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Business News/ Companies / CAG says govt shouldn’t pay RIL $395 mn towards cost recovery
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CAG says govt shouldn’t pay RIL $395 mn towards cost recovery

CAG says oil ministry should develop consistent, uniform parameters for evaluating commerciality of discoveries

CAG also recommends that the government, DGH give approval to the work programmes, budgets before the start of a fiscal year. Photo: Ramesh Pathania/MintPremium
CAG also recommends that the government, DGH give approval to the work programmes, budgets before the start of a fiscal year. Photo: Ramesh Pathania/Mint

Mumbai/New Delhi: The government should not pay Reliance Industries Ltd $394.8 million towards recovery of costs because it had breached some terms of its contract for its D6 block in the Krishna-Godavari (KG) basin off India’s east coast, the Comptroller and Auditor General of India (CAG) said in a report tabled in Parliament on Friday.

The country’s top auditor also recommended that the government and the directorate general of hydrocarbons (DGH) give timely approval to the work programmes and budgets before the start of a financial year. It suggested the petroleum ministry should develop “consistent and uniform parameters for evaluating commerciality of discoveries".

The Mukesh Ambani-controlled firm failed to meet its own target for gas generation in the KG-D6 offshore fields, despite having claimed associated costs as deductions before estimating the profit to be shared with the government. The issue is currently in arbitration.

CAG’s recommendation includes disallowing $160.81 million for drilling wells after the declaration of commerciality of the D1, D3 and MA fields, $118.99 million for claiming cost recovery from D29, D30 and D31 fields that have so far not been declared commercial and around $115 million for various contractual activities such as extension of facilities, additional payments to vendors and sub-vendors, and fabrication and installation of living quarters. These figures mainly comprise the cost incurred or claimed by RIL between fiscal 2008 and fiscal 2010.

The cost-recovery model has proved controversial. Until March, the government had disallowed Reliance to recover $2.376 billion from fiscal 2011. While the United Progressive Alliance (UPA) government disallowed the company recovery of $1.797 billion of costs on the block, the National Democratic Alliance (NDA) government recently disallowed recovery of an additional $579 million.

“Our attention has been drawn to the CAG report tabled today in Parliament. There are obvious differences between the CAG and RIL on certain basic issues concerning the production sharing contract (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," a company spokesperson said in a statement.

Reliance in its arbitration notice said disallowing cost recovery has never been a part of the production sharing contract, irrespective of the production from the D6 field, as the company and its partners had invested the amount at their own risk.

Under India’s new exploration licensing policy (Nelp), companies win exploration blocks in a competitive bidding process that involves revenue-sharing (or production-sharing) agreements with the government. According to this contract, the government’s share from hydrocarbon blocks, known as profit petroleum, comes only after the companies recover all their costs.

“The total expenditure incurred in the block till March 2013 was $10,441.98 million out of which $9,293.22 million had been cost recovered by the contractor. Out of the profit petroleum (PP) of $1,032.58 million till March 2013, the contractor has got $929.32 million and the GoI has got $103.26 million," CAG said in its report on hydrocarbon production sharing contracts submitted in Parliament on Friday.

Reliance and its partners BP Plc and Niko Resources Ltd together own the D6 block. Hydrocarbon explorers in India have made a total payment of $15.41 billion to the Union government as royalties, cess and profit petroleum, and $1.93 billion to state governments since 1994.

This comes in the backdrop of the Bharatiya Janata Party-led government’s rethink on the domestic gas-pricing formula approved by the previous Congress-led UPA where the natural gas price was revised to $5.6 per million British thermal units (mmBtu) from $4.2 per mmBtu. The price will be revised every six months. The government is also debating the incentive regime for hydrocarbon exploration, swinging between two contentious options—the existing cost-recovery model and the alternative revenue-sharing model.

Many gas-based plants are idling because of declining production from the KG-D6 block, the country’s largest reservoir of the fuel. The government is trying to rekindle waning interest in India’s hydrocarbon sector. The government’s plan to start hydrocarbon exploration stems from broader concerns that India’s energy import bill of around $150 billion is expected to balloon to $300 billion by 2030.

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Published: 29 Nov 2014, 12:15 AM IST
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