RIL violated contract with govt, said CAG

The federal auditor in 2011 accused RIL of violating the terms of contract for the KG-D6 block off the AP coast but did not talk about loss to exchequer or impact on gas price.

The CAG report on a special audit of RIL books for 2006-2008, when most major equipment and services were contracted, let RIL off the hook on artificially jacking up the cost of bringing the field into production.

The report, presented in Parliament on September 8, 2011, was more muted than the draft. This had said there could be a loss to the exchequer but couldn’t quantify it. The draft report showed contract costs rising phenomenally because of RIL’s sweetheart procurement deals. But the final report criticized the oil ministry and its technical arm, DGH, for allowing RIL to hold on to the entire block when it was to have surrendered 25% of the area.

The ministry, then under Murli Deora, ordered the special CAG audit of three fields operated by private entities after Samajwadi Party alleged RIL had jacked up capital investments in KG-D6 Block.

RIL had initially sought approval for a $2.4-billion investment plan, projecting an output of 60 million units per day. It revised the plan to $8.8 billion, projecting an output of 80 million units.

While investments don’t have a direct bearing on oil or gas prices, they impact the government’s take from a field. The present format of contract, followed in many countries, allows companies to recover costs before sharing profit with the government in a graded manner.

On gold-plating of costs, the CAG said: “Since approval of estimates does not constitute acceptance of the cost of projections of the operator, validating the cost incurred by him can be done only after audit of the actual cost through proper norms.” The drastic gas output fall has brought RIL’s operations and investments into question. The company has invested upwards of $10 billion in the block’s exploration and development, while it has recovered over $5.6 billion in costs.

A chastised ministry under S Jaipal Reddy slapped a $1.8 billion penalty on RIL for the output drop, refusing to allow it to recover this amount of investment. They are locked in arbitration.

Under M VeerappaMoily, the ministry has also taken back some discoveries, amounting to 25% of the block, and ordered that RIL would get the revised gas price only if it submits a bank guarantee, estimated at $1.2 billion, to cover the quantity by which it has fallen short of its supply commitment.

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