KG-D6: RIL may not back off in 2 cases

Tanya Thomas Mumbai | Updated on January 12, 2018 Published on June 25, 2017

Mukesh Ambani, Chairman and Managing Director, RIL

One is for recovery of $2.75 b in costs; another is over gas extraction from an ONGC reserve

The decision by Reliance Industries Ltd (RIL) and BP to jointly bow out of a dispute with the Centre on the pricing of natural gas may not necessarily lead to similar conclusions in its two other arbitration cases.

The deep-water KG-D6 fields on the eastern offshore have been fraught with controversy, a fall in production of natural gas, and disputes over pricing and profits for the past several years.

The RIL-BP announcement earlier this month, that the joint venture would kick-start work again on these fields with an investment of ₹40,000 crore, and a simultaneous decision to withdraw from arbitration on the pricing of the gas produced, means production from the newer fields will be eligible for the higher gas price of $5.56 per mmBtu in the R-series reserves in this field. (The currently producing D1 and D3 fields from the D6 block will not get the premium price as the new price only applies to developments made after January 1, 2016. )

However, a source within RIL said the company still intends to pursue arbitration in two other major disputes that it has with the government in the same fields. The first has to do with the recovery of costs of $2.75 billion incurred by RIL and its partners in the KG-D6 block.

The government has disallowed these costs from the production sharing contract, saying the companies missed their production targets for five consecutive years from April 2010.

The second ongoing arbitration case is over a dispute between state-run ONGC and RIL, and the latter’s alleged production of gas from a neighbouring reserve of ONGC.

“In the second is unlikely that RIL will back down,” a consultant to the oil industry told BusinessLine.

“There is a concept globally of unitisation for adjacent hydrocarbon reserves. There should have been joint development in such fields; this isn’t the first case of gas migration in the world.”

“RIL-BP’s decision to invest further in KG-D6 is an excellent sign for the oil industry in India in general,” the person further said.

Stalled capex

“Otherwise, we’ve seen stalled private capital expenditure in this sector over the last few years. There’s only been ONGC, which is investing about ₹34,000 crore to develop fields in the KG-DWN-98/2 block.”

“Withdrawal of price arbitration is a sentiment-positive for RIL’s stock,” a report by JP Morgan said.

“Given that the first of the incremental gas is not before 2020, and the full ramp-up would be only in 2022, we see limited financial impact till FY20. The capital spend of about $1 billion a year is also very manageable for RIL. While current gas prices are low, so are capital costs for developing these fields. RIL’s ability to make counter cyclical investments is a key positive...”

Published on June 25, 2017
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