Directorate General of Hydrocarbons: We went by the book on KG viability tag

Approvals to RIL as per contract, timelines followed, says regulator

Even as the alleged suppression of KG D6 gas output by Reliance Industries is a political hot potato and subject matter of arbitration, the upstream oil regulator has denied any regulatory lapse on its part. Countering the Comptroller and Auditor General’s (CAG) view that the Directorate General of Hydrocarbons (DGH) did not have reasons to declare D1 and D3 discoveries in KG basin as “commercially viable”, the latter said all approvals were given to RIL and its two foreign partners in KG D6 as per the production sharing contract (PSC) and that the timelines had been followed.

In a recent communication to the national auditor, the DGH said: “The inference drawn by CAG relating to discovery area, continuity of exploration activities and appraisal programme in the contract area are incorrect and contrary to the provisions of the PSC.”

The KG D6 block, which consists of D1 and D3 among other fields, is operated by a consortium led by RIL and comprising BP and Canada’s Niko Resources. The output from the block is hovering around 13 mmscmd, far lower that the peak of 68 mmscmd reached in 2010.

Once the regulator accords a discovery the status of being “commercial”, it means the contractor can go ahead and monetise the hydrocarbons.

CAG in its draft audit report for the block KG-DWN-98/3 (KGD6) for FY09 to FY12 found that the regulator gave its go-ahead for D1 and D3 discoveries as ‘commercial’ without sufficient appraisal programmes. In January, the CAG sent its observations to DGH for comments, where it said “there was no appraisal programme” in D1 and D3 gas discoveries as required under the PSC.

The operator moved directly from discovery to “commercial discovery”, while there should have been an appraisal exercise to validate the claims before commerciality was endorsed, the auditor said. “...It is not clear how DGH had assured itself of the reliability of the development plan, as well as the associated estimates of reservoir reserves, production rates, development and production costs, in the absence of the appraisal programme,” the CAG said.

DGH has now countered this, saying the exploration period of KG-DWN-98/3 was from June 2000 to July 2008 and during this, the contractor was only required to complete minimum committed work programme specified under the PSC, independent of discoveries and continuity of appraisal programme. And the operator did complete the work programme as per the PSC, the DGH reiterated.

In May 2004, RIL submitted the initial development plan (IDP) that envisaged output of 40 mmscmd from 34 wells. The management committee (panel comprising explorers, and officials from petroleum ministry and DGH) gave its go-ahead to the IDP on November 5, 2004 that expected first gas production by August 2006. However, in October 2006, before start of commercial production, RIL submitted an 'addendum' to IDP that projected plateau production of 80 mmscmd with first output expected by mid-2008.

The CAG had found that RIL was required to drill, connect and put on stream 22 wells. However, the auditor found the company connected only 18 wells up to 2011-12 in the main D1 and D3 reservoir area. Another 4 wells were drilled from August 2010 to August 2011 but these, the CAG said, were not connected to the production facility because of inadequate incremental volumes. The CAG pulled up the DGH for not objecting to this. The government and RIL are now engaged in arbitration over the alleged underproduction from KGD6, with both sides appointing their arbitrators and the Supreme Court considering the request for an umpire auditor by RIL.

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