In 2002, when gas was discovered in the D-6 block, it was projected that output would peak at 80 mmscmd. Today, it is about 32.66 mmscmd. RIL says its not my fault. Critics say rubbish, you are waiting for price revision in 2014. So what's the truth?

Remember the popular series ‘ Whose line is it anyway ?' The points awarded in that show were purely decorative, served no practical purpose, and were often awarded to audience members or other arbitrary third persons. At the conclusion of each episode, a winner or several winners are chosen arbitrarily by the host.

Something like this is happening in the RIL-Petroleum Ministry tussle over the D6 block which produces natural gas. There are four main characters — RIL, the Government, the Directorate-General of Hydrocarbons (DGH), and the unpredictable gas fields.

The task, a la the American sitcom, is to find the gas. But we don't know where it is — or if RIL is telling the truth about it.

No gas, just facts

The bare facts are as follows. So far five gas fields have been discovered in D6 block. Of these two (D-1 and D-3) and MA are producing fields. RIL holds 60 per cent interest in KG-D6, British Petroleum holds 30 per cent and Niko Resources of Canada the remaining 10 per cent.

In 2002, when gas was discovered in this block projections were that output would peak at 80 mmscmd. Today, it is about 32.66 mmscmd.

In terms of the agreement with the Government, RIL was required to drill, connect and put on stream 22 wells by April 1, 2011 with an envisaged production rate of 61.88 mmscmd and 31 wells by April 1, 2012 with an envisaged production of 80 mmscmd.

But that has not happened. Output has fallen short by a significant margin. The average gas production from KG-DWN-98/3 block (D6) has decreased from 55.89 mmscmd in 2010-11 to about 42.65 mmscmd in 2011-12.

RIL is saying the shortfall is because of “geological complexities”. The DGH is saying this is because RIL has not drilled enough wells.

If corridor gossips are to be believed, RIL is purposely not increasing output as it wants the gas price to be revised from the current $4.2/mmBtu. In fact, critics are even saying that the producing wells in Dhirubhai-1 and Dhirubhai-3 gas fields have not been drilled to full depth, and that there is still more gas.

Investors and industry watchers are watching this drama is bemused silence waiting for someone to tell them where the gas is.

RIL has brought down the gas reserve estimates of its domestic portfolio, including from the country's largest gas fields D6, from the earlier projections by almost 7 per cent.

The contractors (BP-Reliance Industries and Niko) are saying that they will present a fully integrated development plan for the D6 block, which will maximise the use of the entire existing infrastructure to produce the balance of the discoveries from the block.

RIL is also claiming that under the formula in the agreement, it has not recovered even the actual sunk costs in KG D6 block. Under the D6 PSC, even at this stage 10 per cent of profit share goes to the Government.

Fight on, McDuffs

But the critics are not convinced. RIL, they say, may not have made a profit but cost recovery is a different thing altogether. Till date RIL is said to have spent close to $10 billion. Revenue from gas sales in 2010-11 was $2.8 billion and 2011-12 is $2.1 billion.

The Government, understandably unhappy at the drop in output, decided that it would disallow expenditure incurred in constructing the production and processing facilities in D-1 and D-3 gas fields that now have excess capacity because of the drop in output.

But RIL quickly issued an arbitration notice. It said that the government move to disallow cost recovery is violative of the production sharing contract (PSC). The government did not respond and maintained that RIL's reaction was pre-mature.

On May 2, after taking legal opinion the Government wrote to RIL saying it proposes to disallow about $1 billion as cost recoveries for 2010-11 and 2011-12 in the East Coast gas fields.

RIL responded on May 4 saying there are no provisions in the contract that entitle the government to disallow any cost recovery. Indeed, it went a step further and said since now that the Government has acknowledged that there is a dispute, it should also appoint an arbitrator.

But the Government is treating RIL's arbitration notice as just a piece of paper on the grounds that when it was served there was no case for it. According to it, RIL has failed to adhere to the amended initial field development plan and hence is in clear violation of the PSC.

Investors are watching the situation. Since the Government notice of May 2 RIL has seen a fall of 7 per cent. RIL says this is in line with market trends and not related to the notice of May 2.

As the elephants wrestle, the audience watches in helpless silence.

> richam@thehindu

Related Topics
comment COMMENT NOW