The government stopped imposing penalties in the form of disallowance of recovery of a part of the cost incurred on the fields after 2016 when Reliance-BP filed a challenge
New Delhi: A Right to Information (RTI) query has revealed that the government has stopped issuing penalties on Reliance Industries and its partner British Petroleum (BP) for natural gas production from eastern offshore KG-D6 fields not matching the targets after the matter went into arbitration. The government stopped imposing penalties in the form of disallowance of recovery of a part of the cost incurred on the fields after 2016 when Reliance-BP filed a challenge.
However, in a similar arbitration proceeding involving Cairn Energy Plc of UK, the government’s conduct had been a stark contrast to the Reliance-BP case. The government had then sold shares, seized dividends and confiscated tax refunds, totalling around $1 billion (Rs 6,900 crores), to recover retrospective tax dues from Cairn.
Four notice issued to RIL-BP between before 2016
Responding to the RTI query, the Directorate General of Hydrocarbons (DGH) said that in all, four notices were issued to Reliance Industries-BP, disallowing recovery of a part of the cost incurred in producing gas from Dhirubhai-1 and 3 (D1&D3) fields. The last one was issued on June 3, 2016.
DGH refused to share copies of the notices on grounds that the information was “commercial confidence of the third party” and said details cannot be disclosed because “the subject information is sub-judice before Arbitral Tribunal/Court of Law.”
Matter being heard by international panel
While neither Oil Secretary MM Kutty, nor DGH, was available to comment on the matter, sources said that the notices were stopped because the issue was being heard by an international arbitration panel.
Why did govt stop sending notices?
The notices were believed to have been stopped after a three-member arbitration panel was constituted in 2015 to hear Reliance-BP’s challenge to the penalties imposed. However, in the case of Cairn Energy, the government sold its 4.8 percent holding in Vedanta Ltd, seized dividends due to it totalling Rs 1,140 crore and confiscated tax refund of Rs 1,590 crore while an international arbitration tribunal was hearing the British firm's challenge to the imposition of penalties retrospectively.
Why was penalty imposed on RIL-BP?
The government issued cost recovery disallowance notices to Reliance-BP because gas output lagged behind targets because the two did not drill the committed number of wells on the fields.
The total penalty levied till 2016 totalled to Rs 2,100 crores approximately ($3.02 billion). Under the Production Sharing Contract (PSC), Reliance and its partners BP PLC of the UK and Canada's Niko Resources are allowed to deduct all capital and operating expenses from the sale of gas before sharing profit with the government. Imposing the penalty would have meant an increase in the government’s profit share. The government claimed an additional $175 million as its profit share after the cost disallowance in 2016.
The decline in production
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 the actual production was only 35.33 mmscmd in 2011-12, 20.88 mmscmd in 2012-13 and 9.77 mmscmd in 2013-14. The output has since only traced a downward trajectory in and is now below 4 mmscmd.