RIL asked to stop sale of KG-D6 crude to Jamnagar

Petroleum Ministry has asked Reliance Industries to stop sale of crude oil from KG-D6 block to its affiliate Jamnagar refinery, saying it was not an arms- length sales.

The Ministry wants to deduct $115 million from sale proceeds of the crude oil to make up for the additional profit petroleum it believes is due after disallowance of $1.797 billion in cost for KG-D6 gas output falling short of target. It has asked RIL to sell oil to Chennai Petroleum Corp Ltd (CPCL) on an interim basis. RIL transfers shipload of crude oil from the offshore MA oilfield in the predominately KG-D6 block off the Andhra coast, to user refinery once a month and the occasion for such a transfer hasn't arisen since the Ministry order.

A company spokesperson, however, said RIL has not received any letter from the Ministry. "There is no restriction under the Production Sharing contract (PSC) for sale to affiliates or self (other division of RIL) and the sale is in accordance with PSC provision."

RIL, which sold MA crude to CPCL during first five years of production on negotiated terms, earlier this year floated a tender for sale of 2.5 million barrels of oil in 2014-15.

Jamnagar refinery of RIL won the tender as CPCL offered a pricing formula that was about $4-5 per barrel less than the formulation quoted by the private sector refiner.
Sources said the Ministry, which could not recover the $115 million of additional profit petroleum because CPCL was no longer a buyer and did not owe any money to RIL, stated that oil sales is to be done on arms length basis and cannot be done to an affiliate.

Incidentally, RIL had sold condensate from the block for almost two years as well as test oil Cambay basin block to Jamnagar with full knowledge and approval of the Ministry. No issue of Jamnagar refinery being an affiliate was raised then.

The Ministry had disallowed $1.797 billion in cost for gas output from main fields in KG-D6 block falling short of target between 2010-11 and 2012-13. It calculated that the government should have got an additional profit share of $115.263 million. To recover this, it wanted CPCL and gas utility GAIL India to deduct this amount due to RIL. GAIL has not bought any gas from KG-D6 since June 2013 and could not deduct any amount. CPCL too lost out the crude tender in May.

After including cost disallowance of $579 million for 2013-14, the total additional profit petroleum claimed from RIL comes to $195 million, sources said.
However, the cost disallowance issue is under arbitration and it is unclear how the Ministry wanted additional profit petroleum even before the issue is decided.