The Mukesh Ambani-owned Reliance Industries Limited (RIL) is in for more trouble as the Comptroller and Auditor-General has questioned the Petroleum and Natural Gas Ministry over the recent gas price increase and wanted to know the steps taken to ensure that the operator (RIL-BP) delivers gas at $4.2 mbtu as per the approved production plan.

Virtually questioning the Rangarajan formula, the CAG has taken serious note of the price revision done in July and sought to know why the Ministry has not exercised its right to fix the price under Article 21.6.3 of the production sharing contract (PSC) for the KG-DWN-98/3 block.

In its August 14 communication, the Office of the Principal Director of Audit, Economic and Service Ministries has sought to know the steps the Ministry has taken to make sure that the operator complies with PSC provisions and meets the Addendum to Initial Development Plan (AIDP) targets, given that technical reports have indicated that the operator has “not fulfilled” its obligations in respect of drilling wells. In view of the shortfall in gas production due to non-compliance with the production sharing contract and the ADIP, has the government “ensured that the operator delivers as per the approved production profile at the price fixed of $4.2 mbtu? asks the letter. “If not, reasons thereto, along with supporting documentation. If yes, orders/action taken by the Ministry may be detailed along with supporting documents.”

The CAG has also asked the Ministry to clarify why it has not exercised its right to fix price for the KD-D6 block in view of details of the ADIP, the statement of costs, expenditure and receipts and cost recovery statements and shortfall in production. “As per records made available for audit with reference to requisition 30, dated July 18, 2013, regarding revision of pricing of natural gas, the Petroleum Ministry initiated a proposal for the Cabinet Committee on Economic Affairs to fix a new price of domestic gas as per the recommendations of the Rangarajan Committee.”

As per provision 21.6.3 of the PSC, the formula or basis for the prices to be determined shall be approved by the government before the sale of natural gas to consumers. To grant approval, the government shall take into account the prevailing policy, if any, on the pricing of natural gas… and it may delegate this function to a regulatory authority. The basis for valuation of natural gas from the KG-D6 block has been regulated by the Ministry.

“In this regard, audit observed that while approving the AIDP for the KG-D6 in December 2006, the Directorate-General of Hydrocarbons considered rates between $4 and $5 per mbtu for a production profile up to 2020 and also worked out the government take on profit petroleum on these fixed prices. However, government is aware that the natural gas production from the D1-D3 gasfields is less than that approved by the managing committee,” the letter says. The average output during 2010-11 was 48.13 mmscmd against the approved production of 53.40 mmscmd; during 2011-12, it came down to 35.33 mmscmd, against 61.88 mmscmd.