Cagey Basin

• Petroleum ministry serves Reliance notice to stop around $1 billion cost recovery
• Arbitration route planned to resolve issue of production sharing contract violation
• Significantly, proposal to seek revalidation of D6 block reserves
• Gas production from K-G D6 expected to drop to 28 mmscmd instead of 80 mmscmd it was targeted to reach
• RIL has sought SC directive for arbitration, with government not responding

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On the face of it, the Union petroleum ministry has finally taken some action in its slow-fuse battle with Reliance Industries over the D6 block in the Krishna-Godavari basin. A long legal arbitration duel between the two parties seems inevitable (over Reliance’s failure to deliver the promised quantum of gas despite a several-fold increase in capital expenditure at the D6 block). But doubts persist on the government’s true intention. The market buzz remains that the government is not really serious about pursuing the arbitration path—unlike Reliance, which wants it—and that is why it is delaying the appointing of an arbitrator.

Part of this confusion stems from the petroleum ministry under Jaipal Reddy being keen to follow the rule book. The ministry clearly doesn’t want to attract any flak for favouring the corporate giant. Reliance is already in the Supreme Court after the prime minister refused to agree to its demand for an early price revision for KG gas. Will the government finally take recourse to legal action?

“We may agree for arbitration as there is provision for it,” says a senior petroleum ministry official, who declined to be identified. This is a more affirmative stance by the ministry, for sure. In November ’11, the solicitor general had advised against proceeding with Reliance’s notice for arbitration (Reliance then approached the Supreme Court). “But now the S-G has said recovery of investment costs for unutilised infrastructure, created for handling more than double the current gas production, be disallowed,” the official adds.

The reasons are obvious. Production was supposed to be 70.38 million metric standard cubic meters per day (mmscmd) at this juncture, but is likely to average 28 mmscmd for the year. And instead of touching 80, it’s “projected to decline to 20 mmscmd in 2014-15,” Jaipal Reddy informed Parliament this week. That explains the notice sent to Reliance, disallowing recovery of around $1 billion (`5,300 crore) investment cost—out of the $5.5 billion-plus invested in the K-G D6 block—till the production goes up.

Significantly, given the distrust over Reliance’s failure to meet its work and production commitment, official sources told Outlook, “We are considering a third-party inspection of the reservoir to get an unbiased opinion.”

Energy expert T.N.R. Rao feels such a step would be fruitful only if the ministry engages a neutral party like the Commonwealth Secretariat to provide expertise. This was done in the early 1990s for the award of Panna-Mukta and Tapti blocks, the Ravva oil fields and the Kharsang oil block in Assam. “We got the necessary software for estimating the reservoir reserves and the expected return so that nobody could accuse us of wrongdoing,” says Rao, a former petroleum secretary.

Experts are critical of the fact that the government has so far failed to put in place a statutory body that would make it mandatory for contractors to report on reserves. This is the practice in developed countries. Niko Resources, which holds a 10 per cent stake in K-G D6 block, reported ahead of Reliance about the possibility of the reserves being lower. In its annual report on May 8, Reliance has cut estimates for proven gas reserves in its Indian blocks by 6.7 per cent to 3.67 trillion cubic feet. It, however, did not specify whether the fall in reserve estimate includes the D6 block.

The market buzz is that D6 block reserves have been overestimated much like the adjoining block held by gspc, which has been certified to hold 2 trillion cubic feet (tcf) of gas as against the 20 tcf Gujarat CM Narendra Modi was made to declare initially. As Rao stresses, reservoir data has to be constantly reviewed and assessed “so that work programmes can be altered suitably by the management committee (which includes representatives of exploration regulator dgh, the ministry and the contractor). In no case can the contractor unilaterally decide on altering the work programme, he can only take operating decisions”.

The run-up to the upcoming legal battle has been more of a shadow play, with the petroleum ministry seeking legal opinion on the options for holding Reliance accountable for not complying with the work programme. But before the petroleum ministry could concretise its line of action, Reliance launched multi-pronged pressure tactics—sending an arbitration notice, approaching the prime minister and even appealing to the empowered group of ministers (EGOM) for revising the gas sale price at par with imported fuel. The request for gas price revision, RIL officials claim, is nothing new. “We had talked about market price for gas even earlier with the EGOM and had asked for a revision after three years instead of the five years (in 2014) decided by it,” company sources point out.

The petroleum ministry is also curious why, despite Reliance having brought in global exploration major BP as partner to help it tackle the geological challenges in the east coast deep-sea block, there has been a consistent drop in production. In its notice to Reliance, the ministry has pointed out that “at no point of time after the approval of the aidp (Addendum to the Initial Development Plan) dated December 12, 2006, have you sought to further amend the aidp or informed the government of any changed circumstances which made you apprehend that you may not be able to meet the targets projected by you”.

Planning Commission member and energy expert B.K. Chaturvedi wonders why “the production has fallen further after BP joined. Unless there are strong explanations, we have to see the developments in that light”. Chaturvedi feels withholding the cost recovery is absolutely justified, “given that K-G D6 was a discovered field and the production projections were made on that basis”.

There’s a lot at stake, considering the missing D6 gas could have helped generate 6,000 MW of power. “If the government does not pursue its claim, then it will be construed as waiver and will support Reliance’s stance,” says Ramesh Vaidyanathan, partner, Advaya Legal. For now, it looks like the government has made up its mind to go the full course. Of course, for that it would have to act firmly—and decisively.