Reliance Industries (RIL) told the office of the Comptroller and Auditor General (CAG) today, that its charges on ‘gold-plating’ regarding the Krishna Godavari (KG) D6 block were not true.
The CAG was asked to do a performance audit of some important production sharing contracts – such as RIL D6 block, Cairn India's Rajasthan oil fields, and BG-RIL-ONGC-operated Panna-Mukta-Tapti fields — by the Ministry for Petroleum and Natural Gas. The CAG audit was for 2006-07 and 2007-08. In case of RIL's D6 block, the CAG had observed that the contractor had inflated the development cost.
RIL said the charges in KG-D6 block from $2.4 to $8.5 billion does not mean more profits. RIL contended in its reply to the CAG that if the company increases capex by Re 1, its entitlement to profit petroleum comes down by Rs 0.90. In the initial years, the contractor is entitled to 90 per cent of profit petroleum.
RIL said the CAG had overlooked how cost-recovery and production sharing provisions of the production sharing contract operates. “CAG appears to believe that under the PSC where the contract costs are greater, rather than lower, such an increase in costs benefits the contractor (in this case RIL). The practical effect upon the contractor of the commercial terms of the PSC concerning cost-recovery and production-sharing is that the contractor is worse off by Rs 0.90 for every Re 1 overspent and is better off by Rs 0.90 for every Re 1 of contract costs saved,” the company said in its over 250-page reply.
RIL was represented by its executive director P M S Prasad. “Any increase in the investment only increased the risk exposure of the operator without giving any additional benefits,” the company said in a written submission to CAG.
RIL said between 2005 and 2008, the costs associated with deepwater oil and gas development rose sharply. Contractors and suppliers of equipment had their order books full. The cost of materials and labour had also seen a sharp rise, it added.
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“CAG, however, seems to have no regard to conditions in the market and how that affected the procurement process,” RIL said.
The company said ‘using the benefit of hindsight, CAG cannot question the technical and operational judgements of the operators that were in effect the best possible judgements at the time, based on the best information available.
Besides Reliance, Cairn India and UK's BG Group replied to audit observations on Rajasthan oilfields and Panna/Mukta and Tapti fields, respectively, at the exit conference.
Director General of the Directorate General of Hydrocarbons (DGH) S K Srivastava, in a separate session with CAG, said the Production Sharing Contract (PSC) allowed companies to revise costs and plans for developing oil and gas finds. CAG will now finalise its report and present it before the Parliament.