The government will initiate action to limit the amount of expenditure Reliance Industries is allowed to recoup from its flagging KG-D6 gas fields in 3-4 weeks, Oil Secretary G C Chaturvedi said on Tuesday.
"We had sought an opinion of the Law Ministry (on restricting cost recovery -- now at 100% -- in proportion to the gas output). We have received the opinion... we are considering it," he told reporters here.
Reliance has built facilities to handle 80 million cubic metres per day of gas production, but the fields are producing less than 42 mmcmd.
Production Sharing Contracts (PSC) allow the operator to recover 100% of their exploration and production costs and does not link cost recovery to output.
However, the ministry wants to "disallow expenditure incurred in constructing production/processing facilities at the Dhirubhai-1 and 3 gas (D1 & D3) fields in the KG-D6 block that are currently under-utilised/have excess capacity because of falling output".
The Law Ministry, which relied on Solicitor-General Rohinton F Nariman's comment for its opinion, has backed the move, but has not quantified how much of the USD 5.8 billion that Reliance has already invested should be disallowed.
"Law Ministry does not quantify the amount... If at all, we will have to do that," he said.
Asked if the PSC provides for restricting cost-recovery, Chaturvedi said, "We are studying that", but clarified that the government will not hesitate "to amend the PSC if required" in the Reliance case.
"If need be... if suppose PSC is to be changed, we will do it," he said. "We will decide (on the next course of action) in 3-4 weeks."
Chaturvedi said his ministry will ask the Law Ministry why it has not pointed to specific clauses, if any, in the PSC while giving an opinion on limiting cost-recovery in KG-D6.
The move is bound to be challenged by Reliance and its new partner BP Plc and is likely to head to arbitration.
Falling pressure and water incursion have pushed down output from the D-1 and D-3 fields in the Bay of Bengal from 54 mmcmd in March, 2010, to less than 35 mmcmd now, as opposed to the targeted 61.88 mmcmd. A further 7.1 mmcmd comes from the MA oilfield in the same licence area.
The PSC allows operators the right to recoup 100% of the spending incurred on finding and producing oil or gas from the revenues made on sales before splitting profits with the government.
Such expenditure is approved by the government at two stages -- first when it gives approval to the field development plan and subsequently every year, when it approves field budgets.
All spending on KG-D6 has all been approved by both the Oil Ministry and upstream regulator (DGH).