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Photo: Bloomberg
Photo: Bloomberg

CAG red-flags $1.6 billion excess cost recovery by RIL at KG-D6

The comptroller and auditor general (CAG) of India says many of the issues it had pointed out in the previous audits (2006-12) of KG-D6 block still persist

New Delhi: The government auditor comptroller and auditor general (CAG) of India has red-flagged $1.6 billion of excess cost recovered by Reliance Industries Ltd (RIL) at KG-D6 gas block and took note of state-owned Oil and Natural Gas Corp. Ltd’s (ONGC) gas flowing into the eastern offshore fields of RIL.

The CAG, in a report tabled in Parliament, said 831.88 sq. km. of KG-D6 needs to be taken away from RIL as per the contract and cost of discoveries it had relinquished should not be allowed to be recovered from sale of oil and gas from the block.

Also, the cost recovery for doing discovery conformity test should be looked into, it said. The CAG said a November 2015 report of independent expert DeGolyer and MacNaughton (D&M) submitted on reservoir continuity between KG-D6 and contiguous ONGC operated blocks has pointed out that gas has migrated from the blocks owned by the state-owned firm to the private company operated fields.

“The report indicates that as on March 31, 2015, of the gas initially in place, 44.32 per cent in Godavari PML and 34.71 per cent in KG-DWN-98/2 (both of ONGC) had migrated," it said.

“The report projected a higher proportion of gas migration and its production through RIL operated KG-DWN- 98/3 (KG-D6) block by end of 2019," it said.

The government has appointed one member committee under justice A.P. Shah to consider the report and recommend action. “In case if the Ministry of Petroleum and Natural Gas accepts D&M report conclusion that RIL did draw gas from ONGC’s contiguous fields, and directs RIL to compensate ONGC for the same, it may affect the financials of KG-DWN-98/3 including cost petroleum, profit petroleum, royalty and taxes over its entire period of operation (since April 2009 when production of gas commenced from the block)," the CAG said.

It said many of the issue it had pointed out in the previous audits (2006-12) of the block still persist. “The total financial impact of excess cost recovery during 2012-14 on account of the earlier identified audit findings was $1.547 billion ( 9,307.22 crore).

“For the period 2012-14, additional issues of excess cost recovery claimed by the operator (RIL) were noticed, financial effect of which was $46.35 million," it said.

The CAG had in its previous reports slammed the oil ministry and its technical arm the DGH for not exercising enough control and vigil over KG-D6 block, leading to instance of excess cost recovery.

As per the production sharing contract (PSC), an operator is allowed to recover all his cost before sharing profit with the government, a provision which the CAG says encourages companies to inflate cost to delay profit sharing.

The CAG in its report tabled in Parliament on Tuesday said RIL refused to connect to production system four wells it had drilled on the D1 and D3 gas field in KG-D6 block on the pretext that they would not produce adequate incremental volume to justify the additional capex spend.

“Though these wells have not contributed to production from the D1-D3 field, the Operator has recovered $102.94 million up to the FY2013-14 towards their cost," the CAG said.

Also, the ministry had ordered RIL to relinquish 6,198.88 sq. km. out of total KG-D6 area of 7,645 sq. km. as per the contract that allowed retaining only area were discoveries are made.

“However, contrary to Ministry’s directives, the Operator relinquished only an area of 5,367 sq. km. retaining an excess area of 831.88 sq. km. The Operator also paid Petroleum Exploration License (PEL) fees of 3.32 million relating to the excess retained area," the CAG said, adding that the relinquishment of the additional area retained needs to be ensured by the ministry.

The CAG said $63.78 million RIL got through marketing margin should be included in price of gas for calculation of royalty payable to government and profit sharing. Also, Aker of Norway, which supplies a floating oil production vessel (FPSO), was paid additional benefit of $10.13 million.

RIL declined to comment on the matter.

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