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Arbitration could be closer to ending on this one

[Bigwhiskey]

April 16, 2015: The petroleum ministry has started collecting the $195-million penalty it imposed on Reliance Industries Ltd for producing less natural gas from KG-D6 field than what it had pledged in the revised field development plan. Sources said Rs 2.57 billion was transferred on Wednesday to the national exchequer after a ministry directive to GAIL India on March 2 to move the differential price deposited in gas pool account (GPA) from sale of gas produced from KG-D6 field.

The NDA government in October, while approving price revision of domestic gas, had decided that since the issue of cost recovery due to KG-D6 production shortfall was under arbitration, the difference between the revised price and the then price ($4.2 per million British thermal unit) be credited to the GPA. It approved that “the operator (RIL) would be paid the earlier price of $4.2 per mBtu till the shortfall quantity of gas is made good … difference between revised price and the present price ($4.2 per mBtu) would be credited to the GPA maintained by GAIL India and whether the amount so collected is payable or not to the contractors of this block would be dependent on the outcome of the award of pending arbitration and any attendant legal proceedings”.

From November 2014, gas price was hiked to $5.61 per mBtu but buyers of KG-D6 gas were told to pay RIL $4.2 and deposit the balance $1.41 in the GPA. The incremental $1.41 was to become due to RIL if it could legally prove that the gas shortfall was due to geological reasons and not because of hoarding. However, last month, the ministry directed GAIL to transfer the GPA collection to the national exchequer to compensate for the penalty “on account of disallowance of cost recovery of these fields”. It also asked GAIL to transfer the differential price on a monthly basis until the penalty is fully recovered.

“Accordingly, the government directed GAIL on March 2, 2015, to deposit the amount — presently credited to the GPA maintained by GAIL with effect from November 1, 2014 — to the government’s exchequer towards the additional profit petroleum of $195.34 million due and payable by the contractor (RIL) up to 2013-2014,” it informed Parliament on March 11. “GAIL has also been directed to keep on depositing the amounts to the government’s revenue account on monthly basis till the amount of additional profit petroleum due to government is fully recovered,” says petroleum minister Dharmendra Pradhan’s statement to the Rajya Sabha.

GAIL officials said Rs 2.57 billion was the differential price collection until end-March and was transferred on Wednesday. RIL, which has been resisting paying the penalty and has invoked an arbitration case against it, had initially suggested that it should be allowed to collect the new rate of $5.61 and promised to pay royalty on the full amount and deposit the $1.41 in the GPA within three working days. It later demanded that interest be paid on its gas sales payments flowing into GPA. It wrote to the ministry saying that it would be entitled to get the principal amount along with market interest rate in case it wins the case.

When contacted, RIL spokesperson said: “We have not received any formal letter from ministry of petroleum & natural gas or directorate general of hydrocarbons regarding any such transfer from GPA to the national exchequer.” He did not respond to the newspaper’s query if RIL was aware of the possible penalty collection considering the ministry outlined it in its Rajya Sabha statement in March.