New Delhi: Mukesh Ambani-led Reliance Industries (RIL) might have to fork out $1.6 billion on its KG-D6 block if the government accepts a report of the comptroller and auditor general of India (CAG) on hydrocarbon production sharing contracts tabled in parliament on Tuesday.
CAG has observed that RIL had claimed an “excess expense” of $1.6 billion in developing the D6 block, which they subsequently recovered against the gas price administered by the government. However, RIL went on to produce far less amount of gas that such a huge investment would have yielded. CAG has now recommended that the government should recover the “excess amount” that RIL recovered from its customers, without sharing the profit with the government.
As per the production-sharing contract between the producer and the government, an operator is allowed to recover all his cost before sharing profit with the government; a provision, which CAG says encourages companies to inflate cost to delay profit sharing.
CAG has said that the government should recover the expenditure claimed by RIL on the basis of improperly declared discovery area and faulty procurement and service contracts that clearly showed deficiencies in implementation.
The report is a follow-up audit of RIL's eastern offshore (KG-DWN-98/3 block) KG-D6 block that has reviewed the developments between the period 2012-13 and 2013-14. Its earlier report, tabled in 2014, has covered the period between 2008-12.
In its latest report, the official auditor has said that between 2012 and 2014, RIL claimed excess cost recovery of $46.35 million (Rs 278.70 crore) on testing the feasibility of wells D29, D30 in the KG-D6 area. This needs to be appropriately assigned and reversed in view of the oil ministry’s May 2015 directive that disallowed recovery of such expenditure.
Together with the findings of the earlier audit of 2014 that had estimated excess cost recovery by RIL in the KG D6 block at $1,547.85 million (Rs 9,307.22 crore) during 2012-14, the total amount to be recovered now goes up to $1.6 billion.
While providing cost recovery numbers, CAG has also pointed out that the matter still remained unresolved, as the RIL had gone for arbitration over some of its observations.
“The operator has invoked arbitration on some of these exceptions (under-utilisation of gas handling facilities, un-connected wells) and these matters presently stand unresolved,” CAG said in its report.
A RIL spokesperson refused to comment on the CAG’s fresh findings and said that the company was still studying the report. Moreover, the matter flagged by the auditor was already under arbitration, he said.
In its previous reports CAG had slammed the oil ministry and its technical arm directorate general of hydrocarbons (DGH) for not exercising enough control and vigil over KG-D6 block, leading to instance of excess cost recovery.
In its report, CAG also took note of state-owned ONGC's gas flowing into eastern offshore fields of RIL KG-D6 block. A committee headed by Justice AP Shah is already looking into the dispute between the two oil-producing companies and is likely to submit its report soon. Earlier an independent expert (appointed by ONGC) DeGolyer & MacNaughton (D&M) had reported that a substantial portion of gas in the Godavari area and KG-DWN-98/2 (both of ONGC) had migrated to KG-D6.
“In case if the ministry of petroleum and natural gas accepts D&M report conclusion that RIL did draw gas from ONGC's contiguous fields, and directs RIL to compensate ONGC for the same, it may affect the financials of KG-DWN-98/3, including cost petroleum, profit petroleum, royalty and taxes over its entire period of operation (since April 2009 when production of gas commenced from the block),” CAG said indicating that government would have to rework KG D6 maths to prevent loss to the exchequer.
Further CAG observed that 831.88 sq km of KG-D6 area was being used by RIL even though the government had asked it to surrender non-producing areas, as per the terms of PSC. The government, it said, should recover this.
Oil ministry had ordered RIL to relinquish 6,198.88 sq km out of total KG-D6 area of 7,645 sq km, as per the contract that allowed retaining only area were discoveries are made. “However, the operator relinquished only an area of 5,367 sq km retaining an excess area of 831.88 sq km. The operator also paid petroleum exploration licence (PEL) fees of Rs 33.2 lakh relating to the excess retained area,” CAG said,
Indicating its frustration over non-adherence to its earlier recommendations on KG-D6 block, the auditor in its report said that many of the issue it had pointed out in the previous audits (2006-12) of the block still persist.
CAG also said government should include $63.78 million, which RIL got through marketing margin on gas supplies from its KG-D6 block, in overall price of gas for calculation of royalty payable to government and profit sharing.
(This story originally appeared on Financial Chronicle)
