The Oil ministry has rejected Reliance Industries'(RIL’s) plan to hike the cost of gas produced from the KG-D6 oil wells atleast for five years say CNBC-TV18 sources. But RIL says raising the price to $ 6 per unit is a viable option as they have run into cost overruns on the project.RIL had written to the ministry late last year that it is the only gas company which is sharing profits with the government on selling gas from KG-D6 at $4.20 per unit. The energy giant had also contended that it has not yet recovered cost on this project and hence it needs to hike the price of the gas.
Hence, to resolve this cost recovery issue so as not to hinder future investments in this block, the company has begun arbitration proceedings against the government.
Under the KG-D6 production sharing contract (PSC) signed between RIL and the government, RIL was allowed to recover the complete expenditure that it had incurred to develop the fields before it started splitting its profits with the government.
However, RIL said that production from the field is receding and it need to cover up its cost.
Executive Summary of the Contract:
The Production Sharing Contract for KGD6 (PSC) was awarded as part of the first round of New Exploration and Licensing Policy (NELP) auctions. The PSC was signed between the Contractors – Reliance Industries Limited (RIL) and Niko Resources Limited (Niko) – and the Government of India (GoI) in April 2000. The KGD6 block was one of 12 blocks won by RIL in the first NELP round. Approximately $2,259m of exploration costs have subsequently been incurred on these blocks. Out of the remaining 11 blocks, 8 have subsequently been abandoned with $244m of irrecoverable exploration costs incurred by RIL.
During 2002, the world‟s largest gas discovery for that year was made in the KGD6 block. As the first deepwater development in India, exploiting this discovery represented a significant engineering and project management challenge. However, after nearly 50 million man hours, commercial production was declared in May 2009, a considerably shorter commissioning period than the global average.
The KGD6 block is situated next to others that have also been included in the NELP auction process. We understand based on media sources that although gas has been discovered in some of these blocks, so far none other than KGD6 has been converted to commercial production, with production scheduled for commencement from 2016.
Developing the KGD6 field required a significant up-front financial investment by the Contractors. Of the total amount invested by the Contractors in the period from inception to March 2011, $4,216m of this cost was still to be recovered by the Contractors under the terms of the PSC as at 31 March 2011.
Krishna Godavari Basin:
Krishna-Godavari basin is a peri-cratonic passive margin basin in India. It is spread across more than 50,000 square kilometers in the Krishna River and Godavari River basins in Andhra Pradesh.