CAG slams GSPC for cost overrun

Gandhinagar: The Comptroller and Auditor General of India (CAG) has criticized state-run Gujarat State Petroleum Corp. (GSPC) for cost overruns in many of its hydrocarbon exploration blocks, especially its offshore asset in the Pandit Deendayal block of the Krishna-Godavari (KG) basin in Andhra Pradesh.

The CAG report for the year ended 31 March 2011 was introduced in the Gujarat assembly on Friday, the last day of the budget session, in the absence of opposition members who were suspended on Wednesday for stalling proceedings.

According to the bid evaluation criteria, the financial capability of the bidder based on the net worth should be at least equal to or more than the cost of minimum work programme of phase one.

At the time of the bidding, the net worth of the consortium was $60.05 million, against the estimated phase one cost (both seismic and drilling) of $59.23 million, CAG said.

“The actual cost incurred including cost of seismic study was $1,404.86 million (Rs 6,265.38 crore) for all the three phases, which was 12.81 times the estimated cost of $109.70 million (Rs 531.94 crore). This indicated the aggressive approach adopted by the company while bidding for the block, which in turn reveals the undue risk taken by the company in high risk prone oil exploration activity,” the report said.

The KG block has been GSPC’s most successful one. Gujarat had announced in 2005 that it had discovered 20 TCF (trillion cubic feet) gas in the Deendayal block.

Directorate General of Hydrocarbons has certified about 2 TCF of recoverable reserves in the DD-West area of the Deendayal block discovered by the GSPC consortium.

The auditor attributes the incorrect cost estimation mainly to the adoption of a deficient geological model prepared by joint venture partner GeoGlobal Resources Inc. (GGR). GGR was made a partner by virtue of its technical skills and without any financial contribution during the exploration phase. As a result, GSPC incurred GGR’s share of $175.07 million towards the exploration cost.

When contacted, a GGR official said that it was a “carried interest partner” according to the production sharing contract. This means it has no financial liability in the project and will get its share of revenue only after the project cost is recovered by the operator, he added.

“The geological model given by GGR is a technical model and not a financial model. It is a concept that led to the discovery in the Deendayal area,” said B. Mohapatra, country manager, India, GGR. “GSPC had a final say on how to monetize the discovery, operational decisions and financial commitments.”

A GSPC official said on condition of anonymity that the initial four wells drilled as per the GGR model did not produce any gas. “We had to drill much deeper than what GGR had suggested and this led to a delay, besides cost escalation. It made no sense to take them forward as ‘carried interest’ partner as their model did not seem to be working. We also had to rope in another technical expert for advice,” he said.

CAG has observed that GSPC suffered financial losses in trading activities on account of undue favours extended to buyers by way of non-recovery of take or pay (ToP) charges and the sale of gas/oil at price below purchase cost.

The report also stated that GSPC bought natural gas from the spot market and sold it to the Adani group at a lower price. CAG estimated that Adani received undue benefit of ₹ 70.54 crore in the process.

“If GSPC charges as per the market rate then the household and auto sector consumers of Gujarat would have to pay 60% more than the prevailing price,” Adani said in a statement.

maulik.p@livemint.com