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RIL warns of further output drop if govt disapproves budget

Press Trust of India/New Delhi 12 Jun 12 | 06:29 PM
 Reliance Industries Ltd
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With KG-D6 output hitting an all- time low, Reliance Industries has warned that production will continue to decline as government is not approving investments needed to boost output.

RIL also threatened it would seek damages for the drop in output which was a direct result of government not approving several of its investment plans for the flagging gas fields.

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While the government-controlled block oversight committee is supposed to approve spending before beginning of a fiscal, in case of KG-D6 budgets and work programmes for 2011-12 as well as 2012-13 have so far not been approved, the company's counsel wrote to the oil ministry.

Listing six interventions it had planned in the KG-D6 to arrest output decline, it said these were "critical to the maintenance of production at the current levels" but have so far not been approved by the block Management Committee.

"Should the government decide not to approve these costs on an urgent basis through its representatives on the Management Committee, the production from Block KG-D6 will continue to decline as a direct result of the government's decision and RIL will be forced to seek all appropriate relief including damages," it added.

In a 13-page letter, the company's counsel A S Daya & Associates on June 8 point-by-point rebutted charges that the ministry had levied in imposing a penalty of $1.005 billion for current output of 31.57 million standard cubic meters per day falling way short of the target of 80 mmscmd.

Refuting charges of violation of Production Sharing Contract, RIL's counsel stated that indicative output targets were given in $8.8 billion approved field development plan of 2006 "based on present day knowledge of the reservior".

The Krishna Godavari basin reservior has proved to be more difficult to exploit than previously predicted with high water and sand ingress in wells hampering production.

Oil Ministry holds RIL responsible for the fall in output and last month disallowed $1.005 billion of its cost already incurred saying lower production had led to under- utilisation of facilities.

"There is no basis under the PSC to limit the contractor's recovery of its contract costs by reference to either the production levels achieved or the extent to which any facilities installed by the contractor may not be fully utilised," it said.

The company said, "the government has through its representatives on the Management Committee prevented the approval of the contractor's (RIL's) work programme and budgets for 2011-12 and 2012-13.

"As a result, the contractor has been conducting petroleum operations and incurring contract costs without an approved work programme and budget since April 1, 2011".

"The uncertainty resulting from the government's conduct is having an adverse impact on the petroleum operations and is therefore diretly contributing to the decline in production from block KG-D6," RIL's counsel wrote.

"It is extraordinary, particular given the government's duties to the nation to maximise production, that you maintain your refusal to provide the requisite approvals," it said.

The PSC, it said, envisages preparation of annual work programmes and Budgets and not the production of a defined quality of Hydrocarbons. "The language of Article 10.13 (of the PSC) is plain - the maximum quantity of production based on contractor's estimates (no the target quantity - much less the minimum quantity) is required to be approved by the Management Committee".

It asked the ministry to immediately appoint arbitrators to resolve the dispute over cost recovery.

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