Government’s Auditor Red-Flags $1.6 Billion Excess Cost Recovery By Reliance Industries

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New Delhi: The Comptroller and Auditor General of India (CAG) has red-flagged $1.6 billion of excess cost recovered by Reliance Industries Ltd (RIL) in the KG-D6 gas block. The government’s auditor also took note of state-owned ONGC’s gas flowing into the eastern offshore fields of billionaire Mukesh Ambani-led Reliance Industries.

CAG, in a report tabled in Parliament, said 831.88 square kilometers of KG-D6 area needs to be taken away from RIL as per the contract and the cost of discoveries it had relinquished should not be allowed to be recovered from sale of oil and gas from the block.

Also, the cost recovery for doing the discovery conformity test should be looked into, it said.

CAG said the November 2015 report of independent expert DeGolyer & MacNaughton (D&M) on reservoir continuity between the KG-D6 and contiguous ONGC-operated blocks has pointed out that gas has migrated from the blocks owned by state-owned firm to the private company-operated fields.

“The report indicates that as on March 31, 2015, of the gas initially in place, 44.32 per cent in Godavari PML and 34.71 per cent in KG-DWN-98/2 (both of ONGC) had migrated” to KG-D6, it said.

“The report projected a higher proportion of gas migration and its production through RIL operated KG-DWN- 98/3 (KG-D6) block by end of 2019.”

The government has appointed a one-member committee under Justice A P Shah to consider the report and recommend future action.

“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.

It said many of the issues it had pointed out in the previous audits (2006-12) of the block still persist.

“The total financial impact of excess cost recovery during 2012-14 on account of the earlier identified audit findings was $1.547 billion (Rs 9,307.22 crore).”

“For the period 2012-14, additional issues of excess cost recovery claimed by the operator (RIL) were noticed, financial effect of which was $46.35 million,” it said.

CAG had in its previous reports slammed the Oil Ministry and its technical arm DGH (Directorate General of Hydrocarbons ) for not exercising enough control and vigil over the KG-D6 block, leading to instance of excess cost recovery.

As per the production sharing contract (PSC), an operator is allowed to recover all its cost before sharing profit with the government, a provision which the national auditor (CAG) says encourages companies to inflate cost to delay profit-sharing.

CAG, in its report tabled in Parliament on Tuesday, said Reliance Industries refused to connect to the production system four wells it had drilled on the D1 and D3 gas fields in KG-D6 block on the pretext that they would not produce adequate incremental volume to justify the additional capex spend.

“Though these wells have not contributed to production from the D1-D3 field, the Operator has recovered $102.94 million up to the FY2013-14 towards their cost,” CAG said.

Also, the ministry had ordered Reliance Industries to relinquish 6,198.88 square kilometers out of the total KG-D6 area of 7,645 square kilometers as per the contract that allowed retaining only area were discoveries are made.

“However, contrary to Ministry’s directives, 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 License (PEL) fees of Rs 3.32 million relating to the excess retained area,” CAG said, adding that relinquishment of the additional area retained needs to be ensured by the ministry.

CAG said $63.78 million Reliance Industries got through marketing margin should be included in the price of gas for calculation of royalty payable to government and profit-sharing.

Also, Aker of Norway, which supplies a floating oil production vessel (FPSO), was paid an additional benefit of $10.13 million