Another scam

The Comptroller and Auditor General’s (CAG) performance report on hydrocarbon production sharing contracts has found a number of wrong practices and violation of rules in the case of the Krishna Godavari D6 oil exploration blocks of Reliance Industries (RIL).

In its final report presented to parliament last week, the CAG has, as in the case of its critical report on decisions pertaining to Air India, desisted from mentioning the loss to the exchequer that an increased capex in D6 may cause to the government. The CAG had in its draft report said that the increase in the estimated capex from $2.4 billion to $8.5 billion between May 2004 and October 2006 was likely to have a significant adverse impact on the government’s financial stake. According to the production sharing contracts RIL had to share profits with the government only after recovering  all this inflated expenditure.

The report has criticised the petroleum ministry and the directorate of hydrocarbons for seemingly favouring  RIL. They allowed the company to enter the second and third exploration phases without relinquishing a part of the contract area of the first phase.

This amounted to a violation of the production sharing contract. The report is right in pointing out that the present profit sharing formula between the government and private contractors gives an incentive to inflate capital costs, as it happened in the case of  RIL. This is because the formula is based on an investment multiple. The suggestion in the report that a single biddable profit-sharing percentage might eliminate this possibility can be considered by the government.

The report is more critical of the government than of the company on various issues relating to exploration policy and profit sharing. The report has made a number of recommendations to improve efficiency and transparency in the field where big money is involved and which is of critical interest to the economy. Since it is a capital intensive and technology-dependent sector there will be few players. That makes it essential that it should have the best policies and procedures which will serve the national interest.

There is the need for better sectoral oversight, as suggested by the report. Lawless exploitation of natural resources and political and official collusion in it have become common. The CAG report on the oil sector should therefore be followed up and acted upon.