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India Oil Ministry Seeks to Restrict Reliance's Gas Field Cost-Recovery

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India Oil Ministry Seeks to Restrict Reliance's Gas Field Cost-Recovery

NEW DELHI - India's oil ministry is trying to restrict Reliance Industries Ltd. from recovering about $1 billion of its investment to develop an offshore gas field as the company has fallen way short of the production target it had agreed with the government.

The ministry has served a notice to Reliance, saying the company should recover costs only for the infrastructure used for gas production and not for the wells that haven't added to output, a top oil ministry official, who declined to be named, told reporters Friday.

Under Reliance's production-sharing contract with the government, it can keep a part of the revenue from gas and oil sales to offset the cost of developing the filed. The rest will be shared between the government and the company, which has two partners for the field off India's east coast.

Reliance said it was entitled to recover all costs under the contract and there are no provisions that entitle the government to disallow cost-recovery.

The company has already moved the Supreme Court for appointment of an arbitrator to resolve the issue. "The government's communication articulates the very issues which are subject matter of the notice of arbitration," it said in a statement.

A sharp decline in output from the D6 block has crippled India's gas-based power plants and hurt the flow of investments into the power sector as banks have become cautious about lending due to the absence of committed fuel supplies.

Also, the image of Prime Minister Manmohan Singh's government has been hit by a series of corruption scandals. This has led to various ministers adopting a cautious attitude toward their dealings with the corporate sector.

The official, as well as analysts, said the notice won't have any major impact on Reliance's production or investment plans for the block.

"It'll have a minimal impact," the official said. "We will allow them (Reliance) cost-recovery as soon as they ramp up output."

"Reliance is not into this business (of exploration) for making small money," independent analyst S.P.Tulsian said. "There won't be any material impact on oil and gas production because of the government move."

The company has claimed an expenditure of $9.47 billion and recovered $5.26 billion from the fiscal year that began April 2006 up to March 2011 for developing the block, the oil ministry said in March.

Reliance produced 42 million metric standard cubic meters of natural gas a day from the block in the last fiscal year ended March 31, well below its original target of 70 MMSCMD, the official said.

Output for the current fiscal year is estimated at 27 MMSCMD against the target of 80 MMSCMD, the official said.

Reliance has a 60% interest in KG-D6, where BP PLC owns 30% and Niko Resources Ltd. of Canada the rest.

Copyright (c) 2012 Dow Jones & Company, Inc.

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