Reliance Industries, promoted by Mukesh Ambani, has just been penalised an additional $579 million by the central government, for producing less than the targeted quantity of natural gas from the offshore KGD6 block in Andhra Pradesh. With this, the cumulative penalty imposed on RIL for consistently missing gas production targets since April 1, 2010 stands at a staggering $2.376 billion, or over Rs 14,000 crore.



The penalty notice by the new government is expected to silence critics who have alleged proximity between prime minister Narendra Modi and India’s largest business house. Here’s how it all unfolded.



*Petroleum minister Dharmendra Pradhan, in a written reply to queries raised by members of Parliament including Trinamool Congress’ Saugato Roy, stated the government sent the $579 million penalty notice on July 10, 2014.



*This is the first notice sent by the National Democratic Alliance government and the fourth received by RIL.



*Former petroleum minister Jaipal Reddy was the first to penalise RIL for a shortfall in gas production. His successor, Veerappa Moily, also of the UPA government, also served RIL with penalty notices. The Bharatiya Janata Party’s minister has continued the practice.



*In November 2011, RIL preempted arbitration against the Indian government for wanting to penalise the company. RIL has argued in the Supreme Court that it never committed to natural gas production targets, and that the production-sharing contract it signed with the Government does not allow such penalties. The arbitration is yet to begin.



*RIL says the field development plans submitted to the government were for an expected gas flow of 80 mmscmd – a common unit in the measurement of gases, expanding to million metric standard cubic meters per day – but this was never a target or commitment from the company



*Irrespective of whether 80 mmscmd was an expectation or a commitment from RIL, gas production today is just 10% of that. According to Pradhan’s written reply to Parliament, RIL’s gas production from the D1D3 blocks of the KGD6 fell to 8.05 mmscmd in June.



*The petroleum ministry, as it did under the UPA dispensation, alleges that India's largest business house has not adhered to the contract it signed with the government. For example, Pradhan said RIL created production facilities for 80 mmscmd, whereas production has been much less, resulting in the under-utilisation of facilities and creation of surplus inventories.



Pradhan also stated that RIL failed to adhere to the government-approved development plan in terms of drilling and putting on-stream the required number of wells to meet the production target.



*The penalties have been imposed by way of not allowing RIL to recover their costs in proportion to what the government calls “missed production targets”. The contract between the government and RIL allows the company to recover its investment and operating costs in a graded manner, before sharing profits with the exchequer. RIL has incurred costs of over $8bn so far.



*RIL now wants gas prices to be included in the arbitration, and sent a notice to the government on May 10 this year with that demand. RIL says the government failed to revise the gas price of $4.2 a unit on April 1, 2014, as it was supposed to. Citing the model code of conduct, the Election Commission did not allow the UPA government to double gas prices earlier this year, despite the cabinet of the UPA government approving a price formula for all gas producers that would come into effect from April 1, 2014. The new government has said it will take a decision only by October 1.



