The Union government has sought compensation of more than ₹2.5 lakh crore (around USD 30 billion) from Reliance Industries Ltd and its partner BP in a 14-year-old dispute relating to the KG-D6 gas block in the Krishna–Godavari basin. According to sources, the government has alleged that the project partners created production infrastructure larger than required but failed to achieve committed natural gas output targets, causing substantial loss to public resources.
The claim forms part of the government’s submissions before a three-member arbitration tribunal. Hearings concluded on November 7, and the tribunal’s award is expected sometime next year. People familiar with the matter said that whichever side loses the case is likely to challenge the ruling before the Supreme Court of India.
Government’s claim: Compensation for ‘unproduced gas’ and excess expenditure
Sources said the Centre has sought the monetary value of natural gas that was not produced and remained underground, along with compensation for alleged excess infrastructure spending, fuel marketing costs, and interest liabilities. Taken together, the government has valued its total claim at over ₹2.5 lakh crore.
D-1 and D-3: Energy security hopes that fell short
The Dhirubhai-1 (D-1) and Dhirubhai-3 (D-3) gas fields in the KG-D6 block were India’s first major deepwater gas projects and were once projected as key to strengthening the country’s energy independence. However, the project was hit by multiple challenges, including water ingress, declining reservoir pressure, and prolonged disputes over cost recovery. Production consistently lagged projections, and the fields eventually ceased production in February 2020.
Allegations of ‘unduly aggressive production’
During the arbitration proceedings, the government argued that under the production-sharing contract, the gas discovered belongs to the Union of India, and that alleged mismanagement led to the loss of a significant portion of reserves. It alleged that Reliance adopted an “unduly aggressive” production strategy, extracting gas from only 18 wells instead of the 31 originally planned, and did so without adequate supporting infrastructure. This, the government claimed, caused irreversible damage to the reservoir.
Revised investment plans and downgraded reserves
Reliance, in its initial field development plan, proposed an investment of ₹20,500 crore (USD 2.47 billion) to achieve a peak output of 40 million standard cubic metres per day (mmscmd). In 2006, the plan was revised, with projected investment rising to ₹67,900 crore (USD 8.18 billion) and peak production expected to double through drilling 31 wells by March 2011.
In practice, the company drilled 22 wells, of which only 18 were brought into production. Due to unanticipated sand and water ingress, output declined earlier than expected, prompting a mid-course revision of reserves to 3.10 trillion cubic feet (Tcf) from the earlier estimate of 10.03 Tcf.
Dispute over cost recovery
The government attributed the decline to deviations from the approved development plan and, in the initial years, disallowed ₹25,000 crore (USD 3.02 billion) in costs claimed by Reliance and its partners. It also sought an additional ₹2,050 crore (USD 247 million) in profit petroleum after disallowing cost recovery.
Reliance and BP, however, have argued that under the New Exploration Licensing Policy (NELP), the Production Sharing Contract (PSC) allows contractors to fully recover all capital and operating costs before sharing profits with the government. They contend that the government has no contractual right to retrospectively disallow costs that were already incurred and approved.
A long legal journey
The dispute entered arbitration in 2011, but proceedings were delayed for years due to disagreements over the composition of the tribunal. Subsequent challenges by the government before the Delhi High Court and the Supreme Court were dismissed, paving the way for the arbitration hearings to finally commence.
Production performance
Gas output from the D-1 and D-3 fields was projected at 80 mmscmd, but actual production stood at 35.33 mmscmd in 2011–12, 20.88 mmscmd in 2012–13, and 9.77 mmscmd in 2013–14. Output continued to decline thereafter, culminating in the shutdown of the fields in February 2020.
Stakeholding
Reliance currently holds a 66.66% stake in the KG-D6 block, while BP owns the remaining 33.34%. The partners maintain that all investments were made with the approval of the management committee, which included government representatives, and that they remain entitled to recover costs under the PSC.
All eyes are now on the arbitration tribunal’s decision, which is expected to determine the future course of one of India’s largest and most contentious energy-sector disputes.
