New Delhi: Finding itself admist a raging controversy over comments against it in a draft CAG report, the Oil 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 oil ministry and its technical arm, Directorate General of Hydrocarbons (DGH), for allegedly showing favours to private operators.
"We have very stringent regulations. A operator, say Reliance, is allowed to recover only that part of the investment which it has spend on 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.
The 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 its KG-D6 block, leading to reduction in government take from the eastern offshore block.
CAG in its draft report did not say if the increase in 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 stated that it is "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 and gas exploration and production is unlike a normal factor where economies of scale apply. In a gas field, the first gas is cheapest to produce as it targets 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 mmscmd 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 mmscmd from the Deendayal find in the same KG basin," he added.
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 mmscmd. Subsequently, more reserves were discovered and capex revised to recover 11.3 Tcf of reserves at plateau output of 80 mmscmd.
Consequently, the Addendum to the IDP, while more than doubling the estimated recoverable reserve to 11.3 tcf and plateau production to 80 mmscmd, 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 $ 0.7 billion increase in cost of development wells and $ 1.9 billion rise in cost of facilities due to more than doubling of international oil prices.
Rig hire charges rose by almost 300 per cent as did the cost of facilities like pipelines, sub-sea control systems, umbilical, vessel mobilisation and demobilisation, etc.
These costs alone would have been sufficient to double the initial plan itself to $ 5 billion prices without any change in the development work programme.
A $ 2.9 billion additional investment was due to increase in project scope due to increase in reserves and production level and another $ 0.8 billion for new facilities required primarily due to increase in project size.
It is to be noted that the cost of the incremental production rate of 40 mmscmd is only $ 2.9 billion, which is 42 per cent lower as compared to $ 5 billion for the first 40 mmscmd.
In spite of the escalation in costs, RIL's KG-D6 project has been benchmarked by independent analysts such as Goldman Sachs to be amongst the lowest in the world, he said.
The official said the oil ministry had asked CAG in November, 2007 to carry out special audit in respect of certain blocks/fields operated under pre-New Exploration Licensing Policy (NELP) and NELP regimes.
"The draft Performance Audit Report has been received on June 8, 2011," he said adding the ministry's response will be sent to CAG in coming weeks.
Besides allowing Reliance to increase gas field cost, the ministry and DGH also bent the rules to grant "huge benefits" to Reliance when it was allowed to retain the entire block, CAG said in the draft report but added that the gains cannot be quantified.
Responding to the reports in media, Reliance earlier this week said that "as a responsible operator, it has fully complied with the requirements in the Production Sharing Contract (PSC) at all times in conducting petroleum operations, and refutes any suggestion to the contrary".
"The KG-D6 project has been globally acclaimed for its cost effective, speedy, flawless execution and smooth commissioning," Reliance had said in a statement.
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