New Delhi: The government has sought compensation of over USD 30 billion from Reliance Industries Ltd and BP, alleging that the partners built larger-than-required facilities at the KG-D6 gas fields and subsequently failed to meet approved natural gas output targets, a PTI report said.
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According to sources, the claim was made during submissions before a three-member arbitration tribunal, which concluded hearings on November 7 in the 14-year-old dispute, the PTI report said. The tribunal is expected to deliver its award sometime next year, after which the losing party is likely to challenge the ruling before the Supreme Court of India, three people aware of the matter said.
Reliance and BP did not immediately comment when the claim was made during the arbitration proceedings.
Sources said the government has sought the monetary value of natural gas that was not produced, along with compensation for excess expenditure on installations, fuel marketing margins and interest. The combined value of these claims has been pegged at over USD 30 billion.
The dispute relates to alleged non-compliance by Reliance with the approved investment plan for the Dhirubhai-1 and Dhirubhai-3 (D1&D3) fields, the first and largest discoveries in the Krishna Godavari basin KG-DWN-98/3 (KG-D6) block to be brought into production. The government has argued that this resulted in under-utilisation of installed capacity.
Gas production from the D1&D3 fields began to lag company projections from the second year of output in 2010, and the fields ceased production in February 2020, well before their projected life.
Reliance’s initial field development plan envisaged a USD 2.47 billion investment to produce a peak output of 40 million standard cubic metres per day (mmscmd). In 2006, the company revised the plan to USD 8.18 billion, projecting a doubling of output by drilling 31 wells by March 2011. However, only 22 wells were drilled, of which 18 were brought into production.
The wells shut earlier than expected due to unanticipated sand and water ingress, prompting Reliance to revise mid-way the estimated reserves to 3.10 trillion cubic feet (Tcf), sharply lower than the 10.03 Tcf projected in the 2006 plan.
The government attributed the decline to Reliance’s failure to adhere to the approved development plan and, in the initial years, disallowed USD 3.02 billion of costs incurred by Reliance and its partners. Reliance disputed the move, stating there was no provision in the KG-D6 production sharing contract (PSC) that entitled the government to disallow cost recovery on this basis.
On November 23, 2011, Reliance served an arbitration notice seeking resolution of the dispute. Proceedings were delayed after the government refused to accept the judges nominated to the tribunal.
In 2014, Reliance appointed former UK judge Sir Bernard Rix as its arbitrator, replacing former Chief Justice of India S P Bharucha, who had recused himself after the government nominated former Chief Justice of India V N Khare as its arbitrator. In September 2014, former Australian High Court judge Michael Kirby was appointed by the Supreme Court as the neutral arbitrator and chairman of the panel.
The government later moved the Delhi High Court seeking removal of Rix and Kirby, alleging ex facie bias against the Union government. The court dismissed the plea as “not maintainable” in December 2022. The government then approached the Supreme Court, which dismissed the petition on January 11, 2023, paving the way for the tribunal to begin hearings.
Gas output from the D1&D3 fields was projected at 80 mmscmd, but actual production stood at 35.33 mmscmd in 2011-12, 20.88 mmscmd in 2012-13 and 9.77 mmscmd in 2013-14, before declining further until production ceased in February 2020.
Through letters dated May 2, 2012, November 14, 2013, July 10, 2014 and June 3, 2016, the government disallowed USD 3.02 billion of costs for missing production targets over six years starting April 1, 2010. In these notices, it sought USD 247 million in additional profit petroleum after disallowing cost recovery.
Reliance and BP, which acquired a 30 percent stake in KG-D6 and 21 other blocks in 2010 for USD 7.2 billion, have argued that PSCs under the New Exploration Licensing Policy explicitly allow operators to fully recover development costs before sharing profits with the government.
They have maintained that exploration is a high-risk activity borne entirely by the operator, and that reserve downgrades due to geological factors are not uncommon globally. They also pointed to a similar experience in a KG block initially held by Gujarat government firm GSPC and later sold to state-owned ONGC.
The partners said all investments were approved by the management committee, which included representatives from the Directorate General of Hydrocarbons and the oil ministry, and described the ministry’s action of “retroactively” disallowing costs as being contrary to the signed PSC.
In a statement issued late on Monday, Reliance categorically rejected reports of a USD 30 billion claim. “There is no claim of USD 30 Billion against Reliance and BP. The claim made by Government of India in relation to KG D6 Block is of the order of USD 247 Million which has been appropriately and consistently disclosed in the Company’s annual audited financial statements, in accordance with its disclosure requirements,” the company said.
Reliance added that “the matters referred to in the report are entirely sub judice and would be determined in accordance with the laws of the country by its judicial system, in which Reliance has full faith.” It further said that Reliance Industries Limited, together with its partner BP, “has at all times complied with its contractual and legal obligations and take strong exception to mischaracterisation of facts in the report.”
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Reliance originally held a 60 percent participating interest in the KG-DWN-98/3 block, with BP holding 30 percent and Niko the remaining 10 percent. Niko later exited the block amid financial difficulties, leaving Reliance with a 66.66 percent stake and the balance with BP.