The Manmohan Singh government, currently under siege on the issue of corruption, came in for another strong indictment from the Comptroller and Auditor General of India (CAG) which charged the Petroleum and Natural Gas Ministry and the Directorate General of Hydrocarbons (DGH) of shelling out "undue benefits" to Mukesh-Ambani owned Reliance Industries Limited (RIL) for its blocks in the KG basin.

The CAG also was "highly critical" of government oversight, particularly on high value procurement decisions, and sought an 'in-depth review' of 10 contracts, including eight awarded to Aker Group by RIL on a single-bid basis. "We recommend that in case of the KG-DWN-98/3, the Ministry should review in depth the award of 10 specific contracts on the basis of a single financial bid. We are not even remotely suggesting that the operator should follow government procurement procedures, yet any commercially prudent private acquisition would also attempt to generate competition and thereby obtain the most competitive price. Such concern for a cost effective acquisition is not perceptible in the aforementioned process," it noted in the report placed in Parliament on the concluding day of the Monsoon session.

The CAG said the contractor (RIL) was allowed to enter the second and third exploration phases of the blocks without giving up 25 per cent of the contract area in each, by treating the entire area as a discovery area. Coming down heavily on DGH, the watchdog for oil and gas exploration, the CAG said it should have stopped RIL from proceeding on the next phase of production in the light of earlier violation of the contract. "We recommended that the Ministry of Petroleum and Natural Gas should review the determination of the entire contract area as a "discovery area" strictly in terms of the PSC provisions. Further it should delineate the stipulated 25 per cent relinquishment area at the time of the conclusion of the first and second exploratory phases, and then correctly delineate the "discovery area" strictly based on the PSC definition, lined to well or wells drilled in that part, without considering any subsequent discoveries (which would be invalid on account of non-compliance with PSC provisions).

The CAG said the Petroleum Ministry and DGH were ill-equipped to oversee the PSCs with private players and was of the view that DGH should have stopped RIL from proceeding with phase 2. This block consists of 7,645 sq km in the Bay of Bengal after the giant Dhirubhai-1 and 3 gas finds were made in 2001. Interestingly, during this period the Petroleum and Natural Gas Ministry was headed by Murli Deora the DGH by V.K. Sibal who is already facing a CBI inquiry.

The CAG questioned the 'reasonableness of costs incurred' in the 2007/08 procurement activity in the area and said there was enough ground to revisit the profit sharing mechanism. Pointing the RIL KG basin case, the CAG report states that the Petroleum Ministry and RIL both ignored the 'production-sharing contract' allowing the company to hoard exploitation acreage. The CAG found that by April-May 2005, the DGH did a U-turn away from its own rules to favour RIL in this regard.

Two other fields — Barmer Oil fields in Rajasthan operated by Cairn India and the Panna-Mukta and Tapti (PMT) fields, where State-run Oil and Natural Gas Corporation (ONGC) is the majority-stake holder, have also been studied by CAG. Without quantifying losses, the report says the government suffered substantial royalty losses from the PMT fields. ONGC holds 40 per cent in the PMT field, while British Gas India and Reliance Industries hold 30 per cent each.

However, CAG did not specify if the capital expenditure for KG-D6 being raised from $2.4 billion proposed in 2004 to $8.8 billion in 2006 was unjustified or inflated. It said the approval of estimates (first $2.4 billion and then $8.8 billion in 2006) "does not constitute acceptance of the cost projects", which can be done only through an audit of the actual cost incurred.

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