Disallow $970 mn of Reliance Industries’ KG-D6 cost recovery: CAG

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New Delhi | Updated: November 29, 2014 1:47 AM

Says company agreeing to pay 200 m euros extra for EPIC work unjustified

On the same lines as the previous study, the report brings to light that RIL was allowed to retain the entire contract area KG-DWN-98/3, commonly known as KG D6, a decision taken by the government on February 2009. The report brings to light that RIL was allowed to retain the entire contract area KG-DWN-98/3, commonly known as KG D6, a decision taken by the government on February 2009.

The Comptroller and Auditor General of India (CAG) has, in its latest report on hydrocarbon production sharing contracts, opined that Reliance Industries (RIL) can’t recover the $970 million it had incurred on KG-D6. This includes  $690.70 million on expenditure-related issues ($386.83 million), revenue issues ($250.93 million) and accounting issues ($52.94 million), and another $279.72 million that the auditor found as unjustified costs.

FE had reported earlier the CAG report disallowing a part of costs that RIL had claimed.

“CAG noticed deficiencies in implementation of procurement/service contracts and in issues relating to accounting/revenue,” the auditor said in a statement. The latest report is for FY08 through FY12.

The national auditor found it unjustified that RIL agreed to pay an additional 200 million euros to Allseas Marine contractor to complete EPIC (engineering, procurement, installation, commissioning) work. The CAG is of the view that this was a lump sum contract awarded and neither the production sharing contract (PSC) nor the contract between RIL and Allseas has any provision to pay additional cost. Similarly, RIL paid $17.36 million for extension of dry docking to fifteen years for a floating production, storage and offloading (FPSO) unit.

CAG-RIL

On the same lines as the previous study, the report brings to light that RIL was allowed to retain the entire contract area KG-DWN-98/3, commonly known as KG D6, a decision taken by the government on February 2009. The PSC under Article 4.1 says that 25% of the block area must be relinquished after completion of the first phase of exploration programme.

RIL went ahead with exploration activities, which included drilling of eight exploration wells and six appraisal wells of discoveries resulting in an expenditure of $427.03 million at the risk of revenue of the commercial discoveries made in the block.

“These activities were not in line with PSC provisions. CAG has recommended that the petroleum ministry should disallow the cost recovery of $118.99 million already effected by the operator on four of these exploration wells,” it added.

The CAG has also pulled up the oil ministry for not being able to take a decision for four years on the dispute over not conducting drill stem test (DST) for three discoveries in the KG-D6 block – D29, 30 and 31. “The issue has, however, still not been finalised, which is against the New Exploration Licensing Policy (NELP) objective of expeditious monetisation of hydrocarbon resources,” CAG said.

The petroleum ministry has proposed to give a one-year extension to redo tests at three gas discoveries (D29, D30 and D31) in KG-D6. Earlier, these discoveries were not recognised by the DGH as RIL didn’t conduct DST, a mandatory technical requirement to establish presence of hydrocarbons that can be drilled commercially. The ministry has sent the proposal to the Cabinet Committee on Economic Affairs (CCEA) for its nod. These discoveries, with an associated reserve of 345 billion cubic feet (bcf), are valued at about $1.45 billion at the previous gas price of $4.2/mBtu.

The national auditor has also found anomalies in gas reserve estimates of KG-D6. On May 4, 2007, DGH had told the nodal ministry that original gas in place (OGIP) was estimated at 7.6 tcf and recoverable reserves were 5.32 tcf. However, the approval of the initial development plan (IDP) indicates the DGH has considered OGIP as 5.45 tcf and recoverable reserves as 3.81 tcf.

Meanwhile, the CAG also noticed that the pricing mechanism for crude from the MA oilfield had not been finalised and approved by the petroleum ministry and sales were being treated as provisional by the government. However, RIL was treating the sales as firm and final. Marker has not been fixed so far, leaving scope for ambiguity in pricing.

Also, the pricing and sale of condensate has not yet been approved by the government and is being sold at a discount value below Dated Brent.

The difference between the sale value of Dated Brent and KG-DWN-98/3 condensate amounted to $33.93 million over July 2010-March 2012.
RIL provided restricted or customised access to CAG for some modules of SAP. Further, access to modules like sales and distribution, project system, assets accounting, bank accounting and audit information system, among others, were not provided.

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