CAG Slams Oil Ministry for Poor Monitoring of Reliance Industries' KG-D6 Block: Report
The Comptroller and Auditor General of India (CAG) has slammed Oil Ministry and its technical arm Directorate General of Hydrocarbons (DGH) for not exercising enough control and vigil over Reliance Industries' KG-D6 block, which led to losses of several hundred millions of dollars to the exchequer.
From not approving budgets for the year at the beginning of the year and monitoring expenditure according to the approved plan, the ministry was castigated for allowing costs of unapproved drilling programme and allowing RIL to retain area without any discovery.
In a draft report on its second audit of spending on the eastern offshore KG-D6 block, the national auditor said, "The monitoring mechanism at the Ministry of Petroleum and Natural Gas (MoPNG)/DGH was far from being effective as it had not been able to ensure compliance with some of the Production Sharing Contract (PSC) provisions in letter and spirit."
KG-D6 production has not matched the capacity of the facilities RIL created in the Bay of Bengal fields. Besides, expenditure incurred has overshot the approved plan.
"As of March 2012, the operator (RIL) has incurred expenditure of $5.76 billion on the development of D1-D3 gas fields as against the approved cost of $5.20 billion for Phase-1," the CAG report said.
"The actual spend has increased though the operator has informed that the cost of Phase-I was mainly based on commitments/contracts already finalised."
A RIL spokesperson did not offer any immediate comment on the CAG findings.
The auditor said the onshore gas receipt terminal was constructed at the cost of $827.68 million as against estimated cost of $550.87 million while six sub-sea manifolds were installed at the cost of $80.10 million as against estimated cost of $70.81 million.
'Pipelines' and 'pipeline end manifold' were installed at the cost of $1.019 billion as against the estimated cost of $906.92 million.
Also, control cum riser platform (CRP), which serves as a hub for receiving gas production from deep-water pipeline before sending it onshore, was constructed at a cost of $571.39 million as against estimated cost of $446.83 million.
The CAG said in none of the four years beginning 2008-09, the work programme and budget (WP&B) was approved before start of the fiscal year as provided in the PSC.
"The WP&B is one of the most important tools available with the (block oversight panel) Management Committee to exercise monitoring and control over the operations of the block. MC did not effectively utilise this control. Consequently, there was inadequate budgetary/financial control over operational activities leading expenditure open ended," it said.
The CAG said the DGH (Directorate General of Hydrocarbons) had disallowed $160.81 million cost incurred on three appraisal wells RIL drilled in the block as they were past the PSC timelines.
"Despite the fact that cost recovery was denied by the DGH and MC, Audit noted that the operator included the cost of these wells for cost recovery in the books of accounts for the year ended 2011, 2012 and 2013," it said.
"Even after the MoPNG communicated its decision, the operator continued to claim the cost recovery, as seen in the final accounts for 2013. As on date (February 2014), the MoPNG has been unable to enforce its decision."
The auditor came down heavily on MoPNG for allowing RIL to retain more than the area where discoveries have been made.
The DGH and the MoPNG allowed RIL to declare the entire 7,645 sq km of KG-D6 block as discovery area when the PSC provides for quickly ring-fencing the discovery area and moving to develop them. All areas were discoveries are not made are to be relinquished.
Without discoveries, RIL was allowed to retain entire KG-D6 block and it continued with exploration activities side-by-side. The operator spent $427.03 million on exploration after that, which adversely impacted the share of government, it said.
The ministry and DGH also were not able to enforce conditions required for declaring a discovery.
The auditor said there was scope for strengthening the PSC regime to ensure that the interest of government as owner of the natural resources was adequately protected.
"Provisions relating to relinquishment of contract area, declaration and assessment of the viability of discoveries and their commerciality, sharing of risk, approval of development plans are some of the areas in the existing PSC model which may require critical review and rationalisation so that there are no loose ends or vagueness," the auditor's report noted.
