CAG questions petroleum ministry’s decision to hike gas price for RIL

Reliance Industries Limited (RIL), which is currently in the midst of a controversy over the petroleum ministry's decision to allow it a higher price for natural gas produced from the KG-D6 fields, is in for further trouble with the Comptroller and Auditor-General of India (CAG) questioning the petroleum ministry's decision.

CAG wanted to know what steps the petroleum ministry has taken to ensure that the operator (RIL-BP) delivers gas at $4.2 per mmBtu (million British thermal units) as per the approved production plan.

The petroleum ministry had straight away accepted a price revision plan formulated by a committee headed by the chairman of prime minister's  economic advisory council, C Rangarajan, doubling the $4.2 per mmBtu price provided in the production sharing contract to $8.44 per mmBtu.

CAG has taken serious note of the price revision done in July and sought to know why the ministry has not exercised its right to fix the price under Article 21.6.3 of the production sharing contract (PSC) for the KG-DWN-98/3 block.

The petroleum ministry had since pegged the price for natural gas lower at $6.7 per mmBtu, purportedly at the intervention of the finance ministry.

The office of the principal director of audit, economic and service ministries of the CAG, in its 14 August communication, sought to know the steps the ministry has taken to make sure that the operator complies with PSC provisions and meets the Addendum to Initial Development Plan (AIDP) targets.

Since RIL as the operator has ''not fulfilled'' its obligations in respect of drilling wells and in view of the shortfall in gas production due to non-compliance with the production sharing contract and the ADIP, has the government ''ensured that the operator delivers as per the approved production profile at the price fixed of $4.2 mmBtu? the letter asks. ''If not, reasons thereto, along with supporting documentation. If yes, orders/action taken by the ministry may be detailed along with supporting documents,'' the communication adds.

The CAG also sought the ministry's clarification as to why it has not exercised its right to fix price for the KD-D6 block in view of details of the ADIP, the statement of costs, expenditure and receipts and cost recovery statements and shortfall in production.

''As per records made available for audit with reference to requisition 30, dated July 18, 2013, regarding revision of pricing of natural gas, the petroleum ministry initiated a proposal for the Cabinet Committee on Economic Affairs to fix a new price of domestic gas as per the recommendations of the Rangarajan Committee.''

As per the provisions of the PSC, the pricing formula for natural has to be approved by the government and the grant of approval for price revision should be based on the prevailing policy and on the advice of a regulatory authority.

''In this regard, audit observed that while approving the AIDP for the KG-D6 in December 2006, the Directorate-General of Hydrocarbons considered rates between $4 and $5 per mmBtu for a production profile up to 2020 and also worked out the government take on profit petroleum on these fixed prices. However, government is aware that the natural gas production from the D1-D3 gasfields is less than that approved by the managing committee,'' the letter says.

The average production at the KG-D6 block during 2010-11 was 48.13 mmscmd against the approved production of 53.40 mmscmd. It came down to 35.33 mmscmd during 2011-12, against the agreed 61.88 mmscmd. Actual production at present is way below even this level.