RIL vs DGH: Co slams regulator for snatching gas discoveries arbitrarily

Reliance Industries has slammed the DGH’s move to snatch 86 percent of its KG-D6 block area, including eight gas discoveries worth $10 billion, as “arbitrary” and said the oil regulator was responsible for the delay in developing the finds.

Reliance Executive Director P.M.S. Prasad on August 24 wrote a strongly worded letter to Oil Secretary Vivek Rae, questioning the intent of the Directorate General of Hydrocarbons (DGH) in asking the company to give up 6,601 sq km out of the total 7,645 sq km area in the block on the grounds that the time line to develop the fields had expired.

Of the eight discoveries in the area, the DGH refused to consider investment plans for five, with 0.8 trillion cubic feet of reserves, saying they were not viable at the current price of USD 4.2 per million British thermal units.

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The regulator refused to recognise the other three as discoveries in the absence of prescribed tests to confirm them and then disallowed pleas by Reliance and partner BP Plc for time to do the tests.

[caption id=“attachment_1111161” align=“alignleft” width=“380”]  Reliance Industries has slammed the DGH’s move to snatch 86 percent of its KG-D6 block area, including eight gas discoveries worth USD 10 billion, as “arbitrary” and said the oil regulator was responsible for the delay in developing the finds.

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“In spite of the PSC providing for sale of gas at market prices, and the approved price of $4.2 being only valid until March 31, 2014, DGH insisted on evaluating the proposed development plan (of five discoveries) at a gas price of USD 4.2 and declared them to be unviable,” Prasad said, adding this was done even after the knowledge that the field would start production much later than April 2014.

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Prasad said Reliance-BP had agreed to carry out the DGH-prescribed drill stem test to confirm the three discoveries but the regulator never approved them and was now insisting on relinquishment of the areas.

In the 11-page letter with point-by-point rebuttals to the DGH claims, a copy of which was marked to Oil Minister M Veerappa Moily, Prasad asked Rae to “advise the concerned to rectify the errors and remove the hurdles which are needlessly delaying further progression in these discoveries.”

RIL had offered to relinquish 4,233 sq km of “low prospective area” in the eastern offshore KG-DWN-98/3 or KG-D6 block in keeping with the contractual requirement to retain only portions needed to produce oil and gas.

The area RIL is seeking to retain contains the 20 oil and gas finds it has made till date.

“Needlessly projecting RIL as a defaulter and forcing the contractor to relinquish discovered resources will not only hurt the investor but considerably reduce the chances of many of these discoveries ever being produced,” Mr. Prasad said. “Contractor (RIL) is of the view that the action is clearly an afterthought, based on arbitrary decision and tantamount to disputing completely valid discoveries made at the contractor’s risk,” he wrote.

Prasad said the discoveries were unilaterally declared unviable by the DGH without a discussion by the block oversight panel or taking its views into consideration. “Under normal course it would be considered bad faith to take a biased unilateral view, which…delayed further progress for development, and then turn around to blame the contractor for expiry of time period,” he said.

RIL, he said, had “spent enormous amount of time and money on bringing these discoveries to fruition” and would “suffer immensely if pushed to a situation of forced relinquishment of rightful discoveries.”

The area proposed for cessation has at least 1.15 trillion cubic feet of known recoverable gas reserves valued at $4.83 billion at current prices.

Of the 20 finds, RIL began crude oil production from MA field in September 2008. It started gas output from MA field and Dhirubhai-1 & 3, the largest of the gas discoveries in the block, in April 2009. The DGH proposed that RIL should retain only an area of 1,044 sq km, which holds the currently producing D1 and D3 gas and MA oil and gas fields, besides a cluster of four satellite fields (D-2, 6, 19 and 22) and another D-34 discovery.

RIL had in its March 13 proposal wanted to retain 3,412 sq km containing all the oil and gas finds made till date. Contractually, companies are required to relinquish 25 per cent of the area in an oil and gas block at the end of the first phase of exploration that spans three years. At the end of second phase, 50 per cent of the area is to be given up. By the third phase, only the area needed for development and production of a discovery is allowed to be retained.

The second and third phases are of two years duration each.

RIL was awarded the KG-D6 block in 2000. The three-year first phase ended on June 7, 2003, and the third phase ended on June 7, 2007.

Sources said the DGH in 2006 agreed to RIL’s proposal to declare the entire area as a discovery, allowing the company to retain it. The decision was ratified by a committee headed by additional secretary in the ministry and by the Oil Minister thereafter.

However, the decision was questioned by the Comptroller and Auditor General of India, the government auditor, as only 79 per cent of the block area had been covered by 3D seismic survey at the end of the third phase and yet it had been declared a discovery area.

CAG, in its performance audit in 2011, had asked the ministry to review the determination of the entire KG-D6 contract area as a ‘discovery area’.

Agencies