NEW DELHI:India’s national auditor has again cautioned the government it should not rush to validate the entire expenditure of Reliance Industries in the D6 block because part of the money was spent after 2008, the period for which accounts have not been audited.
The Comptroller and Auditor General of India, or CAG, Vinod Rai, told the Public Accounts Committee of Parliament at a meeting last week that in his view money spent by Reliance in developing the field should be reimbursed from gas sales only after D6 accounts up to 2011 are audited, a person with direct knowledge of the matter said.
The CAG’s view could potentially escalate the row between regulatory authorities and Mukesh Ambani-controlled Reliance Industries, which has initiated legal action over the issue of fully recovering its investment. RIL says its contract allows full, not partial, recovery of costs.
“The petroleum ministry has been told clearly that … until the full audit is completed up to the end of 2011, it should be careful about settling the costs to the developer,” said the person who declined to be identified. In other words, the auditor feels that if the next audit detects unjustified expenditure, the oil ministry may not be able to recover it from the company.
RIL had proposed in 2004 to spend $2.47 billion and produce 40 mmscmd of gas. Two years later, it secured approval to spend $8.8 billion to produce 80 mmscmd, extend the field’s life to 13 years from nine years, and raised estimates of gas reserves to 10 trillion cubic field from 3.8 tcf.
Actual production has now fallen to 35 mmscmd, making authorities wonder if RIL should be reimbursed for building infrastructure appropriate for a much higher volume of gas. According to annual accounts of the D6 block, up to March 2011, RIL has spent $5.7 billion on the D1 and D3 gas fields and $1.73 billion on the MA oilfield in the block, the government said.
Industry officials say the company does not plan to spend the rest of the approved $8.8 billion in developing D1 and D3 and the surplus infrastructure would be used for other fields in the block under a proposed integrated field development plan that aims to produce gas from all 19 discoveries in the field. So far only three have been developed.
These sources also say that RIL’s plan to develop the entire D6 block, instead of doing it in bits, will reduce costs by at least $3.5 billion.
The CAG had told the oil ministry last year that its audit covered only the period up to 2008 and that the government should be careful about recovery of costs without the benefit of the full audit report for three years till the end of 2011.
The crux of the concerns raised by CAG is whether the company’s capital expenditure was excessive. Higher expenditure effectively reduces the share of profit that accrues to the government after taking into account the costs incurred for developing the field.
RIL has now approached the Supreme Court over the recovery of costs with the government declining to settle the dispute through arbitration. The company has complained to the court that the oil ministry was not approving its budgets and putting more pressure to drill more wells although geological data suggests that this may be counterproductive.
The company reckons that the national auditor has ignored many of its arguments while preparing its audit report for the period till 2008. The government is concerned about the fall in output from the field against the promised target and has raised the issue with the company in the backdrop of allegations that the developer was waiting for a higher price before ramping up output.