domestic cost of production. The panel pointed out that the benefit of lower gas prices at Henry Hub has been largely diluted by the inclusion of Japan’s LNG prices which includes 60% royalty component linkage to Japanese Crude Cocktail and a host of other factors.
Separately, the oil ministry and RIL are engaged in arbitration over the government’s move to disallow $1.005 billion expenditure made by the company in developing the KG-D6 fields because of the sharp fall in output. The arbitration, where RIL is opposing the government stand that non-drilling of committed wells led to 80% fall in output, might get extended for an indefinite period. Oil ministry officials say that the outcome of the arbitration would prove whether the contractor deliberately suppressed gas output or it whether the fall in output was a genuine geological surprise, as claimed by RIL.
The Directorate General of Hydrocarbons in July raised the penalty on RIL to $1.8 billion to reflect the fall in natural gas supply from Dhirubhai 1 and 3 gas fields in KG-D6 block. "Directorate General of Hydrocarbons vide letter July 22, 2013, has proposed for disallowance of cumulative cost recovery amounting to $1,797 million up to financial year 2012-13 towards creation of excess capacity," said a note from the regulator.
RIL states that the fall in production is a result of geological complexities. Gas production from the D1 & D3 fields fell to 8.7 million metric standard cubic metres per day (mmscmd) this month from a peak of 55.9 mmscmd in 2010-11. The output from the MA oil and gas field in the KG-D6 block, too, has fallen over 62%. The estimated shortfall in production vis-a-vis targets between 2009-10 to 2013-14 stands at 122.77 mmscmd of gas.
Oil ministry officials say that they want to settle the pricing issue before the Nelp 10 round of auctions. The Planning Commission and the law ministry have also both backed the bank guarantee as the possible resolution to the issue.