The comptroller and Auditor General of India (CAG) has sought disallowance of $357.16 million (approximately Rs 2,179 crore) expenditure which Reliance Industries ltd (RIl) incurred towards drilling of wells and payments to contractors in KG-D6. It has also pulled up the Petroleum Ministry for delaying approvals and maintaining inconsistent parameters.
In its second audit of RIl’s eastern offshore KG-D6 block, the CAG recommended disallowing the Mukesh Ambani-run company from recovering $279.8 million in cost of three wells as well as a part of expenditure the firm had incurred in area which was improperly declared discovery area.
The CAG in its report which was tabled in Parliament on Friday, found irregular payment of $427.48 million to contractors, of which it sought disallowance of at least $77.36 million cost.
Under the Production Sharing Contract (PSC), RIl and its partners BP plc of UK and Canada’s Niko Resources are allowed to recover all capital and operating expenditure from sale of oil and gas before sharing profits with the Government.
“Expenditure amounting to $160.81 million incurred on account of three appraisal wells was not eligible for cost recovery and had been disallowed by Petroleum Ministry. However, even after the Ministry communicated its decision, the Operator continued to claim the cost recovery, as seen in the final accounts for the year ended 2013,” it said.
The CAG recommended that the Ministry “ensure that the disallowed cost of three wells amounting to $160.81 million is recovered” from RIl and its partners.
Reacting to the CAG’s observation, RIl said that it will respond after receiving a formal communication of the audit exceptions from the Government.
The national auditor pulled up the Petroleum Ministry for not approving annual expenditure and work budgets on time and also asked it to “develop consistent and uniform parameters for evaluating commerciality of discoveries.”
Also, the Ministry was asked to urgently take steps to resolve the differing views of the contractor (RIl) and upstream regulator DGH on the reserve estimates of KG-D6 and take appropriate action to increase production.
listing instances of irregular payments, the CAG said RIl paid Allseas Marine Contractors (AMC) Euro 200 million more for construction of offshore facilities.
It wanted cost recovery of $77.36 million paid for a floating oil production system to be disallowed. Besides, it found fault with payment of $12.48 million start-up and production bonuses to employees, $88.77 million in hiring of deepsea drilling rig and over $16 million in bonus to contractors.
Finding fault with the Ministry in declaring the entire 7,645 square kilometre KG-D6 block area as discovery area, CAG said, “normally the entire amount of USD 427.03 million would requirement to be disallowed for cost recovery since these activities were not in line with PSC provisions.”
Keeping in mind, however, the fact that the exploration resulted in a commercial discovery (D34), it said recommended disallowing $118.99 million expenditure.
“At this stage, keeping in mind the national interest and energy security, Audit recommends that Ministry should accept sharing of exploration cost of only those of the above mentioned wells which resulted in a commercial discovery and disallow the cost recovery of $118.99 million already effected by the operator on the remaining wells,” CAG said.
RIl’s spokesperson later said that “there are obvious differences between the CAG and RIl on certain basic issues concerning the PSC. Once we receive a formal communication of audit exceptions by the Government, we will respond to the Government in accordance with the provisions of the Accounting Procedure under the PSC and also exercise such other rights as are available to us in law”.