Will never allow any operator to overbill govt, says Oil Ministry

Finding itself amid a raging controversy over comments against it in a draft CAG report, the petroleum ministry has said it will never allow Reliance Industries or any other operator to overbill the government and cause loss to the exchequer.

The ministry is in the process of preparing a response to the draft report of the Comptroller and Auditor General of India (CAG), which slammed the ministry and its technical arm, the Directorate General of Hydrocarbons (DGH), for allegedly favoring some private operators.

“We have very stringent regulations. An operator, say Reliance, is allowed to recover only that part of the investment which it has made on the ground and which has been established through an audit done by government auditors.

So, no matter what an operator may put in his budget for a gas field development cost, only that amount is permissible which is actually spent,” a ministry official said.

Operators like Reliance are allowed to recover all capital cost incurred on developing a field from revenues earned from the sale of oil or gas before profits are split between the stakeholders, including the government. CAG conducted the audit of the accounts of Reliance after allegations of ‘gold-plating’, or artificially inflating the cost of development of Dhirubhai-1 and -3 gas fields, two of the 18 discoveries in the operator’s KG-D6 block, leading to reduction in the government take from the eastern offshore block.

CAG, in its draft report, did not say if the increase in the development cost of D1 and D3 fields was unjustified. “We will never allow Reliance to dupe the government,” he said.

The nation’s top auditor in the draft report said it was “unable to comment on the reasonableness, or otherwise, of the increase in (Phase-1) cost (from $2.39 billion proposed in May 2004 to $5.196 billion in 2006), both overall and in respect of individual line items”.

The official said oil & gas exploration and production was not like a normal factor where economies of scale applied. In a gas field, the first gas was the cheapest to produce, as it targetted the main reservior. Gas outside the reservior cost more.

“Reliance put a total expenditure (in two phases) for D1 and D3 at $8.8 billion. The output envisaged was 80 million cubic meters per day from 40 mscmd projected in the initial development plan,” he said.

“Compare this with $1.8 billion that Gujarat government company, GSPC, is putting in to produce 6-7 mscmd from the Deendayal find in the same K-G basin.”

Reliance’s initial development plan (IDP), prepared in 2003, had estimated a capex of $2.4 billion for 5.3 trillion cubic feet (tcf) of recoverable reserves at a plateau output of 40 mscmd. Subsequently, more reserves were discovered and capex revised to recover 11.3 tcf of reserves at plateau output of 80 mscmd.

Consequently, the Addendum to the IDP, while more than doubling the estimated recoverable reserve to 11.3 tcf and plateau production to 80 mscmd, necessitated a revision in the estimated capex to $5.2 billion with expected additional expenditure of $3.6 billion to be incurred in subsequent phase to maintain a longer plateau and optimise recovery.

“Reliance has told us that the additional expenditure is for sustaining plateau production,” the official said.

According to the company, the increase in cost was due to the $0.7-billion increase in the cost of developing wells and $1.9 billion rise in cost of facilities due to more than doubling of international oil prices.