KG-D6: Oil ministry refuses $1.2 bn cost recovery by Reliance

The oil ministry has served a notice on Reliance Industries disallowing $1.2 billion of cost recovery from eastern offshore KG-D6 fields for failing to meet drilling commitment.

The ministry on Wednesday sent a notice to RIL disallowing $457 million of cost recovery for 2010-11 and $778 million of cost recovery in 2011-12, sources privy to the development said.

RIL has already slapped an arbitration notice on the ministry saying the production sharing contract (PSC) allows for operators to recover 100 per cent of the capital and operating expenditure on an oil and gas field and it does not in any way link the cost recovery to production.

The ministry has refused to join arbitration, saying there is no dispute till now but its notice of May 2 establishes that there is a dispute over how much of cost can be recovered.

The letter signed by A Giridhar, joint secretary (exploration) states that RIL has till now spent $5.693 billion on development of Dhirubhai-1 and 3 (D1& D3) gas fields in KG-DWN-98/3 (KG-D6), off which about $4.574 billion has been incurred on production facilities alone.

"It is brought to your notice that up to March 31, 2011, you have recovered a sum of approximately $5.258 billion from the petroleum operations in the D1 and D3 development area," the letter stated.

D1&D3 are producing about 27.5 million standard cubic meters per day as against 61.88 mmscmd committed by RIL in its $8.8 billion development plan for the fields.

The ministry says that lower-than-anticipated production has led to under-utilization of the field facilities. Also, it blamed the fall in output from 53-54 mmscmd achieved in March 2010 to drilling of less than committed wells, they said.

Sources said RIL, as per the approved field development plans, should have put 22 wells on production for 61.88 mmscmd of output by April and 80 mmscmd by the end of the year from 31 wells.

But the company has so far drilled 22 wells on the fields but has put on production only 18 wells. The other four have not been connected to production system as they contain uneconomical reserves.

Of the 18 wells, six had to be shut because of high water and sand ingress and fall in pressure. RIL believed that the field has not behaved as predicted and so indiscriminate drilling would be a big drain on cost.

But the ministry held RIL responsible for violation of its committed work programme in the PSC and slapped cost recovery disallowing notice, they added.

Together with 6.5 mmscmd of output from MA oilfield in the same block, KG-D6 output is around 34 mmscmd currently as against about 70 mmscmd target (61.88 mmscmd from D1&D3 and 8 mmscmd from MA field).