The comptroller and auditor general (CAG) has attacked the petroleum ministry and the country’s largest company, Reliance Industries Ltd, for violations in the production-sharing contract (PSC) governing Reliance’s crown jewel, the KG-D6 block. In its final report on the functioning of hydrocarbon PSCs tabled in Parliament on Thursday, the government auditor has recommended revisiting the profit-sharing formula. It is, however, silent on the loss that an increased capex in D6 may cause to the government.
In its draft report, the auditor had said the increase in estimated capex from $2.4 billion to $8.5 billion between May 2004 and October 2006 was likely to have ‘significant adverse impact on government’s financial take’.
Shares of RIL lost 2 per cent during intra-day trades before recovering to close in positive territory on Thursday. The stock of the country’s largest private sector entity has been under heavy selling pressure since June, when details about the draft CAG report came out in the open. In the last three months, it lost 30 per cent but gained 20 per cent in the last 10 days. On Thursday, its share price at the BSE touched a monthly high of Rs 859 and closed at Rs 853.50, up 2.6 per cent, hinting the market had already discounted for the adverse CAG report.
In the final report, CAG has accused RIL of hoarding exploration acreage.
It said “RIL was allowed (by DGH) to enter the second and third exploration phases without relinquishing 25 per cent each of the total contract area at the end of Phase-I and Phase-II in June 2004 and 2005, respectively, as against Articles 4.1 and 4.2 of PSC by treating the entire contract area as discovery area. Subsequently, in February 2009, the government also conveyed approval to treat the entire contract area of 7,645 sq km as discovery area, thus enabling the operator to completely avoid relinquishment of area”.
CAG has also said RIL’s opinion that petroleum existed in the entire contract area was baseless, and DGH should have forced the contractor to relinquish the stipulated area. CAG recommended the petroleum ministry review the determination of the entire contract area of the KG block while strictly complying with the PSC. RIL, however, said in a statement issued on Thursday that as a contractor, it remained “committed to complying with the PSC provisions and procedures including adopting Good International Petroleum Industry Practices (GIPIP)".
With regard to the same block, CAG said the operator submitted an initial development plan (IDP) in May 2004 with an estimated capex of $2.4 billion. The IDP was followed by an addendum (AIDP) in October 2006 with an estimated capex of $5.2 billion for Phase-I and $3.6 billion for Phase-II. “We found most procurement activities were undertaken late in line with the schedules of the IDP of May 2004. By contrast, activities in respect of items in the AIDP were initiated even before the submission/approval of the AIDP,” CAG has said.
According to CAG, the current slabs for profit-sharing between the operator and government are so designed that a highly capital intensive project (implying a lower investment multiple or IM) causes a lower government share of profit and vice versa. This implies that the current system of profit-sharing does not give an incentive to keep costs lower.
With respect to the RJ-ON-90/1 block, operated by Cairn, CAG found 13 fresh discoveries were made during or between the appraisal phase and in the development phase in areas already delineated as development areas. “Consequently, in our opinion, the declaration of fresh discoveries during the appraisal/development phases within the delineated discovery/development areas amounted to irregular extension of exploration activities, which is not in consonance with the terms of the PSC”. Despite the tabling of the report, Cairn India gained 4.20 per cent or Rs 11.65 to end the day at Rs 289 on the BSE.
On the PMT fields operated jointly by RIL, BG and ONGC, CAG said the government incurred a substantial loss (on account of royalty) by failing to finalise the norms for post-well head costs of gas, and consequentially, gas well-head prices. Even the norms for post well-head costs notified in August 2007 had significant deficiencies. CAG criticised the government’s limited role in overseeing the functioning of PSCs. Operational control of E&P operations is largely with private operators, and the government’s oversight role is restricted essentially to its representation in the management committee for the block. Further, it also observed the oversight/control of government representatives on high value procurement decisions was very limited in scope.
