The Comptroller and Auditor General of India (CAG) has “charged” the Petroleum and Natural Gas Ministry with showing “undue favour” to Cairn India Limited (CIL) and of using a “backdoor method” in allowing the company to conduct exploration activities, including granting it over 856 sq. km. of additional area for oil discovery in the Rajasthan block.

Accusing the Ministry of violating the Production Sharing Contract (PSC) terms, the CAG said: “The grant of additional area of 1,708.20 sq. km. beyond the contract area by the government was not in line with the provisions of the PSC, adversely affecting the sacrosanct nature of the contract area and its phase relinquishment,” it said in the draft report sent to the Petroleum and Natural Gas Ministry for comments.

The report is likely to be finalised soon and placed before Parliament during the monsoon session.

As per the PSC, the total contract area of the RJ-ON-90/1 block in Rajasthan, operated by CIL, was 11,108 sq. km. The Ministry had agreed to the company's request for an additional 852.2 sq. km. in 2004 and 856 sq. km in 2005.

“In our view, the contract area under the PSC is sacrosanct. The only scope for an extension of the contract area is in terms of Article 10.1 [Unit Development], which provides that if a reservoir is situated partly within the contract area and partly in an area where no PSC has been granted, the government will favourably consider extending the contract area to include the entire area of the reservoir, if so requested by the contractor. It can by no means be argued that already discovered reservoirs extend over the entire extended area of 852.20 sq. km. While there is some scope for considering reallocation of the area of 852.20 sq. km [stated to have been relinquished from the original area], the extension of 856 sq. km. is in no way covered by the terms of the PSC and amounts to a grant of “undue favour” to the operator [CIL],” the report states.

The report said the PSC provided for extension of the exploration by up to 36 months, subject to the approval of the Government of India, and also for an appraisal period of up to 30 months. In the case of CIL, the Ministry, when extending, in 2002, the stipulated exploration period of seven years by 36 months, said that the PSC's provision for extending the exploration period by a maximum of 30 months for appraisal work on discovery would not be applicable. However, it “failed” to have the PSC suitably amended. The Ministry granted successive extension without considering the already stipulated condition.

The CAG said CIL made fresh discoveries during the appraisal and development phases in areas already delineated for development. “This represented a ‘backdoor method' for [allowing] further exploration activities, when the exploration period had come to an end. The development area was, evidently, irregularly delineated and included excess area beyond that properly associated with the declared commercial discoveries and the associated development plans.”