a part of the costs would not only result in contractors having to absorb those expenses but also result in higher profit share from oil and gas produced to the government. The government claimed an additional $175 million as its profit share after the cost disallowance in 2016.

The arbitration panel agreed to most of the 19 requests made by Reliance-BP for disclosure of documents by the government.

These included one for the "disclosure of earlier formal but unpublished guidelines in effect between 1997 to October 2007 concerning the classification and/or recovery of general and administrative costs incurred by contractors under NELP PSC".

The other requests of Reliance-BP granted by the arbitration panel included:

  • Ministry disclosing "July 2011 response to an enquiry from the government auditor (CAG)"
  • Documents giving reasons for the decision not to approve revised field development plan that set out reasons for lower output in October 2013
  • Documents pertaining to the position the ministry took on drilling of development wells

Also read: RIL, BP Plc To Invest $5 Billion In KG-D6 Basin, May Explore Mahanadi Basin As Well

KG-D6 Production Slowdown

Gas production from Dhirubhai-1 and 3 gas field in the KG-D6 block in the Bay of Bengal was supposed to be 80 million standard cubic meters per day but actual production was only 35.33 mmscmd in 2011-12, 20.88 mmscmd in 2012-13 and 9.77 mmscmd in 2013-14 - the years for which the over $3 billion penalty was levied. The output has continued to drop in the subsequent years and is now below 2 mmscmd.

Reliance holds 66.6 percent interest in block KG-DWN-98/3 or KG-D6 in the Bay of Bengal. BP owns the rest.

Also read: Reliance Industries, BP Sanction Third Phase Of Integrated KG-D6 Development

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