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Reliance violated govt contract terms: CAG by Sanjay Dutta

The government's auditor has accused Mukesh Ambani's Reliance Industries Ltd of violating terms of the contract for its showcase Andhra offshore acreage and expressed doubt over the costs at which India's biggest private sector oil company contracted goods and services for bringing the largest gas discovery into production.

The Comptroller and Auditor General's final report on a special audit of Reliance's Krishna-Godavari basin fields, presented to Parliament on Thursday, also suggests the oil ministry played along with the exploration regulator's decision that, it said, was not in line with provisions of the contract.

The CAG says that the contract with the government obligated Reliance to relinquish 25% of the exploration block after making its gas discovery. But the Directorate General of Hydrocarbons, after initially objecting to Reliance demand to keep the entire area, made a U-turn against the "written word" of the contract.

The report recommends the government review of the decision allowing Reliance to retain the entire acerage. It suggests that the discovery area should be demarcated afresh so that 25% area that Reliance should have given up can be identified. It also sought an "in-depth" review of 10 contracts for goods and services that were awarded "on the basis of single financial bid".

It shows how Reliance was allowed to "proceed from phase (of development) to phase", while its "proposal of April 2004 to not relinquish any area" and declare the entire acreage as a discovery "remained submerged in a sea of correspondence between RIL and DGH".

In spite of such observations, the final report appears more muted than the draft report, first reported by TOI on June 13. The draft report had blamed the ministry and the DGH for favouring private oil companies, including Reliance. It had also said there appeared to be some loss to the exchequer with regard to the RIL field, though it was unable to quantify it.

TOI had also first reported on June 14 and June 22 how the draft report showed cost of contracts rising phenomenally because of RIL's sweetheart deals for procurement of goods and services.

In contrast, the final report does not talk about any loss to exchequer. It also lets Reliance off the hook, at least for the time being, on allegations of artificially jacking up the cost of bringing the field into production. "Since approval of estimates does not constitute acceptance of the cost of projections of the operator, validating the cost incurred by him can be done only after audit of the actual cost through proper norms," the report says.

This allegation of gold-plating, leveled after Reliance increased the capex estimate from $2.4 billion to $5.2 billion, was the key reason for the oil ministry to order the special audit -- the first time CAG was asked to scrutinize books of private companies. Since operators are allowed to recover their investment from oil/gas sale revenue before sharing profit with the government, any increase in capex impacts the Centre's take.

There is also reprieve for Murli Deora, as the CAG says the then oil minister, who ordered the special audit, did express concerns about the decision to allow Reliance to retain the entire acreage and whether it was in line with the contract. The report notes that the minister ratified the decision only after an expert committee under additional secretary approved it.

Deora declined to comment. Reliance too withheld comment, saying it hadn't seen the report. "We had already provided to the ministry, DGH and CAG our detailed comments along with the views of international experts on such parts of the draft report that had been communicated to us... We reiterate that, as a Contractor, we remain committed to complying with the PSC provisions and procedures," a company statement said.

"Since many of the comments in the draft report had referred to issues that were technical in nature, we had offered to CAG a complete and thorough interaction with subject matter specialists. We remain open to such interaction at all times," it said.