Reliance Industries cites production contract to refute CAG

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New Delhi | Updated: November 24, 2014 8:59 AM

Says PSC allows $427 million expense, which CAG objects to.

According to CAG, RIL had incurred this expenditure on exploration, and that is not allowed in the ‘discovery area’. ReutersAccording to CAG, RIL had incurred this expenditure on exploration, and that is not allowed in the ‘discovery area’. Reuters

Apart from reiterating its earlier statement that the Directorate General of Hydrocarbons (DGH) had erred in allowing Reliance Industries (RIL) to retain all of the contract area even after its exploration phase had ended (see graph), the Comptroller and Auditor General of India’s (CAG) latest audit report says, among other comments, that RIL should not have been allowed to set off costs worth $427 million. According to CAG, RIL had incurred this expenditure on exploration, and that is not allowed in the ‘discovery area’.

Click here for graph

RIL has, however, told the CAG that according to Clause 1.39 of the Production Sharing Contract (PSC), the contractor is allowed to retain an area where it believes there is petroleum (oil/gas) to be found. Clause 1.39 says ‘Discovery Area means that part of the Contract Area … based upon Discovery and the results obtained from a Well or Wells … the Contractor is of the opinion that Petroleum exists …’

According to RIL, the DGH later saw reason in its argument and the government allowed it to retain the area in February 2009. As reported by FE on November 18, the Parliamentary Standing Committee has questioned the DGH’s stance.

The CAG’s latest audit report, for the period FY09 to FY12, is to be tabled in Parliament in the current session beginning Monday.

As for the $427-million expenditure, RIL has quoted Section 15.3 of the PSC to say ‘the Contractor shall be entitled to recover… Exploration Costs which it has incurred in any Year after the date of Commercial Production …’

While the CAG has said that expenses of $161 million on appraisal wells AR1/AW1/AK3 should also be disallowed as they had not been approved, RIL has said the PSC allows this – though the DGH had not okayed the costs, RIL had included the costs while calculating the profit gas for FY11-FY13.

In the case of AR1, RIL told the CAG that the DGH had cleared the field development plan of its R-series on the basis of the results received from AR1, so where was the question of the well’s costs not being approved?

In addition to the broader charges that apply to the DGH/petroleum ministry, the CAG has made specific allegations about certain RIL contracts.
In the case of the EPIC contract with Allseas Marine Contractors for $1 billion, the CAG has alleged extra payments of around $270 million over and above the contracted amount.

RIL’s argument, however, is that there were delays that were unanticipated — against an expected surface current of 1-2.4 m/sec during the December to July period, the actual levels observed went up to 3.2-4.1 m/sec, making work impossible — the KG Basin has a work window from just December 15 to April 15 or 30.

In addition, due to other problems as well, while RIL had to hand over 18 wells to Allseas, it could give only 4. As a result, Allseas’ costs went up, and RIL also had to supply some of its own equipment to make up the shortage – Allseas’ equipment was available only for a specified period of time.

The larger point RIL has made is that the PSC says it needs to keep in mind not just the costs, but the cost of delays, which would have been substantial were it to simply go by the book and terminate contracts such as those with Allseas. RIL also says it allowed just 30% of the additional expense that Allseas wanted. RIL has made the same time-saving argument for the $45 million extra the CAG says it paid for its FPSO contract.

In the case of the marketing margin of $261 million that the CAG says have been accounted for while calculating the profit petroleum and royalty, RIL has argued that the PSC ends once the gas leaves the field – that is, the marketing margins cannot be considered part of the PSC-related items.

All told, so far, the government has not allowed RIL to expense around $3.3 billion based on the opinion of the Solicitor General. The SG’s argument was that RIL would be allowed to charge this as an expense when its production levels rose to the levels it had promised earlier.
RIL is in arbitration on the matter, and its argument is that there was no commitment made by it, the figures it had given were just estimates of how much gas there could be in the field, so it is incorrect to link the costs incurred with the actual production levels.

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