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1700 crore penalty imposed on RIL, BP for production violations

The Union government has taken yet another strong step to check complacency among corporates. In its latest move, the government has imposed a fine of $264 million on Reliance Industries and its partners, BP Plc. of the UK and Canada’s Niko Resources. The fine is around Rs 1,700 crore and it has been imposed since Reliance and its partners failed to produce the required amount of natural gas from the eastern offshore KG-D6 fields in 2015-16. According to an oil ministry official, the total fine is far greater at $3.02 billion. It may be recalled that the gas production is managed through a Production Sharing Contract (PSC). The PSC allows Reliance and partners to deduct all capital and operating expenses resulting from the sale of gas prior to sharing the profit with the government.

Since the penalty is in the form of disallowing the costs, as a result of low production, the government’s share in the profit will rise. An additional $175 million has been claimed by the government after the costs were disallowed. The production from the gas fields in the KG-D6 block was mandated at 80 million standard cubic meters per day. However, the actual production was only 35.33 mmscmd in 2011-12, 20.88 mmscmd in 2012-13 and 9.77 mmscmd in 2013-14. The production has been dropping consistently and it is now less than 4 mmscmd. The companies involved are planning international arbitration to challenge the penalty imposed on them.

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