CAG slams Oil Min for allowing RIL to keep entire D6 area

The comptroller and auditor general (CAG) has not diluted its attack on the oil ministry for allegedly allowing Reliance Industries to benefit by avoiding relinquishment of awarded area in KG D6 block.

In its final report on functioning of hydrocarbon production sharing contracts (PSCs) tabled in the Parliament today, CAG said: “RIL was allowed to enter the second and third exploration phases without relinquishing 25% each of the total contract area at the end of Phase-I and Phase-II in June 2004 and 2005 respectively as against Articles 4.1 and 4.2 of PSC by treating the entire contract area as discovery area. Subsequently, in February 2009, the government also conveyed approval to treat the entire contract area of 7,645 sq. km. as Discovery Area, thus enabling the operator to completely avoid relinquishment of area”.

With regard to the same block, CAG said the operator submitted an Initial Development Plan (IDP) in May 2004 (with estimated capex of $2.4 billion). The IDP was followed up with an Addendum to the IDP (AIDP) in October 2006 with an estimated capex of $5.2 billion for Phase-I and $3.6 billion for Phase-II. “We found that most procurement activities were undertaken late in line with the schedules of the IDP of May 2004. By contrast, activities in respect of items in the AIDP were initiated even before the submission/approval of the AIDP,” CAG said.

According to CAG, the slabs for profit sharing between the operator and government are so designed that more the capital intensive the project (lower IM), the lower the government’s share of profit petroleum. Contrarily, the higher the IM, the higher is government’s share of profit petroleum.  In practice, however, the private contractors have inadequate incentives to reduce capital expenditure – and substantial incentive to increase capital expenditure or 'front-end' capital expenditure, so as to retain the IM in the lower slabs or to delay movement to the higher slabs.

CAG also criticised government’s limited role in overseeing the functioning of PSCs. Operational control of E&P operations is largely with the private operators, and the government’s oversight role is restricted essentially to its representation (through ministry of petroleum and/or DGH) in the Management Committee for the block, especially in approval of Annual Work Programmes and Budgets and Field Development Plans, as well as a few approval functions delineated in the PSC. Further, it also observed that the oversight/ control of government representatives on high value procurement decisions is also very limited in scope

CAG is of the view that in order to protect the financial interest of the government, it is necessary that review and approval of development plans should be considered, not just from a “technical perspective” but also from a financial perspective – specifically from the government’s point of view by petroleum ministry and DGH.

With respect to the RJ-ON-90/1 block, operated by Cairn, CAG found that 13 fresh discoveries were made during or between the appraisal phase and in the development phase in areas already delineated as development areas. “Consequently, in our opinion, the declaration of fresh discoveries during the appraisal/ development phases within delineated discovery/development areas amounted to irregular extension of exploration activities, which is not in consonance with the terms of the PSC.  This also indicates that the discovery/development areas were not strictly delineated, and included excess area”.