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Oil ministry faulted for pricing delays, higher cost to Reliance
Friday November 28, 2014 11:02 PM, IANS

India's official auditor has faulted the oil ministry for the delays in fixing hydrocarbon prices and incoherent evaluation norms, while recommending disallowance of costs worth nearly $1 billion claimed by Reliance Industries (RIL).

Reacting to the report tabled in parliament Friday by the Comptroller and Auditor General (CAG), Reliance said there were some basic differences over it, and that it will furnish a reply if and when the government seeks this.

The CAG said Mukesh Ambani-led Reliance Industries was not eligible for expenditure amounting to $160 million on three hydrocarbon wells in the Krishna-Godavari basin.

It further said exploration activities in 14 wells at an expenditure of $427 million was improperly carried out by Reliance, adding that while the entire amount needed to be disallowed normally, it was recommending $119 million to be rejected.

These and other matters have been hotly contested by the contractor.

"There are obvious differences between the CAG and RIL on certain basic issues concerning the Production," a statement from Reliance said.

"Once we receive a formal communication of audit exceptions by the government, we will respond to the government in accordance with the provisions of the accounting procedure under the PSC (price sharing contract) and also exercise such other rights as are available to us in law."

The PSC refers to the contract between Reliance Industries and the government that covers, among other details, how the costs of exploration will be shared and what price will be paid for the hydrocarbons extracted.

The official audit agency also sought to clarify that the report tabled Friday was only a performance audit of the ministry and the regulator, while the operator in question was subject to a financial audit.

"The CAG has recommended audit exceptions to costs on different counts to the tune of $970 million," Deputy CAG P. Mukherjee told reporters here, after the report was tabled. Mukherjee, however, did not elaborate on how the figure was arrived at.

The report has come at a time when a host of market research institutions and rating agencies have come down heavily on the policies governing India's oil sector, calling it a "lost dream" with some even assigning it an "underweight" status.

The audit report also observed that the pricing mechanism for crude from the fields has not yet been finalised and approved by the petroleum ministry, leaving scope for much ambiguity.

"The production sharing contract provisions relating to pricing and sale of crude oil and condensate may be followed and a decision on pricing and sale of crude oil and condensate may be taken at the earliest," the audit report added.

Under the production sharing contract, Reliance and its partners, British oil major BP and Canada's Niko Resources, are allowed to recover all capital and operating expenditure from the sale of oil and gas before sharing profits with the government.

The report found the petroleum ministry at fault in declaring the entire 7,645 square kilometre KG-D6 block area as the discovery area.

The audit report also asked the oil ministry and Reliance Industries to resolve their differences at the earliest over the estimates of reserves and take appropriate action to increase production - earlier targeted at 80 million units per day.

As regards pricing, the government had fixed $5.61 per unit of gas from normal areas with effect from Nov 1, and said a premium will be paid for discoveries from ultra and deep water areas, but without spelling out the details on how it will be calculated.

Most of exploration by Reliance-led consortium is in deep and ultra deep areas.

In conclusion, the report said: "Audit examination revealed that there was scope for strengthening the production sharing contract regime and implementation to ensure the best interest of the government of India as owner of natural resources were adequately protected."

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