Adverse CAG report on RIL does not bother markets

CAG blames DGH and the managing committee (MC) for acts of omission

No one in the market seems to be interested on what the Comptroller and Auditor General (CAG) has found while auditing the books of RIL. There are no reports or comments from analysts and brokers on the findings of the report. Why should they? Reliance has got what it wanted – a higher price of gas, further there is not much gas left in D1 and D3 anyways.

Even if all the allegations of hoarding are proved against the company, it will be paying only a small penalty compared to the benefit that will accrue to it on account of the price hike. In other words, the report will have little material impact on the financials of Reliance Industries, so why bother?

 

But truth be told, the report questions the logic of production cost on which gas price has been revised. 

 

Apart from RIL, the report also blames Directorate General of Hydrocarbons (DGH) and the managing committee (MC) for acts of omission. MC comprises of representatives from petroleum & natural gas ministry and DGH and the drilling company (operator) of the block. One of the gravest charges of CAG is that Reliance moved directly from discovery to commercial production, skipping the intermediate appraisal programme  required as per the production sharing contract (PSC). 

 

As per the DGH, web-site Appraisal Programme is carried out following a discovery in contract area for the purpose of appraising discovery and delineating the petroleum reservoirs to which the discovery relates in terms of thickness and lateral extent and determining the characteristics and the quantity of recoverable petroleum within. 

 

Without an appraisal programme, how did the government and DGH ascertain the amount of gas in the well? And if they did not know how much gas was there in the well, what is the logic and basis of blaming Reliance of hoarding gas. Further, as pointed out by CAG, how did DGH assure itself of reliability of the development plan, production rate and production costs without the appraisal report? 

 

If there is no scientific basis of arriving at the production cost, then how was the gas price hike approved. The government has merely approved the data provided by the company, even though it did not carry the appraisal programme to explain the costs. CAG in its report has said that MC and CGH are responsible for ensuring that cost calculations are reasonable and realistic, but there is no evidence that they verified it.

 

The very agencies which were set to protect the country’s natural reserves have clearly failed to do their job. However CAG blaming the MC for not doing its job is not correct. Some members of the committee (company’s representative) have done a very good job in convincing other members that the data given by them is correct.