After presenting its final report on audit of Reliance Industries Limited‘s (RIL’s) KG-D6 gas block, Comptroller and Audit General (CAG) body has invited a lot of negative press as far its process of gauging industry procedures is concerned.

CAG, in its audit draft report, had lashed out against RIL for allegedly overstating its costs, while also pointing a finger at the oil ministry for showing laxity in implementation and management of production sharing contracts (PSCs). Reliance Industries took a stand on the charges stated by CAG saying that CAG had missed the mark as far as gauging E&P procedures, in relation to internal and external factors, is concerned. While RIL maintains that irrespective of the report, it continues to maintain a strong adherence to global benchmarking procedures, the after math of the allegations has left many operators in oil and gas sector questioning the forethought of the audit body.

Industry experts have stepped up in support of Reliance’s stand sharing the view that the entire shenanigan put up by CAG has left a detrimental mark on the reputation of the E&P sector. Also, independent reports by experts from E&Y, IPA and Daniel Johnston & Co. Inc. have entirely validated RIL’s stand in its responses to CAG. These independent reports have acknowledged RIL’s commendable efforts in ‘bringing to stream India’s first deep water hydrocarbons production facility in record time’ and the fact an energy major as big as BP Plc has entered into a strategic partnership with RIL in this exact block further strengthens Reliance’s stand and justifies its efforts and processes to a large extent.

As for the issue that has been stretched out of proportion by CAG, one thing that finds common ground in all opinions, including those of industry leaders and experts is that CAG has obtusely relied on going by book as against gauging a situation based on current trends and economic factors. Questioning the prudence of an operator is not a part of CAG’s mandate and questioning the technical and operational judgments of an operator that were in effect the best possible judgments at the time, is a factor that must find precedence in evaluating any procedure.

Comptroller and Audit General’s (CAG) final audit report on alleged irregularities in production sharing contracts (PSCs) in energy and petroleum sector has finally found the light of day, but on an incongruous note. While the report has criticized the government for allowing private operator Reliance Industries Limited (RIL) to retain an entire block after the first phase of exploration in violation of its PSC, it also happened to praise the government, ratheraberrantly, for developing world-class, deep-sea infrastructure in record time. CAG has also made a recommendation that the PSC structure be modified and that the government play a more vigilant role in the operations of the same.

Commenting on the audit report, RIL maintained that irrespective of what the report suggests, it has put in place a global benchmark for efficiency, project completion and capital costs in developing India’s oil and gas fields in a continually challenging environment. “We are proud of our achievements,” the company statement added.

Enconters with CAG have been a mixed bag of emotions for all players in E & P sector. The audit reports are known to be out and out harsh on the first count. Following many discussions with the company management and analysis of situation from an operator’s perspective is the stance diluted to an extent. However, many industry experts are of the view that this entire shenanigan by CAG has somewhat made a detrimental mark on the reputation of the E & P sector. As far as making recommendations to the industry procedures is concerned, many experts are of the opinion that CAG is not necessarilytechnically sound enough to do so.

As crude prices have consistently charted an escalating graph over the last five years, the production and development costs have proportionately been affected for almost all operators, especially those engaged in the deep water exploration projects. Experts, including R S Sharma, former ONCG chairman, have opined that capital investment, especially from private players in E&P space,is needed to explore and develop India’s large sedimentary resources, which lay undeveloped. Such reports which discourage foreign investment sentiments reflect badly on the industry and its players on the whole.

As the issue enters a steaming stage, industry experts have stepped up with their opinions regarding the matter concerning Reliance Industries Limited (RIL) and the allegation put on its account by Comptroller and Audit General (CAG) body of India. The subject matter of concern revolves around the allegation made by CAG accusing RIL of gold-plating its capital expenditure incurred on its oil and gas acreage, including KG D6 block, and a parallel assertion made on account of the oil ministry for allowing such price escalation, that too in violation of production sharing contract s (PSCs).

CAG had submitted its initial report on the KG D6 audit earlier in June, red lining many aspects of RIL’s production process, however, the audit report has failed to rationalize any claims it has made against RIL. RIL, in its reply to the audit report, had stated that the increase in cost was a result of increase in cost of deep sea exploration process altogether. Due to rise in cost of procurement of technology and labor worldwide, a ripple affect found its way to Indian operators as well, including Reliance. CAG had also noted that because of this unwarranted increase in cost, the government is at the brink of facing heavy losses, to which RIL has replied that it is in fact the operator that stands to face heavy losses; while the government stands to regain its share through reduction of subsidiary burden.

At present, when CAG is in the process of finalizing its audit report regarding RIL, industry experts have come to suggest that CAG is not the right body to raise questions at the prudence of an operator and question the technical and operational judgments of the operator that were in effect the best possible judgments at the time. It should consider every factor, internal and external, which led to a possible situation and try to reason the action undertaken by taking in the viewpoints of the operator as well. CAG cannot use a pre-existing yardstick to reason an outcome, which could have been taken as necessitated by the situation. Also, to suggest changes in the PSC is matter of deliberation for concerned authorities and not CAG.

Reliance Industries Limited (RIL), India’s largest private sector enterprise, has been let down by Comptroller and Audit General (CAG) body for not considering the response it submitted to CAG’s audit draft report on RIL’s KG-D6 gas fields. RIL Senior Vice President (Commercial) Mr. B Ganguly noted that the letter sent on behalf of Reliance Industries to CAG and oil ministry, highlighting clarifications for CAG’s findings, has not been acknowledged by the audit body in its process of finalization of audit report.

At the Exit Conference held on July 12, CAG did not raise any issues or sought clarification from RIL on any of its audit findings. However, just days before the CAG is slated to submit its final draft to the parliament, the draft notes no mention of Reliance’s elucidations. B Ganguly said, “What is surprising is that in spite of many issues having been clarified by RIL during the Exit Conference (held on July 12) as well as in its written responses, the record of the Exit Conference as minuted appears to take no cognizance of the reasons put forward by the operator. In case the CAG disagrees with out reasons our technical observations or our interpretation of the PSC, the reasons for such disagreement may also be made known.”

Earlier in June, CAG slammed the oil ministry and its technical arm Directorate General of Hydrocarbons (DGH) for allegedly allowing RIL to increase its capital expenditure on its KG-D6 gas fields in violation of the Production Sharing Contracts (PSCs). In retort to this claim, RIL has held that an increase in cost does not border on ‘benefits’; only when an operator incurs low capital expenditure that the profits increase. So far, CAG had not been able to quantify its claim of inflated costs and, according to RIL representatives, the report failed to acknowledge the increase in exploration costs over the last few years for all oil and petroleum exploration and development operators around the world. The shift in global cost patterns have equally affected the exploration and development processes of KG-D6 basin, which CAG has put under the scanner in its audit.

India’s top auditor CAG has said that audit of the D-6 oil block in the Krishna-Godavari basin operated by Reliance Industries is likely to take 4-5 months more to be finished.

“We require 4-5 months to complete the audit… The process would take time, as this is the first time that we are looking at a private player’s books… It’s a very detailed process”, Comptroller and Auditor General Vinod Rai said.

The CAG is auditing Rs 45,000 crore capital spending by RIL, which is controlled by , to tap natural gas from the D-6 block in K-G basin, following a request from the petroleum ministry in 2007.

He said that RIL had submitted all related documents sought by CAG by the end of January this year.

“All the firms, including RIL, have submitted required documents that we have sought,” said Rai.

However, a Reliance Industries spokesperson refused to offer any comment on the issue.

In a hard-pitched battle last year between the Ambani siblings, younger brother Anil Ambani had alleged that Mukesh Ambani-controlled RIL had inflated capital spending to Rs 45,000 crore from the initial estimate of Rs 12,500 crore for the D-6 block.

CAG’s scope of audit is in respect of the block KG-DWN-98/3 (KG-D6) awarded to RIL for two financial years — 2006-07 and 2007-08 — with access to records of previous years linked to transactions in these years.

It is also understood that the scope of this audit will far exceed the normal course of audit by the CAG and the prime objective may be to detect fraud, if any, by the operator (RIL), allegedly in collusion with oil regulator DGH and the Ministry of Petroleum and Natural Gas.

In 2007, the Petroleum Ministry had asked the CAG to conduct an audit of seven oil and gas blocks, including RIL’s KG-D6 block. After initial reluctance, the CAG is now conducting the audit of four oil & gas blocks, namely KG-D6 of RIL, the Barmer and Ravva oilfields being operated by Cairn India and the Panna-Mukta-Ta.

Source:http://www.hindustantimes.com/RIL-s-K-G-basin-audit-to-take-4-5-months-to-complete-CAG/Article1-544355.aspx