Government Vs RIL: High Stakes In This Game
Government Vs RIL: High Stakes In This Game
In what seems to be a rapidly escalating confrontation between the government and India's biggest private oil company, Reliance Industries Ltd, the former has slapped an additional penalty of $579 million on the latter. This adds up to Rs. 3474 crore at a dollar exchange rate of Rs. 60 per share. Previously, Reliance had slapped an arbitration notice on the government.
The latest penalty has been imposed by the Modi government because the private oil company has failed to meet the gas production commitment from its Andhra offshore field. Now, the Mukesh Ambani led conglomerate faces a total fine of $2.37 billion which is Rs.14,200 crore in the 4 financial years commencing April 1, 2010.
The fourth penalty is attracting special attention as it had been paused by the UPA government. The NDA government has created reservations against the choice of the arbiter (Sir David Steele) in the arbitration proceedings launched by the company following the fines that had been imposed on it.
The oil ministry also demanded additional profit petroleum of around $115 million. This is equivalent to the government's share of loss resulting from production shortfall since the year 2012-2013. The profit share of the company would increase by $195 million following these actions, according to oil minister Dharmendra Pradhan who discussed the latest action of the government against Reliance.
Pradhan has also indicates the company had violated the terms of its contract with the government. This is with regard to the approved plan for developing the field as well as infrastructure utilisation and inventory management. Reliance also failed to put up production facilities to yield 80 mcmd/million cubic metres per day of gas yet did not adhere to the approved field development plan as far as drilling and putting on stream the required number of wells.
As far as the UPA government is concerned, the oil ministry under S. Jaipal Reddy had issued notices on the company for a fine of $179 billion, the breakup of which is $547 million for 2010-2011, $548 million for 2011-2012 and $792 million for 2012-2013. The fines were imposed through refusal to allow Reliance to recover costs in proportion with production targets that have been missed. The sovereign contract enables recovery of investments by explorers. Recovery of operating costs in a graded manner was also emphasised before sharing profits with the government.
The other side of the story has been presented by Reliance which has joined hands with its UK partner BP plc and Canadian firm Niko Resources for the arbitration. The company indicated that the contract does not allow for drop in production arising out of geographical factors such as water and sand choking wells. The technical arm of the ministry Directorate General of Hydrocarbons drilling more wells would not yield high production and would only be waste of cash, according to RIL. As the war between RIL and the government intensifies, global warming is not the only reason investors this year may face the heat.
