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• The oil ministry plans to impose cost limits on the development of new KG Basin gas fields by Reliance Industries, and has deferred its decision on the critical issue of allowing the company to fully recover previous costs, giving a new turn to the choppy relationship between the conglomerate and the government. The oil ministry is keen to call a meeting of the Management Committee of the D6 block in a few days to consider Reliance's long-pending plan to develop satellite discoveries in the block and reverse the fall in D6 output, but it will approve the plan on the condition that costs should not exceed original estimates by 10-15%, government and industry officials said. RIL had estimated expenditure of about $1.5 billion in developing the smaller discoveries in the block on the basis of 2006 prices.
• While efforts to approve fresh investment would be a positive signal for the company, industry officials say Reliance's bigger worry is the oil ministry's move to penalise the firm for the fall in gas output, which has dropped below 40 mmscmd from over 60 mmscmd. The company has initiated arbitration proceedings following reports that the government would not allow Reliance to recover all the costs in D6 from gas sales because the output was lower than expected. Last week, the government wrote to Reliance seeking one month's time to respond to the arbitration notice, prolonging the uncertainty over cost recovery.
• Industry officials said it is difficult for a company to invest risk capital without clarity on the critical issue of its ability to recover costs from gas sales. Also, the cost of developing a new field is not in the company's control. Sources close to Reliance said development costs would depend on the prevailing rates of equipment and services. "Cost increase is not in the company's hands. Reliance will try its best to minimise the cost but this cannot be achieved only by price negotiations. Costs can be minimised by engineering effort to ensure maximum utilisation of existing facilities, and minimising the need to build new facilities," one source close to the development said. "The company is trying. There has to be an effort to reduce the cost, and there will be. In fact, the company itself has committed to the government that it will do everything possible to reduce costs, but the effort can come basically from engineering. Prices are not in the company's hand," the source said.

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