CAG advises OilMin of caution on RIL's KG-D6

The Comptroller and Auditor General of India (CAG) has advised Oil Ministry to allow Reliance Industries (RIL) to recover expenditure on its eastern offshore KG-D6 field only after it has been audited.

Stating that the CAG's letter to the ministry was to "flag the critical issues so as to facilitate adequate precautionary action", Deputy CAG Rekha Gupta said in the October 3 communique summed by the CAG report on KG-D6 that was tabled in Parliament last month.

The letter asked the ministry to review the decision to allow RIL to retain 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 besides seeking review of 10 contracts, including the eight awarded to Aker Group for the MA oilfield in the same block, on a single-bid basis.

But it did not mention of CAG report calling for an audit of increase in expenditure proposed by Cairn on its Mangala Rajasthan oilfields from $1.24 billion to $3.34 billion. It also did not mention the $201.54 million expenditure that was disallowed for cost recovery by CAG.

"The Ministry of Petroleum and Natural Gas may like to take precautions to ensure that the audit of expenditure prior to adjustment to the account of this operator be effectively done to ensure that only admitted items are approved," Gupta wrote to the ministry on October 3.

The CAG had audited expenses RIL incurred during 2006-07 and 2007-08, and spending incurred from 2008-09 onwards is to be covered in future audits.

As practice, operators are allowed to recover from sale of hydrocarbons, only that part of investment which has been audited. Even in case of RIL's KG-D6 block, $5.26 billion out of $5.69 billion invested till March 31 was allowed to be cost recovered only after audit.

The CAG audit of KG-D6 was the second audit and expenses had previously been audited by a government appointed auditor.

"Permitting inadmissible items may lead to legal complication if recovery has to be undertaken after audit by the CAG," Gupta wrote.

Gupta said there was considerable scope for improvement in the management of exploration and production. "We also found numerous deficiencies in compliance and control issues vis-a-vis the provisions of the Production Sharing Contract (PSC) by the Ministry/Director of Hydrocarbon (DGH)."

"The government representatives should protect Government of India's financial interests [not just technical perspective] at the time of review and approval of development plans in the Management Committee [MC]," she wrote.