Partha Sarthi Das, Director in the Exploration Division of the Ministry, on January 25 wrote to RIL Executive Director P M S Prasad saying "as on date", no dispute has arisen to warrant arbitration and the company should withdraw the notice invoking arbitration forthwith, ministry sources said. RIL had on November 24, 2011, slapped the notice upon learning that the ministry was moving to restrict cost-recovery in the KG-D6 block after flagging gas production led to utilisation of less than half of the 80 million cubic metres per day of infrastructure the company had built.

The ministry's technical advisor, the DGH, advised disallowing USD 1.235 billion of out of the USD 5.7 billion expenditure already made as RIL has drilled and completed only 18 wells as against agreed the 31 wells in the block, resulting in lower gas output.

Gas production averaged 48.13 mmcmd against the target of 53.40 mmcmd in 2010-11 and 38.61 mmcmd (up to October 31, 2011), compared to the target of 61.88 mmcmd, in 2011-12. Production of 80 mmcmd was envisaged in 2012-13. RIL says it has not drilled the committed wells as the reservoir has not behaved as previously predicted and output dipped due to a fall in pressure and water and sand ingress in wells. Sources said before the ministry could write to RIL on restricting cost-recovery, the company slapped the arbitration notice.

The ministry had referred the arbitration notice to the Law Ministry, which was of the opinion that as on date, there was no cause of action for RIL to raise a dispute (as defined in Article 33 of the Production Sharing Contract) entitling the company to refer it for arbitration.

Also, RIL did not wait for the mandatory 90 days from the date on which the dispute arose, they said, adding that the three-month period expired on December 15, 2011, and not November 15, 2011, as "wrongfully" mentioned in the arbitration notice.

RIL had appointed S P Bharucha, former Chief Justice of the Supreme Court, as its arbitrator and had asked the ministry to appoint its arbitrator within 30 days. The ministry had days before the December 23 deadline expiry sought a one month extension to respond to the notice and after receiving the Law Ministry's opinion, has now written to the company saying its claims are based on surmises, conjecture and apprehensions, sources added.

It remains to be seen how RIL will respond to the ministry's letter. Under the dispute resolution process set out in the PSC, the claimant (RIL) can ask the Chief Justice of India to appoint an arbitrator on behalf of the government. The two arbitrators would then appoint a third neutral arbitrator.

Sources said RIL, as per the revised field development plan approved in 2006, was required to drill, connect and put on stream 22 wells by April 1, 2011, with an envisaged production rate of 61.88 mmcmd and 31 wells by April 1, 2012, at an envisaged production rate of 80 mmcmd. However, till date, it has completed the drilling of only 18 wells and out of these 18 wells too, only 13 wells are presently in operation.