Jaipal Reddy meets PM amidst Reliance's KG-D6 controversy

While Reddy refused to comment on his 15 minute meeting with the Prime Minister this morning, sources in his ministry said the meeting was fixed a long time back, much before the CAG submitted in draft audit report on June 8.

The ministry, they said, will take at least 5-6 weeks to reply to points raised by CAG which Reddy may have told the Prime Minister. CAG had asked for comments in two weeks time.

The delay in ministry's reply may mean that the CAG final report would not be tabled in Parliament in the monsoon session of Parliament next month. Sources said the ministry is taking longer time as it has an entirely new set of officials. The decision on KG-D6 field were taken when Murli Deora was the minister and V K Sibal was the head of ministry's technical arm, Directorate General of Hydrocarbons.

Incidentally, Sibal too was in the ministry today probably to explain to the new Oil Secretary G C Chaturvedi and his team about his role in KG-D6 approvals. CAG in its draft report had rapped oil ministry and its technical arm DGH for allegedly favouring Reliance by allowing it to double KG-D6 gas field's cost but it stopped short of saying if the Mukesh Ambani firm had overbilled the government and thereby caused loss to the state exchequer.

It also pulled up the ministry for going out of its way to grant over 856 sq km of additional area to Cairn India adjacent to its oil discovery in Rajasthan block. The CAG in its draft audit report on KG-D6 block said the ministry and DGH also bent the rules to grant "huge benefits" to Reliance when it was allowed to retain the entire block, but said gains cannot be quantified.

"The increase in (Phase-1) cost from (USD 2.39 billion proposed in the) Initial Development Plan (of May 2004) to (USD 5.196 billion) in the addendum to the Initial Development Plan is likely to have a significant impact on the 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, both overall and in respect of individual line items," accounting watchdog CAG said.

Reliance, however, said that "as a responsible operator, it has fully complied with the requirements in the Production Sharing Contract (PSC) at all times in conducting petroleum operations, and refutes any suggestion to the contrary".

"The KG-D6 project.. has been globally acclaimed for its cost effective, speedy, flawless execution and smooth commissioning," Reliance said in a statement yesterday.

RIL had raised the cost of bringing to production India's first deep-sea and the largest gas field after reserves almost doubled to 11.3 Trillion cubic feet, raising the peak output two times to 80 million cubic meters per day.

An operator like Reliance is allowed to recover all the capital cost incurred on developing a field from revenues earned from the sale of oil or gas before profits are split between the stakeholders, including the government.

The CAG conducted the audit of the Reliance accounts after allegations of 'gold-plating', or artificially inflating the development costs of Dhirubhai-1 and 3 gas fields, two of the 18 discoveries in KG-D6 block, were levied by the Anil Ambani Group.

The premier auditor, whose report will be tabled in Parliament after incorporating comments from the Oil Ministry, said Reliance never had the intention of developing KG-D6 gas fields as per the initial cost estimates and said it did not initiate tendering for equipment as per the original plan.

A top oil ministry official said that a reply to the CAG comments would be sent in two weeks' time.

CAG recommended that the "role of DGH and government of India representative on the Management Committee may be closely scrutinised to see why the operator was allowed to violate the provisions of Production Sharing Contract (PSC) and not adhere strictly to the terms of the approved initial development plan".

On Cairns India, the CAG said as per the PSC, the total contract area of company's operated RJ-ON-90/1 block' in Rajasthan was 11,108 sq km. The oil ministry agreed to Cairn's request for grant of additional 852.2 sq km in August 2004 and 856 sq km in March 2005.

CAG in its draft performance audit of the Rajasthan block stated that according to the PSC, the government can extend the contract area to include a hydrocarbon reservoir that extends beyond the block boundaries.

"In our view, the contract area under the PSC is sacrosanct... It can by no means be argued that already discovered reservoirs extend over the entire extended area of 852.20 sq km (and) 856 sq km," it said.

On KG-D6, CAG said the submission of an addendum to the Initial Development Plan (IDP) instead of a revised comprehensive development plan, as well as lack of adequate details with regard to the Phase-II development cost of USD 3.3 billion, made it virtually certain that the operator will submit more addendums.

"The DGH also approved the Addendum to Initial Development Plan (AIDP), without questioning as to why the operator did not take action in line with the already approved IDP," it said.

In general, the CAG said the benefit granted to Reliance is huge, but cannot be quantified. It also found a "similar irregular determination of the entire contract area" as 'discovery area' in the case of another block operated by Reliance, dubbed KG-OSN-2001/2.

The CAG's scope of audit covers the Production Sharing Contract (PSC) in respect of the KG-DWN-98/3 (KG-D6) block awarded to Reliance for two financial years -- 2006-07 and 2007-08 -- with access to the records of previous years linked to the transactions of these years.