Resolution of RIL’s $247 million KG basin cost recovery dispute with GoI seen in New Year

New Delhi : Reliance Industries Ltd (RIL), the operator of the KG-D6 oil block since 2000, is contesting a $247 claim by the government for additional profit petroleum from KG-D6 in an international arbitration. As this process enters its last leg, a resolution can be expected in 2026, according to industry sources familiar with the case.
The long-running dispute arose after the government disallowed recovery of part of the costs already invested by an RIL-led consortium. The consortium, which also included the UK’s BP Plc and Canada’s Niko Resources, has built deepwater facilities in the KG-D6 block, a first-of-its-kind in India.
Deepwater exploration and production involve considerable risk, and production sharing contracts (PSCs) under the New Exploration and Licensing Policy (NELP) explicitly allow recovery of costs, including those incurred for exploration, development, and production, according to the industry sources cited. The government receives its profit share as per the terms of the production sharing contract, in addition to royalties and taxes. The government also constantly oversees, approves, and audits every expenditure incurred by the contractor, in this case, the RIL-led consortium.
‘Disallowing’ Expenditure
In this case, the dispute, now subject to arbitration, arose when the government sought to disallow part of the capital expenditure incurred when gas production turned out to be less than expected. The government’s move was contrary to both the terms of the PSC and international norms, according to the industry sources cited earlier.
The move dismayed RIL, which has invested considerable risk capital. Besides being a double whammy for RIL, it is also seen as damaging for India’s attraction as an investment destination with stable policies, several industry sources said.
The government’s actions were more surprising as under the PSC, a management committee is set up with two government representatives, who hold veto power over every decision. The contractor consortium cannot implement any decision or spend any money without prior approval of the management committee. The RIL-led consortium followed these processes in letter and spirit and secured all government approvals, as per the industry sources cited.
Further, no provision of the Production Sharing Contract allows for such unilateral and post-facto disallowance of costs after they have been incurred, one of the sources said.
No Investment by GoI
Importantly, the government had not invested anything to develop the reserves and, therefore, bore no financial risk. Nonetheless, the government has received a significant amount of profit petroleum, royalty, and taxes so far. Moreover, RIL was forced to sell the entire gas produced at significant discounts to prevailing market prices despite the PSC explicitly guaranteeing market-driven prices. This marks another violation of the PSC, an industry official said.
However, because of the discount, the country benefited from cheap gas, and the government reduced its fiscal deficit by providing subsidised gas for priority-sector buyers.
RIL developed the KG-D6 block in record time, which to date is India’s most successful deepwater producing block. All other blocks in the KG basin around KGD6, developed by other operators, have performed worse than the D6 block. However, the government hasn’t initiated similar cost recovery proceedings against other operators.
Having approved the plans and the contractor having undertaken investments in good faith, the government’s action disallowing cost vitiates the sanctity of the contract and will negatively impact the investment outlook, industry experts reiterate. This is particularly so, given that India’s import dependence continues to grow, and the country requires more investment for energy atmanirbharta.