New Delhi: The Comptroller and Auditor General of India (CAG) has begun examining the books of Reliance Industries Ltd (RIL) to see whether there was any loss to the exchequer at the company’s D6 block in the Krishna-Godavari (KG) basin in 2008-09 and 2009-10.

This follows its review of the block until the 2007-08 fiscal year, which didn’t contain references to the so-called goldplating as production, and therefore, revenue from the KG-DWN-98/3 block started in 2009. CAG, however, did point out in the earlier report that RIL had declined to share information that would have enabled the auditor to critically examine the justification of the company for cost escalations. CAG’s Performance Audit of Hydrocarbon Production-sharing Contracts report was submitted to Parliament earlier this month.

“The audit purpose is to look at the possible loss resulting from the expenditure vis-à-vis the government share of the revenue generated from the KG Basin," said a CAG official aware of the ongoing audit started in August, who did not want to be identified.

“The recently submitted report only covers the audit period till 2008 and the production started only in 2009, so the revenue aspects were not covered earlier," he said. “It does not mean that the expenditure incurred after 2008 are not part of the audit. That will also be subjected to audit scrutiny."

CAG will also examine in detail the issue of RIL not relinquishing the unexplored block area in contravention of the production-sharing contract (PSC). To be sure, CAG is also auditing the accounts of other explorers such as Cairn India Ltd for 2007-08 and 2008-09. In its earlier report, CAG had found there was an “irregular extension of exploration activities" in Cairn India’s RJ-ON-90/1 block in Rajasthan.

Spokespersons for Cairn India and the petroleum ministry declined to comment. An external spokesperson for RIL declined to comment.

Director general of hydrocarbons S.K. Srivastava did not respond to phone calls.

“The audit is likely to be completed by 2013," said a second CAG official, requesting anonymity. “We have requested for files from the petroleum ministry and the Directorate General of Hydrocarbons (DGH)."

The purpose of the audit “is primarily to verify whether the government’s revenue in the form of profit petroleum (current and future) and royalty is correctly calculated and its (government’s) revenue interests are properly protected". This comes at a time when RIL is facing flak for a decline in production from its D6 block.

CAG, in its report, had stated that the current PSC template encouraged companies to front-load expenditure as it correspondingly reduced the share of the government in profit.

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

The CAG report did comment on cost escalations in the D6 block, particularly on the practice of RIL implementing the work programme even before obtaining approval for increased project costs.

According to CAG, while an initial development plan (IDP) of $2.4 billion (Rs 11,760 crore today) was submitted in May 2004, an addendum to the IDP was made in October 2006 with an estimated capital expenditure of $5.2 billion for phase I and $3.6 billion for phase II.

Suggesting that an exception had been made in RIL’s case for the D6 block, CAG said the explorer was allowed to retain the entire 7,645 sq. km area and enter the second and the third phases without “relinquishing 25% each of the total contract area at the end of phase I and phase II in June 2004 and 2005, respectively", in contravention of the PSC. The report also added that DGH changed its mind after initially disagreeing with RIL’s proposal of non-relinquishment.

“In view of the findings during the last audit, the relinquishment of the unexplored area is something the audit will subject to further scrutiny," the first CAG official added.

Interestingly, India’s solicitor general had advised that the petroleum ministry should make the costs that RIL can recover from its D6 block dependent on capacity utilization, thus protecting the exchequer’s share of future revenue from the sale of gas and oil from the block. The solicitor general had also suggested that the government recover from the company the revenue share related to the excess costs it has already deducted, Mint reported on 14 September.

RIL has meanwhile warned that any attempt to limit cost recovery is illegal and will be challenged in court, the Press Trust of India reported.

Production from the D6 gas fields has fallen from 61 million standard cubic metres per day (mscmd) in March 2010 to about 37 mscmd, instead of rising to 61.88 mscmd, as projected by the firm when it got its $8.8 billion capital expenditure plan for development of the field approved in 2006, PTI added. The petroleum ministry has attributed the drop in output to the non-fulfilment of RIL’s commitment to drill 22 wells in the field.

However, the ministry wants to limit cost recovery in the block in proportion to the variance in output compared with the stipulated timeline, reducing RIL’s entitlement to $3.41 billion.

The company feels such a move would be ultra vires, or beyond the ministry’s powers, as the PSC does not have any such provision and the $1.85 billion already recovered by RIL cannot be reversed.

“If the PSC were indeed to be rewritten to link cost recovery to levels of production, it would also have to include provisions for allowing the contractor (RIL) to recover costs in excess of its investment in case it were to achieve a rate of production higher than that estimated at the time of capex approval," RIL senior vice-president (commercial) B. Ganguly wrote to the ministry on 16 September.

PTI contributed to this story.