Reliance KG-D6
Reliance Industries KG-D6's facility in the Indian state of Andhra Pradesh is pictured in this undated handout photo. REUTERS/Reliance Industries/Handout

The Narendra Modi government has imposed a fresh penalty of $264 million on big gas and oil giants Reliance Industries and British Petroleum as they failed to produce less than targeted natural gas from eastern offshore KGD6 fields in 2015-16.

KG-D6 field's output has stayed below the target of 80 million standard cubic metres per day (mmscmd), for years and now --produces only 4mmscmd a day. So, the government has directed the companies not to account for certain costs each year beginning April 2010, Economic Times reported.

According to an oil ministry official, the total penalty in the form of disallowing recovery of cost incurred for missing the target during six years beginning April 1,2010, stands at $3.02 billion.

So far, the government had disallowed $457 million of cost for 2010-11, $548 million for 2011-12, $792 million for 2012-13, $579 million for 2013-14 and $380 million for 2014-15.

Reliance and partners BP and Niko are in engaged in talks with the government on the amount that can be recovered as cost before profit could be shared from the fields between the companies and the state. The oil companies claim that the contract, however, does not provide for government disallowing cost for not meeting the targets.

The Production Sharing Contract (PSC) allows RIL and its partners to deduct all capital and operating expenses from the sale of gas before sharing profit with the government. The decision of disallowing costs will result in profit-share rise for the government.

Gas fields

The government made a collection of $81.7 million between a period of November 2014 and March 2016, through this mechanism. But, a plunge in the price of domestic natural gas below $4.2 per mmBtu from April 2016 has put an end to the collection.

However, the two oil companies have challenged the cost disallowance of the past years by the government and have initiated an internal arbitration saying PSC does not provide such punishments.

RIL and BP declined to comment on the matter, Economic Times reported.