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CAG: Oil Min Should Review KG Basin Contracts

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[National auditor CAG (Comptroller and Auditor General of India) on Thursday castigated the Oil Ministry for allowing Reliance Industries to retain its entire eastern offshore KG-D6 block in contravention of the Production Sharing Contract, but did not comment on more than tripling of the field development cost. CAG said the oil ministry should review determination of contracted areas to exploration companies in the Krishna Godavari basin, off the Andhra Pradesh coast. The CAG report questioned the "reasonableness of costs incurred" in the 2007-08 procurement activity in the area and said there was enough ground to revisit the profit sharing mechanism. The oil ministry said in June it was examining the draft report, and would prepare a reply to the audit observations after obtaining details from relevant agencies. The CAG, in its much-awaited report tabled in Parliament on Thursday, did not say if the capital expenditure for KG-D6 being raised from $2.4 billion proposed in 2004 to $8.8 billion in 2006 was unjustified or inflated. The CAG report said Reliance was allowed to enter the second and third exploration phases of the blocks without giving up 25 per cent of the contract area in each, by treating the entire area as a discovery area. It faulted the Oil Ministry and its technical arm, the Directorate General of Hydrocarbons (DGH), for allowing Reliance to retain the entire 7,645 sq km KG-DWN-98/3 (KG-D6) block in the Bay of Bengal after the giant Dhirubhai-1 and 3 gas finds were made in 2001. As per the PSC, Reliance should have relinquished 25 per cent of the total area outside the discoveries in June, 2004, and 2005, but the entire block was declared as a discovery area and the company was allowed to retain it. "We recommend that the Ministry of Petroleum and Natural Gas should review the determination of the entire contract area as 'discovery area' strictly in terms of the PSC provisions," the CAG said, asking for delineation of the discovery area and relinquishment of the rest. The CAG was critical of government oversight, particularly on high value procurement decisions, and sought an "in-depth review" of 10 contracts, including eight awarded to Aker Group by Reliance on a single-bid basis. Giving Reliance a breather on charges of 'gold-plating' its KG-D6 expenses, the CAG said "approval of estimates (first $2.4 billion and then $8.8 billion in 2006) does not constitute acceptance of the cost projects", which can be done only through an audit of the actual cost incurred. While expenditure incurred in 2006-07 and 2007-08 was audited by CAG, remaining expenditure incurred from 2008-09 onwards would be covered in the future audit. CAG faulted Reliance for awarding a USD 1.1 billion contract to put up a production facility at MA oilfield in the same KG-D6 block to Aker on a single bid basis. "During our scrutiny of the operator's records, we have come across instances, where multiple vendors were pre- qualified. However, when technical bids were received, all vendors (except one) were rejected, and the contract ws finally awarded on a single financial bid," it said. CAG said such disqualification of vendors on technical grounds, after a pre-qualification process and bidders' meeting for technical clarifications, limits the competitiveness which was not in accordance to the PSC. Seeking in-depth review in the award of 10 contracts (of which 8 were awarded to Aker Group companies), it said, "We are not even remotely suggesting that the operator should follow government procurement procedures, yet any commercially prudent private acquisition would also attempt to generate competition and thereby obtain the most competitive price." It sought review of the PSC signed under New Exploration Licensing Policy (NELP), evolved by the BJP-led NDA government in 1999, saying the regime provides inadequate incentive to contractors like Reliance to reduce capital expenditure. On the contrary, it provides "substantial incentive to increase capital expenditure or 'front-end' capital expenditure" so that government take from the blocks is lower. "Given the similar conclusions that two independent agencies have reached as regards the adverse impact of the profit sharing mechanism in protecting Government of India's share designed in the late 1990s, there does seem to be enough ground to revisit the formula," it said. For future PSCs, CAG recommended that the Investment- Multiple linkage with the profit sharing formula be removed. "Instead, the biddable profit-sharing percentage should be a single percentage. This will reduce the incentive for skewed volume and timing of capital expenditure resulting in very low Government of India share of profit petroleum. "Further, in order to ensure a modicum of control, very high value procurement decisions above a specified limit should be subject to approval by the Management Committee, more specifically the approval of the Government of India representatives," it said. (Agencies)