Govt to RIL: Limit cost recovery to $1.4 bn, say sources

The USD-1.2 billion dispute between the oil ministry and Reliance Industries has taken a new turn. Since November 2011, the oil ministry has been saying no dispute exists with the company and therefore it must immediately withdraw the arbitration notice it had served the government. But that has now all changed with the oil ministry serving RIL a notice to limit its KGD6 cost recovery. CNBC-TV18's Nayantara Rai reports.

Sources say the oil ministry is likely to disallow the USD 457 million of cost recovery for 2010-11 and USD 778 million of cost recovery in 2011-12.
The ministry has asked for a detailed timeline and steps for hiking gas production.
The cost recovery issue surfaced when the Directorate General of Hydrocarbons (DGH) advised the petroleum ministry to disallow USD 1.235 billion of the USD 5.7 billion expenditure already made, as RIL has drilled and completed only 18 wells against agreed 31 wells in the block, resulting in lower gas output.
RIL disagreed with the ministry  that it has not drilled the committed wells as the reservoir has not behaved as previously predicted and output dipped due to a fall in pressure and water and sand ingress in wells.    
KG-D6 gas production averaged 48.13 mmcmd against the target of 53.40 mmcmd in 2010-11 and 38.61 mmcmd (up to October 31, 2011), compared to the target of 61.88 mmcmd, in 2011-12. Production of 80 mmcmd was envisaged in 2012-13.  
Later, when the ministry did not respond to RIL in the affirmative, the latter appointed  SP Bharucha, former Chief Justice of the Supreme Court, as its arbitrator and had asked the ministry to appoint its arbitrator within 30 days.    
On November 23, RIL appointed SP Bharucha, former Chief Justice of the Supreme Court, as its arbitrator and had asked the ministry to appoint its arbitrator within 30 days.  
The ministry had days before the December 23 deadline expiry sought a one-month extension to respond to the notice and after receiving the Law Ministry's opinion, it on January 25 wrote to the company saying its claims are based on surmises, conjecture and apprehensions and so it should withdraw the notice.
On Feb 2, RIL had last written it cannot withdraw the notice and said if the ministry fails to appoint its arbitrator it would take suitable legal recourse.