The Telegraph
Thursday , March 20 , 2014
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Partners to be party to RIL struggle

New Delhi, March 19: Niko Resources and BP — the two partners of Reliance Industries in the KG-D6 blocks —have decided to formally join the Mukesh Ambani firm in the arbitration proceedings against the government for levying penalties for the shortfall in production from the KG-D6 block. The two global majors will be able to benefit from the gas price hike from April if they are part of RIL’s arbitration process.

In December last year, the cabinet had stipulated that the new gas rate would apply to all producers, except the eastern offshore KG-D6 block where the contractor will have to give bank guarantees equivalent to the incremental revenue it would get from the new rates.

The new pricing system, suggested by the Rangarajan committee, is set to be implemented from April 2014. The gas price is likely to go up to around $8.4 per million British thermal unit (mBtu) against $4.2 per mBtu.

The bank guarantee will cover the difference between the current gas price of $4.2 per mBtu and the new rate of about $8.4 per mBtu.

The bank guarantee of around $9 billion will be encashed if it is proved that the company hoarded gas or deliberately suppressed production at the main Dhirubhai-1 and 3 (D1 and D3) fields in KG-D6.

The total shortfall in production from KG-D6 in the last four years is 154 million metric standard cubic metres per day (mmscmd). After the petroleum ministry imposed a penalty of $1 billion for the shortfall, RIL had initiated an arbitration process, which is pending.

If it is proved that the company deliberately produced less gas, the bank guarantee will be encashed, depriving RIL of the incremental revenue.

While RIL agreed to the condition, the oil ministry felt the bank guarantees couldn’t be taken from BP and Niko as they were not part of the arbitration, sources said.

It was being weighed that Niko and BP’s share of incremental revenues could be put in an escrow account till the arbitration was resolved.

BP and Niko, which together hold the remaining 40 per cent in KG-D6, had written separate letters to the oil ministry, saying RIL, in filing the arbitration notice, had acted as an operator representing the interests of all the KG-D6 constituents.

Sources said since the ministry was not convinced by the letters, BP and Niko might now formally join the proceedings through a notice of arbitration.