NEW DELHI: Mounting mistrust between the oil ministry and Reliance Industries has cast a cloud on the future of the prized D6 block as the government continues to maintain a stern posture toward the company while RIL struggles to justify further expenditure on the deep-sea block it operates.
Matters came to a head last week when the ministry issued a notice to RIL saying it will disallow reimbursement of $1 billion from RIL’s field-development costs as gas output has fallen sharply, leaving many facilities unutilised. A top government official later said RIL will be allowed to recover all its costs if gas output rises to previously projected levels, but the uncertainty, company officials say, is making operations difficult.
“Our expenditure over work done in the block over the past two years has not been approved. We cannot go on investing when the government is planning to restrict our cost recovery, in a clear violation of the contract,” a senior RIL executive told ET .
RIL says gas output fell because of unexpected geology, and it plans to use the currently surplus infrastructure to pump gas from other fields in the region, but the government is unconvinced.
The oil ministry is contemplating further restrictions on recovery of development costs in the next two years, when output is projected to fall further, and it has no immediate plans to approve the block’s budgets for the past two fiscal years unless the company accepts the deduction in the costs it can recover, oil ministry officials said.
RIL’s budget and work programme since 2010-11 have not been passed by the management committee chaired by the director-general of hydrocarbons.
“RIL is incurring expenditure as per provisional budgets, at its own risk,” one official in the DGH said. Reliance Industries and the oil ministry did not respond to emailed queries from ET.
The company had expressed apprehensions about the finances of the block when it petitioned the Supreme Court last month seeking an order to start arbitration proceedings, which the oil ministry had rejected.
“Absent an approved work programme and budget for 2012, the fate of expenses incurred by the contractor post 1.4.2012 would be shrouded in doubt and uncertainty,” RIL said in a recent petition to the Supreme Court.
The company is seeking arbitration on the matter. It blames unexpected geology for the fall in output and says that all the facilities in the deep-sea region will be fully utilised when it develops other discoveries in the block. It plans to submit a new plan to simultaneously develop 16 other discoveries in the block. So far, it is producing gas from D1 and D3 fields as well as the MA field that produces both oil and gas.
RIL had initiated arbitration against the oil ministry in November, anticipating government moves to restrict cost recovery. It had escalated the matter to the Prime Minister’s Office and the finance ministry. RIL Chairman Mukesh Ambani had flagged the matter in his meeting with the principal secretary to PM, Pulok Chatterji, this year as delays and media reports on disallowing costs had caused concern.
Reliance is facing pressure from institutional investors and shareholders who have raised this question several times. “We have gone ahead in good faith with our operational and capital expenses for the past two years,” a RIL executive said. The company may find it difficult to keep on doing this, he added.
According to Sanjeev Prasad of Kotak, the notice sent to RIL should be viewed as part of the larger churn that is currently on across sectors. “I’m not sure if this will lead to a transparent system. Corrections are being attempted but the collateral damage is the delay or policy paralysis.”
Gas output from the block has dropped significantly from about 61.8 million standard cubic meters per day in March 2010 to 33.67 mmscmd in April first week. DGH and the oil ministry say that output from D6 fell sharply because the operator did not drill required number of wells.
RIL told the Supreme Court in its petition that the oil ministry insisted the contractor should carry out all the development activities specified in the development plan even if subsequent data did not justify such activity.
It said in the petition that the oil ministry refused to approve the revised work programme and budgets for 2010-11 and 2011-12 unless the operator agreed to drill, complete and connect more wells as per the initial plan.
The company said drilling more wells would not increase output. “The petitioners have repeatedly contended that the data now available establishes that the drilling of more wells will not improve the performance – on the contrary it may prove deleterious to the same,” it said in the petition.
DGH REJECTS TWO GAS DISCOVERY CLAIMS OF RELIANCE INDUSTRIES
NEW DELHI: Upstream oil watchdog Directorate General of Hydrocarbons (DGH) has refused to recognize two significant natural gas discoveries that Reliance Industries (RIL) had made in aMahanadibasin block, because the company failed to conduct its prescribed test to ascertain the find.
DGH in March this year told RIL that Dhirubhai 32 and 40 (D-32 & D-40 ) gas finds in the Mahanadi basin block NEC-25 (NEC-OSN-97 /2) cannot be recognized as a discovery because RIL had not carried out drill stem tests (DSTs) on them, sources said. RIL says the two finds, on which it had conducted other tests, may hold 663 billion cubic feet of gas reserves and can produce 170 million metric standard cubic feet a day from six wells.
It had proposed an investment of $1.17 billion in developing the finds and another $23.5 million annual operative expenditure in producing 476 billion cubic feet of gas over the life of the field. Sources said RIL wrote to DGH seeking are-look at the Declaration of Commerciality (DoC) of D-23 and D-40 finds but the upstream regulator turned that down saying without DST tests it cannot declare the two finds commercially viable. DoC is a pre-requisite for developing a find, and unless the regulator and the government give DoC, no operator can invest any money.
DGH told the company that two discoveries had already been reviewed and rejected by the block oversight committee , called the Management Committee (MC). The panel is headed by DGH and also includes representatives from the Oil Ministry.
RIL, the operator of NEC-25 , had asked DGH to reconvene a meeting of the committee so that the two finds could be recognized. It had argued that the refusal to recognize the two discoveries was delaying the flowing of first gas from the block. To expedite the development of the block, RIL said it was necessary that the DoCs were issued at the earliest. Sources said RIL claimed that a DST was not a conclusive test for a discovery, for it provides information only on the initial well production rate around the wellbore and not on the sustained field production rate.
NUMALIGARH REFINERY EXTENDS SHUTDOWN TO END-MAY
SINGAPORE:India’s fire-damaged 60,000 barrel-per-day (bpd) Numaligarh refinery will extend its shutdown by about 25 days to the end of May, a company official said today.
The start of the planned maintenance was brought forward from end of April to mid-April after a fire broke out at a 22,000 bpd hydrocracker unit at the refinery inAssamon April 7.
The shutdown was initially expected to last about 20 days, but will now take about 45 days to complete, said Madhuchanda Adhikari Choudhury, the refinery’s corporate communications manager.
“The refinery will hopefully be up by end of May,” she said, adding that there were no oil product imports needed by the refinery during the shutdown.
She did not specify the reason for the delay in restart, but said that the maintenance was done unit-by-unit.
Numaligarh refinery itself does not import oil products, but supplies diesel to the northern parts ofIndia, a trader said.
The refinery is 61.65 per cent owned by Bharat Petroleum Corp Ltd (BPCL), while the government ofAssamand OilIndiaown the rest.
BPCL has bought 70,000 tonnes of diesel for delivery in April and another 115,000 tonnes of diesel for delivery in May following the fire, with part of the imports to re-direct stocks withinIndia.
It is not expected to import further diesel due to the extension of the turnaround period as there are currently sufficient stocks, a source familiar with the matter said.
Meanwhile, a report submitted by a three-member panel to investigate the cause of the fire at Numaligarh refinery has not been made public due to “some formalities”, said Choudhury.
“But prima facie, it is likely due to technical fault and not due to arson or sabotage,” she added.
ASSOCHAM CALLS FOR VARIABLE DIESEL PRICE HIKE
BANGALORE: Industry body Assocham has called for variable pricing of diesel linked to end-consumers and early creation of fuel-pipeline-grid.
Graduated steps should be taken towards market determined prices for diesel rather than de-regulation of the pricing system in one go, Assocham said in a statement.
As for the pricing, the full market price should be charged for diesel used for moving large cars and luxury buses, while the increase should be very moderate for others to begin with, Assocham Secretary General D S Rawat said.
Smaller farmers should be exempt for sometime and in phases should be increased, he added.
“It is inequity when the users of luxury vehicles get diesel fuel at the same subsidised rate as those who drive small and medium sized cars,” Assocham said.
Assocham has also suggested that the government should encourage replacing old vehicles, especially trucks, modern trailers with high efficiency engines.
The alternative option of reducing duties on oil products especially on fuel, will be a move from frying pan to the fire, it said.
“If government gives up a major source of revenue like this, it could only do so at the expense of either cutting sharply its development expenditure or raising the level of deficit financing.
“Either way it would be counter productive for a government committed to raising the growth rate and also making this growth inclusive,” the industry body said.
A detailed study by the chamber on diesel use has pointed out that use of high capacity trucks, paving of all major roads with cement and removal of administrative impediments to smooth highway movement of trucks alone could ensure large scale.
It would save the use of diesel in goods transportation and buses which could also mitigate the higher costs transport bodies would have to incur when diesel prices are aligned with the market price, the study said.
MANGALORE REFINERY AND PETROCHEMICALS LTD RESTARTS 2 OF 3 CRUDE UNITS
SINGAPORE: Mangalore Refinery and Petrochemicals Ltd (MRPL) has restarted two of three crude distillation units (CDUs) at a 300,000 barrels-per-day (bpd) plant that was closed more than a week ago following water shortages, traders said on Monday.
The last of the CDUs is undergoing maintenance and is expected to restart in the second-half of May.
RIL MAKES $30-M PROFIT FROM US SHALE GAS BUSINESS
NEW DELHI: Despite intense competition and low price of gas in the US, Reliance Industries has made a profit of about $30 million from its shale gas exploration and production business in the North American continent in 2011-12, the Indian energy major’s first full year of operations there.
RIL, which has three joint ventures in theUSin the shale gas sector, has made a revenue of $250 million from the business, informed persons told FE.
RIL also reported earnings before interest, taxes, depreciation and amortisation (Ebitda) of $200 million. The numbers are included in the recently declared consolidated results of RIL but segment details about the unlisted business are not required to be disclosed.
Despite the industrial recovery in theUS, gas price is still bearish in a seller’s market. Analysts said making profits in the upstream sector in the first year of operations is rare.
RIL, through its subsidiary, Reliance Marcellus LLC, has 40% interest in Atlas Energy, Inc’s (now owned by Chevron Corporation) core Marcellus shale acreage position.
RIL is a partner in 300,000 net acres of undeveloped leasehold in the core area of the Marcellus shale in southwesternPennsylvania, which has a net resource potential of 13.3 trillion cubic feet.
RIL’s second joint venture with Pioneer Natural Resources Company gives the company access to 45% interest in Pioneer’s core Eagle Ford shale acreage.
The joint venture has an approximate net working interest of 91% in 289,000 gross acres. Reliance also has a joint venture with Carrizo Oil & Gas that owns 60% interest in Marcellus shale acreage in Central andNortheast Pennsylvania.
ESSAR OIL SEEKS HC DIRECTION ON REPAYMENT INSTALMENTS
AHMEDABAD: Essar Oil on Monday filed a petition in the Gujarat High Court to seek direction on the repayment instalments and interest in relation to its sales tax deferral liability to the state government.
“This petition has no new impact on the company’s business. The company has already recognised this liability in its accounts for the quarter ended December 31, 2011,” the company said in a statement to the Bombay Stock Exchange.
On January 17, the Supreme Court upheld theGujaratgovernment’s appeal against Essar Oil’s tax benefit claims. Subsequently, the government issued a demand notice to the company for repayment of sales tax deferment benefits utilised by the company to the tune of Rs 6,300 crore with payable interest. Later, it put the company’s tax dues at Rs 8,255.47 crore, including payable interest.
The Supreme Court said the company could not take the benefit of a government exemption scheme since it had not started production from its refinery in Vadinar during the qualifying period. Essar Oil argued one of the reasons its project failed to start during the required period was a cyclone that hitGujaratin 1998. It had also filed a review petition in the Supreme Court.
Under the government’s ‘Capital Incentive to Premier and Prestigious Unit Scheme 1995-2000’, Essar was given a provisional ‘premier’ registration, as it was setting up an integrated greenfield refinery with an investment of over Rs 5,500 crore to process crude to the tune of 9 million tonnes per annum.
According to the terms of the scheme, sales tax that actually accrues to companies investing under the scheme for nearly 17 years, can be paid after 17 years in six equal installments.
This means a company can retain sales tax for 17 years and use the same as cash flow. And then, it has to pay back without any interest. According to industry estimates, Essar Oil has already retained Rs 6,500 crore as sales tax.
In its order in April 2008, the high court had curtailed Essar Oil’s deferment benefit by over Rs 1,000 crore on the basis that the state government’s infrastructure development in the region and the surrounding areas of the project, in the interim, could have benefited the company.
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