RIL violated terms of contract in KG basin, says CAG

RIL violated terms of contract in KG basin, says CAG

New Delhi: The Comptroller and Auditor General (CAG) criticized Reliance Industries and the government over development of the country’s key natural gas resource in the Krishna Godavari (KG) basin and called for revamping profit sharing arrangement from oil and gas blocks.

The offshore KG basin was expected to contribute up to one-quarter of gas supplies in Asia’s third-largest economy, but lower-than-expected output has left the energy-hungry nation more dependent on expensive, imported LNG to fuel power and fertilizer plants.

The CAG and the Supreme Court have been increasingly active over the past year at scrutinising major government contracts.

Reliance, India’s largest listed firm, has been under fire in recent months from the upstream regulator, investors and analysts over slowing gas output from its KG blocks, and its shares have suffered.

Earlier this year, Reliance sold a 30% stake in 22 oil and gas blocks, some in the KG basin, to BP in a $7.2 billion deal, in part to benefit from BP’s expertise in deepwater exploration.

The CAG report, submitted to Parliament on Thursday, said production sharing contracts between the government and operators were designed to encourage increasing capital expenditure by private contractors, which reduces the government’s share.

It said there is considerable scope to improve management of hydrocarbon exploration and production with private sector participation, and called for revisiting the profit sharing mechanism.

The CAG report specifically found fault with Reliance, the operator for the KG-DWN-98/3 block in the area, saying it was allowed to violate terms of its production sharing contract for its blocks in the KG Basin.

The report said Reliance was allowed to enter the second and third exploration phases of its blocks without giving up 25% of the contract area at the end of each phase, as required, by treating the entire area as a discovery area.

It also said Reliance raised its estimated capital expenditure for the D1 and D3 gas discoveries in the KG basin, but most procurement activities were undertaken later than had been agreed under an initial development plan.

In May, India’s upstream regulator said Reliance was producing 48 mscmd (million standard cubic metres per day of gas) from its main D6 block in the KG basin off India’s east coast, lower than the 60 mscmd it produced a year earlier, and far off the planned peak capacity of 80 mscmd.

The CAG report comes at a time when the government is struggling to fend off allegations of massive corruption in awarding of telecom licences that may have resulted in revenue losses worth billions of dollars. The government recently agreed to press ahead with tough anti-graft legislation after facing the biggest protests in decades.