KG-D6 Gas Block Dispute: Government demands compensation of $30 billion from Reliance-BP, 14 year old case will end

New Delhi. The central government has sought compensation of more than $30 billion from Reliance Industries Limited (RIL) and its partner BP for not meeting the natural gas production target from the KG-D6 gas field in the Krishna-Godavari basin.

Sources have given this information. According to sources familiar with the development, the government has presented this claim before a three-member arbitration tribunal. The hearing on this nearly 14 year old case was completed on November 7. Sources said that the tribunal may give its verdict in this case sometime next year. The party dissatisfied with the decision will have the option to challenge it in the Supreme Court. However, Reliance Industries and BP did not immediately comment in this regard.

The government alleges that both partners developed excessively large facilities in the KG-D6 block, but failed to achieve the targets for natural gas production. During the arbitration process, the government has sought monetary value of the gas that could not be produced as well as compensation on additional expenses incurred on the installations, fuel marketing and interest. The total value of all these claims is estimated at more than $30 billion. The crux of the dispute lies with the Dhirubhai-1 and Dhirubhai-3 (D1 and D3) gas fields of the KG-D6 block.

The government says that Reliance did not follow the approved investment plan, due to which the production capacity could not be fully utilized. Production at the D1 and D3 fields began in 2010, but within a year, gas production lagged behind projections and both were shut down in February 2020, well ahead of their expected life. In the initial field development plan, Reliance had set a target of producing 40 million standard cubic meters of gas per day with an investment of $2.47 billion. This was later revised in 2006 to double production with an investment of $8.18 billion and drilling of 31 wells by March 2011.

However, the company could dig only 22 wells, out of which production could start only from 18. The wells started closing prematurely due to infiltration of sand and water. Due to this, the estimate of gas reserves of this region was reduced from 10.03 lakh crore cubic feet to 3.10 lakh crore cubic feet. The government excluded $3.02 billion spent in the initial years from the cost recovery calculations, blaming Reliance-BP for the situation.

Reliance opposed this, saying that the government does not have the right to stop cost recovery on this basis in the Production Sharing Contract (PSC). The company had given a notice of arbitration in the matter in 2011 but the proceedings remained stalled for years due to a dispute over the constitution of the tribunal. The arbitration hearing could begin only after the Supreme Court rejected the government’s petition in January 2023. Reliance’s stake in the KG-D6 block was 60 percent, BP’s 30 percent and Nico’s 10 percent. Later, with Niko’s exit, Reliance’s stake increased to 66.66 percent, while the remaining stake is with BP.