CAG panel allows RIL to recover extra cost on KG-D6

The second performance audit of Reliance Industries Ltd (RIL)’s KG-D6, tabled in Parliament on Friday, has taken a lenient approach towards the country’s biggest private petroleum company. Taking a “pragmatic” view, the Comptroller and Auditor General of India (CAG) has recommended the government allow the company to recover $427 million in cost from the field’s natural gas production.

Cost recovery for $118.99 million on the remaining wells, however, has been disallowed. Besides, the well cost for D29, D30 and D31 would be disallowed if these aren’t found to be commercially viable, the auditor said.

The report covers the four years beginning April 2008 and three petroleum blocks — KG-D6, Panna-Mukta, Tapti (PMT) and the RJ-ON-90/1 block in Barmer — given by the government to private companies.

“Our attention has been drawn to the CAG report tabled in Parliament on Friday. There are obvious differences between the CAG and RIL on certain basic issues concerning the production sharing contract (PSC). Once we receive a formal communication of audit exceptions by the government, we will respond to it, in accordance with the provisions of the accounting procedure under the PSC and also exercise such other rights as are available to us in law,” said an RIL spokesperson.

In its first report in 2011, the auditor had been critical of the United Progressive Alliance government’s cost-recovery mechanism and the fact that it had allowed RIL to retain contract area beyond the contractual period.

This time, however, the government’s statutory auditor has said “normally, the entire amount of $427.03 million would require to be disallowed” for cost recovery, as these activities aren’t in line with production-sharing contract provisions. However, “keeping in mind national interest and energy security”, the auditor recommends the Ministry of Petroleum and Natural Gas accept the sharing of exploration cost of only those wells that result in commercial discovery. There are four such wells — D34 (for which commercial discovery has been made and a development plan has been approved), D29, D30 and D31 (for which discoveries are under finalisation for establishing commerciality). Following the report, the RIL stock jumped to Rs 1,016.20, after opening at Rs 989.25.

Under PSCs, once a contractor makes a discovery, its commercial viability is approved by an oversight panel set up by the government. The expenditure on the discovery is approved by the government.

For the Cairn India-operated Barmer block, the CAG asked the government to promptly finalise the price of crude oil so that profit petroleum and levies such as royalty could be calculated.

On the pricing and sale of crude oil and condensate from RIL’s KG-D6 block, the CAG said, “Marker has not been fixed so far, leaving scope for ambiguity in pricing. The pricing and sale of condensate has not been approved by the government. It is being sold at a discount value below dated Brent.”

The auditor has also taken exception to the hiring of a rig from RIL by a PMT joint venture in which RIL is a partner. The rig was hired on an “assignment basis at higher rates, resulting in extra expenditure of $6.49 million, which impacted the government’s profit petroleum by $1 million,” said the report.