Auditor recommends DGH functioning overhaul

While tabling its report in Parliament on Thursday, the national auditor Comptroller & Auditor General (CAG) said the role of the Directorate General of Hydrocarbons (DGH) should be well demarcated.

It said the technical advisory and related functions should be discharged by a body under the ministry of petroleum and natural gas and regulatory functions, such as review of hydrocarbon reserves and reservoir management, should be discharged by an autonomous body with an arm’s length relations with the government.

The report slammed the oil ministry for allowing Reliance Industries to retain its entire eastern offshore KG-D6 block in contravention of the production sharing contract (PSC). The CAG also asked the government to revisit the profit-sharing mechanism based on investment multiple (IM) that is used to determine the government share in production.

The statutory auditor has recommended that IM linkage with the profit-sharing formula even with the linear sliding scale introduced from the seventh round of New Exploration and Licensing Policy (Nelp) be removed.

“This will reduce the incentive for skewed volume and timing of capital expenditure resulting in very low government of India share of profit petroleum. Also, 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. Such a mechanism already exists in PSCs operating in Bangladesh,” it said in its report tabled in Parliament on the last day of the monsoon session.

Going into the details of the IM-based profit sharing, the report said there was a huge jump in the government’s profit share from 28 per cent to 85 per cent. This could lead to a situation where an increase in capital expenditure could result in an increase in the contractor’s share of profit petroleum despite a total reduction in the total profit petroleum as well as the government share. It recommended a single-point bid, which can be compared straightaway with a single biddable percentage for profit-sharing.

The PSC is currently based on a scaled formula for profit-sharing between the government and the private contractors. Calculations are done through an investment multiple, which is an index of the capital expenditure on exploration and development activities relative to income. The slabs for profit sharing are so designated that more the capital intensive the project, lower the IM and lower the government share of profit petroleum.

CAG said the DGH should put in place effective measures to ensure compliance with all provisions of PSC are fully monitored on a timely basis and appropriately documented and action taken against operators for non-compliance with PSC provisions.