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CAG Pulls Up GSPC For Undue Benefits To Adani, Essar

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[The CAG on Friday pulled up Gujarat government company, GSPC for extending undue benefits to Adani Energy and Essar Steel and said the company's poor management of oil and gas exploration business led to over Rs 5,000 crore loss. The report of the Comptroller and Auditor General (CAG), which was tabled in the state assembly on Friday, said GSPC bought natural gas from the open market (spot market) and sold it to the Adanis at a price lower than the purchase price. CAG estimated that Adani Energy received undue benefit of Rs 70.54 crore in the process. The firm passed on undue benefit of Rs 12.02 crore to Essar Steel Ltd by way of waiver of capacity charges contrary to the provision of gas transmission agreement. CAG was severely critical of GSPC's operations in the Krishna Godavari basin gas block where improper assessment of technical and financial issues led to drilling cost shooting up to $1.302 billion as against estimate of $102.23 million. "The bidding process adopted by the company for acquisition of hydrocarbon block was found to be defective as in case of KG block. The bids of the company ignored the actual cost involved which exposed the company against high risk in exploration activities," CAG report stated. The main reasons for the incorrect estimation, CAG said, was adoption of deficient geological model prepared by its joint venture partnre, Geo Global Resources of Canada, which led to escalation in the cost of exploration phase from Rs 531.94 crore to Rs 6,265.68 crore. Because of the adoption of the Geo Global Resources's model, GSPC had to drill total 12 high-pressure-high- temperature wells instead of estimated four wells, CAG said, adding that admitting the Canadian firm into the KG block consortium without any financial risk, but only on the strength of their technical expertise did not yield the desired purpose. GSPC had given Geo Global Resources a stake in the block without any financial contribution on the ground that it was a technical expert. As a result, GSPC had to incur the Canadian company's share of USD 175.07 million towards the exploration cost besides losing Rs 104.14 crore in interest during 2007-11. The functioning of the GSPC also came under severe criticism from the CAG right from bidding process, to explorations, development activities, trading of gas, management of finances and for lack of proper internal control and monitoring system. Further, the CAG has said that the exploration and development activities undertaken by the company suffered with several deficiencies such as delay in acquisition of study data, excessive time in drilling work, delay in preparing field development plan and others which led to financial loss to the company. The 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, sale of gas/oil at price below purchase cost. During 2006-11, the total revenue from trading of gas was Rs 19,245.39 crore and the revenue from sale of its own production of gas and oil was Rs 1,563.63 crore which indicated that GSPC was focusing mainly on trading rather than production activity, it observed. The CAG also found it "unreasonable" that a time of 14 to 106 months was taken (during 2006-11) for completing the environment impact studies (EIS) in eight out of nine domestic blocks where the company was operator. Besides, against the estimated drilling rate per day of 27.76 meters, the actual rate was 22.49 meters in drilling 16 wells in KG offshore block between July 2004 and April 2010. This resulted in avoidable expenditure of Rs 180.91 crore on drilling work, the report stated. The company incurred total expenditure of Rs 104.29 crore on drilling wells without obtaining approval of Government of India for the field development plan (FDP). In absence of necessary approval, the said expenditure could not qualify for recovery, it observed. The CAG has also observed that the management of finances by the company was not prudent and efficient as it financed the exploration/development activities through short term borrowing, which is against the accepted business practices. (PTI)