Taking a diagonally opposite view to CAG, Parliament’s Public Accounts Committee today said RILBSE -0.29 % is entitled to recover all cost incurred on unviable gas discoveries as government’s technical arm DGH had in the first place allowed it to retain the entire KG-D6 block area.
PAC, which went into the 2011 CAG report that castigated Oil Ministry for allowing Reliance Industries Ltd to retain its entire eastern offshore KG-D6 block in contravention of the Production Sharing Contract, said exploration cost on unviable finds cannot be disallowed.
CAG had faulted the ministry and its technical arm, the Directorate General of Hydrocarbons (DGH), for allowing RIL to retain the entire 7,645 sq km KG-DWN-98/3 (KG-D6) block in the Bay of Bengal after the giant Dhirubhai-1 and 3 gas finds were made in 2001. As per the rules, only the area where discovery is made is allowed to be retained after exploration period.
In its report tabled in Parliament, PAC said delineating Development and Discovery Areas from vast area given to explore oil and gas, requires technical expertise.
And, the block oversight committee comprising of ministry officials and DGH as well as DGH had on the request of RIL allowed it to retain the entire block area as Discovery Area.
“Therefore, the exploration costs incurred by the contractor (RIL) on unviable discoveries cannot be disallowed as the contractor is entitled to recovery contract cost out of a percentage of total value of petroleum produced and saved from the contract area as per the PSC,” the report said.
Contract cost is the expenditure incurred in exploring and/or developing a discovery.
“We recommend that the Ministry of Petroleum and Natural Gas should review the determination of the entire contract area as ‘discovery area’ strictly in terms of the PSC provisions,” CAG had said in its report, asking for delineation of the discovery area and relinquishment of the rest.
In a subsequent report, CAG had stated that the ministry should accept sharing of exploration cost of only those wells which resulted in discovery and disallow the cost for others.
On the USD 2.3 billion expenditure that the ministry had disallowed as penalty for KG-D6 gas output lagging targets due to non-drilling of committed wells, PAC said RIL has invoked arbitration in almost all the cases where Government has disallowed the costs.
It noted that the “ministry in their submission before the Committee agreed that there were anomalies in the provisions” of the Production Sharing Contract (PSC).
“The Committee while appreciating that the Ministry has learnt its lessons are apprehensive about the status of issues between the Government and the Contractors that have been lingering on due to the original provisions which have now been relaxed.
“The Committee are of the view that a strong dispute resolution mechanism should be put in place to address the concerns of both parties,” the report said.
On award of contracts by RIL on the basis of a single financial bid, PAC asked the ministry to develop robust monitoring mechanism within the existing PSC framework to ensure that a fully transparent and cost-effective process is adopted by operators in future.
Commenting on government mandating a discovery confirming test before recognising a gas find, it said alternative tests for confirming commerciality of the discoveries must be allowed.
“The Committee while noting that the CCEA has relaxed the provisions by providing that Operator should either relinquish or carry out DST (test) and pay penalty for delays or develop the discoveries on his own risk in ringfenced manner are of the view that a comprehensive policy may be brought out allowing alternative tests for confirming commerciality of the discoveries to ensure that the policy does not get redundant with introduction of new technologies,” it said.
Government auditor CAG did not say in its September 2011 report if the capital expenditure for KG-D6 being raised from USD 2.4 billion proposed in 2004 to USD 8.8 billion in 2006 was unjustified or inflated.
As per the PSC, RIL should have relinquished 25 per cent of the total area outside the discoveries in June, 2004, and 2005, but the entire block was declared as a discovery area and the company was allowed to retain it.
CAG was critical of government oversight, particularly on high value procurement decisions, and sought an “in-depth review” of 10 contracts, including eight awarded to Aker Group by Reliance on a single-bid basis.