'Oil ministry, DGH bent rules for Reliance'

The CAG has said that the Oil Ministry and its technical arm, the DGH, bent rules for Reliance Industries, but did not conclusively say if the Mukesh Ambani firm overbilled the government on its KG-D6 gas fields to adversely impact government revenues.

In a draft audit report on the KG-DWN-98/3, or KG-D6, block, the Comptroller and Auditor General said the Directorate General of Hydrocarbons allowed Reliance to hike capital expenditure for developing Dhirubhai-1 and 3, the largest of 18 gas finds in the block, by 117 per cent.

"The increase in cost from ($2.39 billion) in the Initial Development Plan to ($5.196 billion) in the Addendum to the Initial Development Plan is likely to have a significant impact on the government of India's financial take.

"However, at this stage, based on the information provided, we are unable to comment on the reasonableness, or otherwise, of the increase in cost, both overall and in respect of individual line items," the CAG said in a draft report sent to the Oil Ministry for comments.

An operator like Reliance is allowed to recover all capital cost on developing a field from revenues earned from the sale of oil or gas before profits are split between the stakeholders, including the government.

The CAG was asked to audit the accounts of Reliance after allegations of 'gold-plating', or artificially inflating the cost of development of gas field costs were levied by the Anil Ambani Group.

The premier auditor, whose report will be tabled in Parliament after incorporating comments from the Oil Ministry, said Reliance never had intention of developing the KG-D6 gas fields as per the initial cost estimates as it did not initiate tendering for equipment as per the original plan.

"Most procurement activities were undertaken late, in line with the schedules of the IDP of May, 2004,

clearly evidencing that the operator had no intention of complying with these timelines," the draft report said.

"By contrast, activities in respect of items in the AIDP were initiated even before the submission/approval of the AIDP," it said.

The CAG said the submission of an addendum to the initial development plan instead of a revised comprehensive development plan, as well as lack of adequate details with regard to the Phase-II development cost of $3.3 billion, made it virtually certain that the operator will submit more addendums.

"The DGH also approved the AIDP, without questioning why the operator did not take action in-line with the already approved IDP," it said.

The report has also said that the ministry and DGH allowed Reliance to enter successive exploration phases without the stipulated relinquishment of area and then allowed it to declare the entire contract area as 'discovery area'.

This was both 'irregular and incorrect', since drilling of wells and consequential discoveries had not taken place in the major portion of the contract area, the CAG said.

"We recommend that government should re-examine delineation of the entire contract area as 'discovery area' and take immediate steps for relinquishment of excess area in line with the provisions of the PSC, as also fix accountability for those responsible for this decision," it said.

The CAG said the benefit granted to Reliance is huge, but cannot be quantified. It also found a 'similar irregular determination of the entire contract area' as 'discovery area' in the case of another block operated by Reliance, dubbed KG-OSN-2001/2.

The CAG's scope of audit covers the Production Sharing Contract in respect of the KG-DWN-98/3 (KG-D6) block awarded to Reliance for two financial years -- 2006-07 and 2007-08 -- with access to the records of previous years linked to the transactions of these years.