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Auditor raps govt role in KG

-The Telegraph

 

The Comptroller and Auditor General (CAG) has slammed the petroleum ministry for failing to take back 25 per cent of the acreage of the KG-D6 oil and gas block off the Andhra coast from Reliance Industries after it reneged on its drilling obligations.

The long-awaited report from the CAG based on a detailed performance audit of the country’s hydrocarbon production sharing contracts was tabled in Parliament today.

The nation’s auditor surprisingly did not comment on the bigger charge against Reliance Industries that it had “gold-plated” development costs at India’s only commercially-operated deepwater gasfield to depress the government’s share of profit petroleum from the gasfield.

The CAG did not say whether the approval by the upstream regulator — the directorate general of hydrocarbons — of RIL’s plan to raise the development cost from $2.4 billion in 2004 to $8.8 billion in 2006 was justified or not.

All that the CAG said was that the “approval of estimates does not constitute acceptance of the project costs,” suggesting that this could be done only after a thorough audit of the actual costs incurred.

The report did, however, express some reservations about the hike in development costs. It said that with gas output from KG-D6 plunging to about 43 million standard cubic metres per day (mmscmd) — which is close to the 40 mmscmd output level envisaged in the 2004 investment plan — doubts could be raised about “whether the upgradation to 80mmscmd with substantial increase in the development cost (to $8.8 billion) was justified”.

The report blamed the petroleum ministry and the DGH for allowing Reliance to retain the entire 7,645 sq km KG-DWN-98/3 (KG-D6) block in the Bay of Bengal after the giant Dhirubhai-1 and 3 gas finds were made in 2001. The report said if the penal provisions of the production-sharing contract (PSC) had been enforced, Reliance would have had to relinquish 25 per cent of the total area outside the discoveries in June 2004 and 2005.

The petroleum ministry had declared the entire block as a “discovery area” and allowed the company to retain it.

“We recommend that the ministry of petroleum and natural gas should review the determination of the entire contract area as ‘discovery area’ strictly in terms of the PSC provisions….delineation of the discovery area and relinquishment of the rest (by RIL),” the report said.

Reliance had committed to drill 22 wells in KG-D6 in fiscal 2011. However, the company had drilled 20 wells in the D1 and D3 areas. Of these, only 18 are in production, and petroleum experts say this is one of the main reasons for the sharp decline in the gas production from the field to about 43 mmscmd from 61.5 mmscmd.

India’s only deepwater block that started commercial production two years ago was supposed to raise production to 69 mmscmd by April.

RIL stock surge

The RIL stock surged after market mavens realised that the CAG report wasn’t as damaging as they had feared. The stock — which has been under considerable pressure since mid-June when portions of the CAG’s draft report were leaked to the media — soared to close at Rs 853.50, a gain of 2.62 per cent. Experts say the stock can now stage a “relief rally” as the auditor hasn’t come down as hard on it.

Reliance said it could not comment on the final audit findings of the CAG as it was “yet to see the report”.

“We reiterate that, as a contractor, we remain committed to complying with the production sharing contract provisions and procedures, including adopting good international petroleum industry practices in our operations,” it said.

Profit-sharing logic

The CAG questioned the slabs for profit sharing between the operator and the government. It contended that these slabs were structured in such a way that the government’s share of profit petroleum would go down if the capital intensity of the project increased.

“In view of the adverse impact of the profit-sharing mechanism in protecting government’s interest, designed in the 1990s, there does seem to be enough ground to revisit the formula,” CAG said.