New Delhi: The Comptroller and Auditor General of India (CAG) has raised concerns about the costs claimed by Reliance Industries Ltd (RIL) for the development of its D6 block in the Krishna-Godavari basin.

In a letter dated 3 October and addressed to the petroleum ministry, the government’s auditor has, among other things, made it clear that the government should attempt negotiating with RIL on the costs and how they should be recovered only after a proper audit of the expenditure incurred by the company after 2008-09; the CAG audit, enclosed in its report tabled in Parliament on 8 September, pertains only to fiscal years 2006-07 and 2007-08.

CAG’s action comes after solicitor general Rohinton Nariman advised the petroleum ministry to link recovery of costs to capacity utilization in the D6 block, thus protecting the exchequer’s share of future revenue from the sale of gas and oil from the area. The petroleum ministry had sought the solicitor general’s views after RIL failed to meet its own target for gas generation in the D6 block despite having claimed the associated costs as deductions before estimating the profit share with the government. Such front-loading of the costs means that the revenue to be shared with the government is reduced correspondingly.

RIL had invested $5.69 billion (Rs27,938 crore today) in the block as on 31 March and recovered $5.26 billion.

In the 3 October letter, Rekha Gupta, deputy comptroller and auditor general, warned that the government could get into legal trouble if it went ahead with cost recoveries without an audit. “The MoPNG (ministry of petroleum and natural gas) may like to take precautions to ensure that the audit of expenditure prior to the adjustment to the account of this operator be effectively done to ensure that only admitted items are approved. Permitting inadmissible items may lead to legal complication if recovery has to be undertaken after audit by CAG," Gupta said.

CAG’s observations are significant because Nariman in his submissions on 17 August had advised that “the costs/expenditure incurred in constructing production/processing facilities and pipelines that are currently underutilized/have excess capacity cannot be recovered against the value of petroleum" by the company, and accordingly recommended that the government not “allow cost recoveries on this account in future periods".

He also suggested that the government recover the cost related to excess and underutilized capacity and equipment by reversing RIL’s share.

In the letter, Gupta also reiterated that there were “numerous deficiencies" in compliance and control of the production-sharing contract, and called for a review of the award of the 10 specific contracts, of which eight were awarded to Aker Group companies on the basis of a single financial bid.

“The expertise, ownership pattern and experience of the Aker Group needs to be ascertained," she said.

An external spokesperson for RIL declined to comment.

A CAG spokesperson said the letter is “a routine affair".

Geir Arne Drangeid, communications director for Aker Solutions, said in an email: “We are not aware of the recent communication between CAG and the ministry that you refer to, and it would therefore not be appropriate for us to make further comments as to its contents."