Reliance violated contract terms in KG Basin, finds CAG report

Written by fe Bureau | Mumbai | Updated: Sep 9 2011, 08:40am hrs
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Oilmin asked to review RILs contracts

The Comptroller and Auditor General of India (CAG) on Thursday told Parliament that Reliance Industries, Cairn India and Gail India deviated from some of the terms of their oil and gas production sharing contracts (PSCs) with the government but the auditor avoided any criticism of gold-plating of costs by RIL at its KG basin gas field.

Earlier, the government had asked the CAG to conduct a special audit of some of the RIL contracts in the wake of the allegations that the company inflated the cost estimate to reduce the profits it had to share with the government.

In its report, the countrys top auditor also made a biting criticism of the petroleum ministry and its technical arm the directorate general of hydrocarbons (DGH) for a number of deficiencies in compliance and control with respect to the contracts with these companies. CAG also said that in violation of the contract, RIL was allowed to retain the entire contract area of KG DWN-98/3 as discovery area without having to relinquish a fourth of the area after first and second exploration phases. The auditor recommended that the ministry should correctly delineate the discovery area as per the contract by excluding 25% of the area at the end of the two exploration phases, treating the subsequent discoveries as invalid.

The CAG noted in the performance audit of 20 hydrocarbon PSCs that the current profit-sharing norms allow adequate scope for oil companies to limit the states share of profits. The CAG also recommended that in future auctions of hydrocarbon blocks, the government should go for a single profit-sharing percentage as bid criteria instead of the investment multiple (IM) formula being followed at present.

Current norms allow substantial incentive to increase the capital expenditure or front-ending of investment to retain the IM in the lower slabs, the CAG said, adding that this practice keeps the governments profit share in the lower slabs for a longer time.

On RILs increase in the capital expenditure from $2.39 billion to $8.8 billion for the D1 and D3 discoveries in the KG basin, CAG said this revision casts doubts on the robustness of the data and assumptions underlying the development plan. The auditor, however, did not make any conclusive remark on the justification of the cost escalation as only expenditure incurred in 2006-07 and 2007-08 has been audited, leaving that of the subsequent years for future audits.

Gold-plating is not an audit terminology, said Rekha Gupta, deputy CAG during a media interaction after the report was placed in Parliament. Gupta, however, said that the CAG could not derive assurance regarding the reasonableness of the cost incurred with respect to the large procurement contracts made by RIL in the two years due to lack of adequate competition and major revisions in their scope, quantities and specifications. The CAG report said these led to consequential adverse implications for cost recovery and the governments financial take. Gupta said the management committee of the project could have exercised more due diligence in approving these contracts.

RIL stated that it hoped its detailed responses as well as the views of industry experts provided to the CAG has been considered while finalising the audit report. We reiterate that, as a contractor, we remain committed to complying with the PSC provisions and procedures including adopting good international petroleum industry practices in our operations, RIL stated.

The company also offered the CAG a thorough interaction on the matter with subject specialists. We maintain that, in KG D6, RIL has set a global benchmark for effective, efficient project completion and capital cost competitiveness under the most trying circumstances and we are proud of our achievements, RIL said while offering full co-operation for the audit.

The CAG also accused Cairn of irregular extension of exploration activities, which is not in consonance with the terms of the PSC in the RJ-ON-90/1 block in Rajasthan. The auditor also said that the government incurred substantial loss by failing to finalise the norms for post-well head costs of gas from the Panna-Mukta and Mid & South Tapti Fields. The CAG criticized the ministry and its nominee for gas purchase Gail India for allegedly failing to comply with the terms of the PSC during 2005-08 with regard to the pre-determined gas pricing formula.