CAG to question move to let RIL raise D-6 capex

Govt Act Drastically Reduces Its Own Revenues

 THE Comptroller and Auditor General of India (CAG) is finalising a report that questions the government's move to allow Reliance Industries (RIL) to increase its expenditure in developing the D-6 field in the Krishna-Godavari basin by over $6 billion, significantly reducing the state's share of revenues from the country's biggest gas field.
    Despite the higher expenditure, Reliance's gas output from D-6 has fallen to about 55 million cubic metres a day, well below the target of 80 million cubic metres, a performance the national auditor may criticise, a senior government official, who did not want to be identified, told ET.
    Analysts say concerns over gas output from the field have been a drag on RIL's shares, which have fallen from a peak of 1,187 in November to 919 on Monday.
    Goldman Sachs said in a recent report there was "uncertainty" about ramping up output while JPMorgan said after the company's quarterly earnings that "RIL management gave no guidance on timelines for ramp-up in the D6 field".
    The official said the chief auditor's finding is likely to include an extensive account of lapses by the oil ministry, which abandoned its own procedures, and by Reliance, which the CAG feels did not comply with some provisions of the production sharing contract (PSC). Under the PSC, the company that is awarded the field recovers the cost of developing the field from sale of gas and the balance output, called profit petroleum, is shared between the government and the company.
    The report would be sent to the oil ministry before it is placed in Parliament, the official added.
    Reliance did not respond to a detailed questionnaire sent by ET. Murli Deora, who was petroleum minister when the higher costs were approved, did not respond to calls or messages sent by ET.
    The CAG report is not final and could undergo changes after being reviewed by the oil ministry. But if the report sticks to the conclusion described to ET, it could lead to a furore in Parliament. Production plateau under scanner
    LATE last year, a report from the national auditor claimed the government had lost $39 billion (Rs 1,76,000 crore) in selling airwaves below market rates. The report famously led to the resignation of A Raja, the telecom minister at the time.
    But the quality of the report—in particular the calculations that led to the headline-grabbing figure of $39 billion—has been criticised by current Telecom Minister Kapil Sibal, and by independent observers. The CAG is auditing RIL's D-6 block in the KG basin in order to assess whether the government's revenues have been protected and if the costs have been inflated. The government is to get 10-90% of the revenues generated from the sale of gas over the life of the KG basin, after deducting the expenses incurred by the operator, RIL in this case.
    The auditor is first scrutinising operations in four blocks, including D-6. The Director General of Hydrocarbons (DGH) and oil ministry had approved the increase in capital expenditure by RIL from $2.4 billion to $8.8 billion between September and December 2006. According to officials, the CAG report is likely to say almost all the money has been spent but only half the work has been done. RIL has drilled only 18 out of a total 50 wells. Importantly, auditors say, despite a huge increase in capex, there is no commensurate increase in gas production. The issue of production plateau from D-6 has also been flagged by seven research reports, which came out between January 17 and January 25, reviewed by ET.
    " The company is currently engaged in talks with the government/DGH on various technical and regulatory issues pertaining to all of their E&P blocks. Better clarity on E&P ramp-up will be possible only on conclusion of these talks," says JPMorgan.
    HSBC said there was no "near-term positive trigger," and there are "lingering concerns on future gas production". "However, we believe RIL is unlikely to ramp up its natural gas production from current levels of 52-53 million standard cubic metres per day (mmscmd) near term, in the absence of relevant regulatory approvals for new development, technical limitations with existing wells and long lead time for critical deepwater equipment.
    The current gas production was not only well below the intended peak rate of 80 mmscmd but also sequentially lower. We believe this steady decline is a concern and could continue in the absence of remedial measures," the bank said. Goldman Sachs has also expressed concerns on the D-6 output stating that there is "uncertainty" on the ramp-up schedule of the project.
    The chief auditor also disagrees with the audit of D-6 by an entity approved by the DGH amid allegations that there was a conflict of interest and that the same auditor had audited some private investment firms of RIL's owners. Government officials said the audit was "very questionable", but there was no "documentary evidence" of any conflict of interest.
    VK Sibal, who was then the DGH, is being investigated by the Central Vigilance Commission (CVC) and the Central Bureau of Investigation (CBI) for alleged wrongdoing in dealings with Reliance. The petroleum ministry had recommended an extension of Sibal's tenure beyond his retirement age, but the government rejected the proposal after objections from the chief vigilance commissioner.
    The report is also likely to observe many private firms in the exploration business had not complied with conditions in their production sharing contracts. The auditor is also expected to point out that the DGH and the petroleum ministry failed to serve either showcause notices or levy any penalties for these breaches, although staterun ONGC is frequently hauled up for similar lapses.
    The CAG had written several times to the oil ministry stating that documents and records were not being furnished by either the DGH or the ministry and, therefore, the audit would get delayed. It had also said RIL was not providing documents or giving incomplete documents. It had told the ministry the company was giving "limited access" to its systems to the auditors. At one point, the CAG also had to complain to the government about Sibal allegedly trying to limit the scope of the audit because of "concerns" expressed by private operators. "You would be aware that the CAG is an independent constitutional authority, and we would be entirely responsible for deciding the scope, extent and coverage of the audit," was CAG's reprimand to the oil ministry and Sibal.