Reliance Industries has said the Comptroller and Auditor-General of India has not found any false inflation of its KG-D6 gas field costs or any dishonesty in developing the nation’s largest gas fields.
Replying to the draft audit report of the CAG, which accused it of being a beneficiary of undue favours from the Oil Ministry and its technical arm, the DGH, Reliance said, “Corporate rivalry motivated a few people with vested interests to indulge in a vicious smear campaign.”
Without naming anyone, it said “baseless insinuations were made through public advertisements questioning the increase in cost estimates” from $2.4 billion proposed in 2004 to $8.8 billion in 2006 due to a 250 per cent jump in the cost of services between the period of initial assessment and the actual commencement of field development.
The CAG, in its draft report, had said the increase in field cost would mean a lower profit take for the government.
“There is no finding or observation in the CAG’s draft audit report that Reliance has falsely inflated its contract cost or that it has dishonestly colluded with any of its suppliers to have them inflate the cost of the goods and services supplied by them,” Reliance said.
After an extensive and detailed audit process, in which eight CAG representatives spent some six months on Reliance premises, “CAG does not state that any evidence exists to support any case that the contract cost has been dishonestly inflated.”
In its voluminous 250-page reply, the Mukesh Ambani firm asked the CAG to state in “clear terms” in the final report that the contract cost has not been dishonestly inflated.
Stating that the CAG neither had any expertise in hydrocarbon exploration nor knowledge of Good International Petroleum Industry Practices, Reliance said the auditor has confused the authenticity of expenses with desirability of expenses.
The CAG, it said, had focused on “a series of minor, and in some cases trivial, observations concerning the procurement activities” for development of the D1-D3 gas fields and the MA oilfield in the KG-D6 block.
Its observations on the “reasonableness” of the cost incurred relate to procurement contracts whose total value is Rs 1,500 crore out of the total investment of Rs 35,000 crore in the block.
The CAG audit “fails to notice that the overall costs of development compare favourably to all similarly situated projects — but makes much of perceived failure to follow government-like procedures,” Reliance said.
“Using the benefit of hindsight, the CAG cannot question the technical and operational judgements of the operator that were in effect the best possible judgements at the time, based on the best information available,” it added.
Reliance said the procedure followed for procurement of equipment and services for the field development was in complete compliance with the provisions of the Production Sharing Contract (PSC).
Inflating capital investment, it said, does not mean higher profits for the operator. If an operator spends Re. 1 more, the amount of petroleum available for production sharing is reduced by a corresponding amount of Re 1. A contractor like Reliance gets 90 per cent of the profit available for sharing with the government in the initial period, so if the cost is raised by Re. 1, his profit petroleum is reduced by Re. 0.90.
“At the end of the day, by spending Re. 1 more than is necessary, the contractor ultimately loses Re. 0.90 as the reduction in the amount of profit petroleum taken by the contractor,” it said.
Reliance said, “A number of the sections in the CAG’s draft audit report demonstrate a comprehensive misreading and misinterpretation on the part of authors of the nature of the project, the norms of good industry practice that apply to development of such fields and issues that should have been kept in focus and which are critical to assessment of whether the revenue interests of the government have been properly protected.”
The KG-D6 project has been described as “one of the best executed deep water projects, using the best technology available” and has led to saving of $25 billion in foreign exchange that the country would have spent on importing energy in the absence of Reliance gas.