RIL recovered an excess of $1.6 bn in cost from KG-D6 gas field: CAG

Reliance Industries Ltd (RIL) has recovered $1.6 billion in excess cost in the KG-D6 gas block as its cost estimates included the area it relinquished and its sale of gas included gas flowing from state-owned ONGC's eastern offshore fields adjacent to that of RIL, the Comptroller and Auditor-General of India (CAG) stated in its report.

In its report tabled in Parliament, the CAG said 831.88 sq km of KG-D6 area held by the Mukesh Ambani-led firm needs to be taken away from RIL as per the contract. RIL should not be allowed to recover the cost of discoveries from sale of gas from the block it had relinquished, the CAG said.

CAG said RIL's claims of cost recovery for doing discovery conformity test should also be looked into.

CAG also cited the November 2015 report of independent expert DeGolyer & MacNaughton (D&M) on reservoir continuity between the KG-D6 and contiguous block operated by ONGC, which confirmed that gas has migrated from ONGC's block to RIL's fields.

"The report indicates that as on March 31, 2015, of the gas initially in place, 44.32 per cent in Godavari PML and 34.71 per cent in KG-DWN-98/2 (both of ONGC) had migrated" to KG-D6, it said. "The report projected a higher proportion of gas migration and its production through RIL operated KG-DWN- 98/3 (KG-D6) block by end of 2019."

The government has appointed a one-member committee under Justice A P Shah to consider the report and recommend future action.

"In case if the ministry of petroleum and natural gas accepts the D&M report's conclusion that RIL did draw gas from ONGC's contiguous fields, and directs RIL to compensate ONGC for the same, it may affect the financials of KG-DWN-98/3, including cost petroleum, profit petroleum, royalty and taxes over its entire period of operation (since April 2009 when production of gas commenced from the block)," CAG said.

CAG said this will be in addition to several other issues it had pointed out in the previous audits (2006-12).

"The total financial impact of excess cost recovery during 2012-14 on account of the earlier identified audit findings was $1.547 billion (Rs9,307.22 crore).

"For the period 2012-14, additional issues of excess cost recovery claimed by the operator (RIL) were noticed, financial effect of which was $46.35 million," it said.

CAG had in its previous reports faulted the petroleum ministry and its technical arm, the Directorate of Hydrocarbons (DGH), for not exercising enough control and vigil over KG-D6 block, leading to loss of revenue for the government.

The production sharing contract (PSC) with the government allows an operator to recover all his cost before sharing profit with the government, a provision which encourages companies to inflate costs to reduce profit share of the government.

The CAG report also stated that RIL had refused to connect to production system four wells it had drilled on the D1 and D3 gas field in KG-D6 block on the pretext that they would not produce adequate incremental volume to justify the additional capex spend.

CAG also said RIL accounts show that it paid additional benefit of $10.13 million to Aker of Norway, which supplies floating oil production vessel (FPSO).

"Though these wells have not contributed to production from the D1-D3 field, the operator has recovered $102.94 million up to the FY2013-14 towards their cost," CAG said.

Also, RIL has refused  to relinquish 6,198.88 sq km out of total KG-D6 area of 7,645 sq km as per the contract that allowed retaining only area were discoveries are made.

"However, contrary to ministry's directives, the operator relinquished only an area of 5,367 sq km retaining an excess area of 831.88 sq km. The operator also paid Petroleum Exploration Licence (PEL) fees of Rs33.2 lakh relating to the excess retained area," CAG said, adding that the ministry needs to ensure that RIL relinquished the additional area.

CAG said the $63.78 million that RIL got through marketing margin should be included in price of gas for calculation of royalty payable to government and profit sharing.