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Reliance, DGH, oil ministry in the firing line

Reliance, DGH, oil ministry in the firing line

New Delhi: The government’s auditor said in a report that Reliance Industries Ltd (RIL) had breached some terms of a production-sharing contract (PSC) with the government for one of its more lucrative blocks, and blamed the petroleum ministry and one of its arms for their failure to provide adequate oversight of the process.

The Comptroller and Auditor General of India (CAG) also said the current PSC template encouraged companies to front-load expenditure as it correspondingly reduced the share of the government in the profits.


Also See | CAG Observations (PDF)

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RIL declined to comment because it was yet to study the report and said that it was committed to the terms of its contract with the government.

The latest charges will hurt the Congress-led United Progressive Alliance government, which is already under pressure over the alleged involvement of some its former ministers and bureaucrats in corruption scandals.

The main opposition Bharatiya Janata Party on Thursday declared that it is making corruption the core of its campaign against the government—setting the stage ahead of elections in the key states of Uttar Pradesh and Gujarat next year.

Two officials of the Central Bureau of Investigation separately confirmed that the apex investigative agency was keeping its options open on using CAGs findings to investigate RIL.

The company declined to comment on this.

The agency had registered a case in July against former officials of the Directorate General of Hydrocarbons (DGH) for allegedly favouring Houston-based GX Technology in carrying out seismic survey in return for personal favours.

CAG, in its report submitted to Parliament on Thursday, called for revisiting the government’s profit-sharing formula for awarding hydrocarbon blocks and emphasized the need for an autonomous body to act as a regulator that will have “an arm’s length relationship"?with the government.

Current regulator DGH is an arm of the petroleum ministry.

Under India’s new exploration licensing policy, 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.

CAG, in its report Performance Audit of Hydrocarbon Production-sharing Contracts, said: “The private contractors have inadequate incentives to reduce capital expenditure—and substantial incentive to increase capital expenditure or ‘front end’ capital expenditure."

Petroleum minister S. Jaipal Reddy had earlier said the government was open to revisiting its profit-sharing formula for awarding hydrocarbon blocks and that DGH was not capable of handling the technical and financial issues of this size.

Suggesting that an exception had been made in RIL’s case for the company’s KG-DWN-98/3 block (in the Krishna-Godavari basin), CAG said that the explorer was allowed to retain the entire 7,645 sq. km area and was permitted to enter the second and the third phase, 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.

The auditor didn’t make any observations regarding gold-plating or overstating of costs by the operator—a charge levied by Reliance Natural Resources Ltd when it was engaged in a bitter battle with RIL over the supply of gas, before eventually arriving at a compromise in May 2010.

But it did comment on the cost escalations in the company’s D6 block, particularly on the practice of RIL to implement the work programme even before obtaining approval for the increase in the cost of the project.

It further pointed out that RIL had declined to share information that would have enabled CAG to critically examine the justification of the company for cost escalations.

The auditor also questioned RIL on its decisions to award contracts, in several instances, without competitive bidding.

CAG’s critical observations against RIL come at a time when the company is already under scrutiny for falling gas production from its KG D6 block.

Former petroleum minister Murli Deora, director general of hydrocarbons V.K. Sibal and current director general of hydrocarbons S.K. Srivastava did not respond to phone calls.

RIL said: “We reiterate that, as a contractor, we remain committed to complying with the PSC provisions and procedures including adopting Good International Petroleum Industry Practices in our operations... We have and will continue to cooperate with the government of India for audit as per the provisions of PSC."

CAG also found that there was an “irregular extension of exploration activities" in Cairn India Ltd’s RJ-ON-90/1 block in Rajasthan and that the government incurred substantial losses by not finalizing the norms for costs and pricing in the British Gas Exploration and Production India Ltd-operated Panna/Mukta and Tapti offshore oil and gas fields in the Arabian Sea, which has other partners such as RIL and state-owned Oil and Natural Gas Corp. Ltd.

Spokespersons for Cairn India and British Gas declined to comment.

The government has recently approved a deal allowing RIL to offload a 30% stake in 21 hydrocarbon blocks, including D6, to London-based BP Plc for $7.2 billion (Rs 33,265 crore today) and another allowing Vedanta Resources Plc to buy a majority stake in Cairn India.

Ruhi Tewari contributed to this story.

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