The nation's top auditor turned down a request of the Oil Ministry to allow private firms like Reliance and Cairn India, against whom the draft report has passed strictures, an opportunity to present their views on the audit objections.
Sources privy to the development said the ministry had on June 22 written to the CAG saying the audit observations were never discussed with either Reliance or Cairn and they did not get an opportunity to respond to the strictures.
The CAG on the same day replied back saying its "audit mandate, scope and coverage" did not provide for seeking a response on its draft observations and the government can raise audit objections after it has finalised its report and it is tabled in Parliament, they said.
The CAG, during the audit of Reliance's eastern offshore KG-D6 gas fields and Cairn's Rajasthan oilfields last year, never gave the private operators a chance to explain the complex nature of their business, which the nation's top auditor had hitherto never scrutinised.
Instead, the CAG wrote audit memos and requisitioned accounts, with which the private operator fully complied.
Sources said the CAG had a 90-minute session, lunch included, with the operators in the first week of June this year with no pre-set agenda and no audit observations were discussed.
Within days of this meeting, the auditor sent its draft report without including any inputs from the private firms, to the Oil Ministry for comments.
The CAG, in its June 8 draft report, stated that the Oil Ministry and its technical arm, the Directorate General of Hydrocarbons (DGH), favoured Reliance and Cairn by allowing them to retain their entire exploration acreage, turning a blind eye to increases in capital expenditure and giving additional area in violation of the Production Sharing Contracts (PSCs).
"The contractors have seen and replied to the audit requisitions and memos only. They have not been given the draft report, which has the response to audit queries and observations of CAG," the Oil Ministry wrote to the CAG on June 22.
"In the interactive meeting (held in first week of June), one of the operators gave a presentation on how the project was executed and no audit observation were discussed. In the other meeting, only one observation was discussed with the operator," it wrote.
"The operators were not given any draft report before this meeting so that they could have come prepared with some reply," it added
Under the Production Sharing Contract (PSC) signed with Reliance and Cairn, "any audit exception shall (have to) be made available by the government in writing to the contractor within 120 days following completion of the audit in question and thereafter, the contractor shall answer within 120 days of receipt of such notice," it wrote.
"Thus, if the audit exceptions are not notified, any reversal of cost recovery/disallowance of any expenditure (based on audit exception) will not be feasible from the operator. This could also lead to disputes and the operator may choose to initiate an arbitration also," the ministry added.
The CAG took almost a year since completion of the audit in June last year to prepare the draft report. But now it is not giving the operators a few weeks to respond as per the principle of natural justice, sources said.
The CAG wants an exit conference with the ministry to be held in the first week of July to conclude its final report.
In the draft report, the CAG said rules were bent, enabling Reliance to retain the entire 7,645 square kilometre KG-DWN-98/3, or KG-D6 block, in the Krishna Godavari Basin off the East Coast.
Also, the development plan Reliance submitted for Dhirubhai-1 and 3, two of the 18 gas discoveries in the KG-D6 block, was not in compliance with the PSC and the ministry and the DGH turned blind eye to the company raising capital expenditure without having begun work on the previous one.
Reliance had in May, 2004, proposed an investment of USD 2.4 billion for producing 40 million standard cubic metres per day of gas from the D1 and D3 fields and later, in October, 2006, moved an addendum to this saying USD 5.2 billion would be required in Phase-1 to produce 80 mmscmd of gas and another USD 3.3 billion to sustain the peak output for a longer duration.
The CAG, however, did not say Reliance overbilled the government or caused a loss to the exchequer with the increase in development cost.
"The increase in cost from Initial Development Plan (IDP) to Addendum to IDP is likely to have significant adverse impact on government of India's financial take. However, at this stage, based on the information provided, we are unable to comment on the reasonableness, or otherwise, of the increase in cost from IDP to AIDP, both overall and in respect of individual line items," it said.
The CAG stated that the Oil Ministry and DGH "irregularly allowed the operator (Reliance) to enter successive exploration phases without the stipulate relinquishment of area and then allowed the operator to declare the entire contract area as a 'discovery area', thus avoiding any relinquishment whatsoever."
On the Cairn India-operated Rajasthan oil fields, it said the grant of an additional area of 1,708.20 square kilometres beyond the contract area by the government was not in line with the provisions of the PSC, adversely affecting the sacrosanct nature of the contract area and its phased relinquishment.
