India rejects $1 bln Reliance cost recovery plan - source

Reliance Industries KG-D6's control and raiser platform is seen off the Bay of Bengal in this undated handout photo.

MUMBAI (Reuters) - India has struck down Reliance Industries Ltd's (RELI.NS) plan to recover about $1 billion invested to develop an offshore gas field as the current output is less than half of that approved under the development plan, an oil ministry source said.

Reliance said in a statement late on Friday that the oil ministry has proposed to "disallow certain costs", without quantifying how much the company was planning to recover.

These "issues will be resolved through arbitration process" initiated by the company in November, it said. The ministry has so far refused to join the arbitration.

Reliance "continues to maintain that a contractor is entitled to recover all of its costs under the terms of the production sharing contract and there are no provisions that entitle the government to disallow recovery of any contract cost," the company said.

The petroleum ministry has allowed Reliance to recover costs only for building infrastructure used for gas production and not for the wells that have not been drilled and have not added to output, the oil ministry source told reporters.

Reliance is currently producing about 27 million standard cubic metres a day (mmscmd) from its key natural gas field in the Krishna Godavari (KG) basin, the source said, far lower than the 80 mmscmd gas it had planned to produce from April this year.

Under India's exploration policy, the government allows companies to first recover their cost from oil and gas revenue, and subsequently share profits with the government.

Reliance's growth outlook has been marred by falling gas output from its huge gas fields, with production less than half of what was originally estimated.

The Comptroller and Auditor General last year criticised both Reliance and the government over development of the KG gas field, and the company's shares slumped by a third in 2011.

The company has earlier said unexpected geology has caused the decline in output and drilling more wells would not help, but this has been rejected by the oil ministry.

(Reporting by Nidhi Verma, Prashant Mehra and Sanjeev Choudhary; Editing by Aradhana Aravindan)