Reliance Industries (RIL) has denied any inflating of costs on its D6 gas field in the Krishna-Godavari (KG) basin or that it had not adhered to the production sharing contract (PSC) in this regard.
Yesterday, the government had tabled in Parliament the report of the Comptroller and Auditor General (CAG) on the issue. The CAG had said RIL was guilty on both issues.
The Mukesh Ambani company said audits by three experts had found that costs in the KG-D6 field were not inflated and the company had adhered to the PSC.
| POINT COUNTERPOINT |
| NON-RELINQUISHMENT OF AREA AS REQUIRED BY PSC |
| CAG: RIL hoarded acreage. DGH blamed for allowing RIL to proceed into next phase without relinquishment. Extension decision was based on only seismic data and not actual drilling. |
| PETROLEUM MINISTRY: The issue under examination is highly technical and ministry is relying upon DGH |
| DANIEL JOHNSTON: Drilling is simply not the only way to appraise a discovery... Technology advances with 3D seismic data have placed seismic technology almost on par with drilling in respect of its ability to aid in appraising a discovery |
| INCREASE IN CAPEX FROM $2.4 BN TO $8.5 BN |
| CAG: Contractors have no incentive to keep the capex lower |
| PETROLEUM MINISTRY: The expenditure is subject to audit and any unsubstantiated expenditure is liable for disallowance |
| E&Y: There was no evidence identified suggesting that KG-D6 costs were overstated in purchases from third parties or purchases from related parties and affiliates |
| DANIEL JOHNSTON: Petroleum fiscal system currently in force in India does not create any incentive for the contractor to indulge in overspending |
For instance, Ernst & Young (E&Y) was asked by RIL to perform a procurement audit and confirm that costs were correctly allocated to the KG-D6 project. Its report said of the total project cost of $8.166 billion on exploration and development incurred till March 31, 2011, only one per cent was incurred through related parties. The related parties’ transactions were primarily for the purchase of fuel and chemicals by following a competitive bidding process and were supplied at a price lower than what was procured through Indian public sector companies. “There was no evidence identified suggesting that KG-D6 costs were overstated in purchases from third parties or purchases from related parties and affiliates and in respect of other costs including allocated costs and non-purchase order-based expenditure,” said the E&Y report, put on RIL’s website.
IPA Inc, requisitioned to benchmark the KG-D6 project vis-à-vis others of global scale, said after adjusting for global projects’ market escalation, the D1 and D3 project (in KG-D6) experienced three per cent cost growth between the addendum to the initial development plan (AIDP) and actual cost. “Because of the effects of the market escalation and the slight change in scope between that considered in the AIDP cost estimate and the final installed scope, it is misleading to compare the nominal actual costs directly against the nominal AIDP cost estimate,” said the Singapore-based analyst of project management systems.
In the initial development plan, RIL had taken approval for $2.4 bn capital expenditure from the government in May 2004. It increased the estimate to $8.5 bn through the addendum in October 2006.
Daniel Johnston & Co Inc, an independent US-based consulting firm also hired by RIL, said the exploration and appraisal efforts carried out by RIL in the block were fully consistent with the geology of the underlying multi-channel turbidite reservoir system. CAG had slammed the ministry of petroleum for granting an extension to RIL instead of asking it to relinquish 25 per cent of the exploration area at the time of conclusion of the first and second exploratory phases, following the company's claim of prospectivity based on seismic surveys, instead of actual drilling of wells. “Drilling is simply not the only way to appraise a discovery...Technology advances with 3D seismic data have placed seismic technology almost on par with drilling in respect of its ability to aid in appraising a discovery in establishing a geological mode,” the consultant said in response to the auditor's observation.
Daniel Johnston and Co said, “The appraisal activities which RIL has carried out in relation to the various discoveries in the KG-D6 block are consistent with the letter and spirit of the commercial provisions of the KG-D6 PSC.” It said “the petroleum fiscal system currently in force in India does not create any incentive for the contractor to indulge in overspending”.
Against CAG’s observation that the operator has an incentive to keep costs high, E&Y says any increase in capital expenditure is detrimental to both the contractor and the government.
The CAG report noted a huge jump in the government’s profit share from 28 per cent to 85 per cent, which could lead to a situation where an increase in capital expenditure could result in an increase in the contractor’s share of profit, despite a reduction in the total on this count.
The RIL statement said the independent reports by E&Y, IPA and Daniel Johnston & Co entirely validate its responses to the CAG’s interim observations, before it prepared the final report.
