The KG gas controversy now has some numbers to go by—the Comptroller and Auditor-General (CAG) of India has pegged "excess cost recovery" at $1,547.85 million (Rs 9307.22 crore). The numbers have been mentioned in a chapter of the CAG report that looked at Union government (civil) compliance issues for the financial year ending March 2015. This chapter pertained to the ministry of petroleum and natural gas; the report was released on Tuesday August 2.
The statements made in the report, albeit quite terse and insipid, are significant on two counts. First, the CAG had hitherto shied away from ascribing numbers; this is the first time that the aditor has pinned things down to specific numbers. And second, the national auditor has also said unequivocally that many of the issues that had been pointed out in the earlier audits still persist.
What the CAG has said this time
Most of the statements made in the chapter are a summary of the findings from 2011-12 and 2014, wrapped up thus: "The total financial impact of excess cost recovery during 2012-14 (the years for which audits were conducted for the report in question) on account of the earlier audit findings was $1547.85 million (Rs 9307.22 crore)." That's a roundabout way of putting things across; straight up: Reliance Industries Limited (RIL) owes the exchequer close to $1.6 billion.
This particular audit looked at revenues received and costs incurred during 2012-13 and 2013-14. The CAG found that non-compliance of the production sharing contract (PSC) persisted, and costs were being recovered by the operator—RIL—in spite of being clearly disallowed or simply not approved by the management committee (that approves these numbers). The audit also found instances of non-compliance of directives issued by the petroleum and natural gas ministry, and also those of instructions that were sent out by the directorate-general of hydrocarbons (under whose ambit the exploration and production of natural gas is carried out).
To cut a long audit short, the CAG dwelt on three expenditure heads. The first pertained to four gas discoveries (named D29, D30, D31 and D34). There were questions of relinquishing these over valid technical grounds. What the CAG found was that the operator—RIL—recovered costs from the D31 discovery even though it should have been disallowed. Moreover, RIL did not maintain separate records for each discovery. The CAG report said that RIL did confirm the relinquishment of D31, and pointed out that the cost recovery would now need to be reworked and reversed. Overall, RIL was yet to give up an area of 831.88 sq km contrary to the ministry's directives. But since RIL had paid fees of $3.32 million for this, the CAG report called for it to be adjusted.
In another instance, the CAG found that RIL had charged $4 million for services that were not utilised. This service (called drill stem test, or DST) was carried out in other blocks/areas, but the cost recovery was allocated to the KG-DWN-98/3 block (better known as the KG-D6 block). The third was about additional cost recovery of $10.12 million that were attributed to rig standby charges even though its upgradation could well have been done earlier.
All very unexciting issues and boring numbers—ones that obscure the real story.
Why "cost recovery" changes the premise of the debate
Most of the controversies related to the KG-D6 gas relate to the subject of "cost recovery". This is also at the heart of the larger debate about how PSCs are scripted and awarded.
For the uninitiated, a brief explainer would be helpful. There are two elements here: "cost petroleum" and "profit petroleum". Cost petroleum allows the developer (RIL here) to recover its costs initially by selling the gas. This appears fair since gas exploration is expensive and rather dissuading for a company unless it can recover the investments soonest. This done, the private party and the government then share the remaining profit petroleum at a predetermined ratio. Moreover, simply put, the cost petroleum is the total investments made divided by price per unit; so, the lower the price, the higher is the quantity. Here, the pricing itself is crucial because if the price is low, the private party would have to sell higher quantities to recover costs. Therefore, if the government-determined price is high, the private party needs to sell less gas initially.
So, where does it pinch the exchequer? To calculate the profit petroleum, it is not the total expenditure that is deducted from the total revenue (elementary maths)—it is the cost recovery amount that is subtracted. So, if the cost recovery is high, the profit petroleum is low. Now you know why the CAG has been repeatedly throwing a fit (not literally, of course) over the issue of cost recoveries. And also why activists have been equally incensed.
Take a look at the chart about the cumulative financial details of the KG-D6 block, and it will tell you the story in context. The total expenditure for this block stood at $11,057.29 million on March 31, 2014, and the total revenues were $11,231.56 million. The profit petroleum of $1,123.16 million was arrived at after deducting the cost recovery amount of $10,108.40 million. The CAG audit points out that the last amount is in excess of $1,547.85 million than what it should be. The Indian government's profit share is a minuscule $112.31 million, and that of RIL is $1,010.84 million.
The lopsided profit-sharing equations are a different debate altogether—one that is about the mindlessly-drawn up PSCs. This flaw was pointed out in the explosive CAG report of 2011-12. It was also reiterated by the Ashok Chawla Committee on allocation of natural resources which had remarked: "The relationship between the pre-tax IM (investment multiple) and the share of the contractor ‘profit petroleum’ changes dramatically once the pre-tax IM crosses 2.5, with the government’s share increasing from 28 per cent to 85 per cent. It is useful to remember that this schedule is bid by the operator, and not determined by the government."
In other words, the more the cost recovery by anyone, the less goes to the exchequer. And all this simply because the PSCs offer no incentive to private operators to cut down on costs.
Does this report change things?
In terms of numbers, not much really. Most of it is only a reiteration of the two earlier audits, with the only palpable difference being the ascribing of a figure. But any would argue that innumerable other heads of expenses from earlier audits have not been taken into account here.
The most significant bit is a word of caution about a subject that is related, but indirectly. The CAG audit has remarked that if the independent report on the verification of allegations made by the Oil and Natural Gas Corporation (ONGC) is accepted at the recommendation of the one-member committee that is currently studying it, then the financials of the game would change adversely (against RIL). The report in question is that of DeGolyer & MacNaughton (D&M), which submitted its findings on the dispute in November 2015. The D&M report itself was a fallout of a Delhi High Court directive on constitution of an independent panel (by the consensus of both ONGC and RIL). If the Justice AP Shah panel goes by the D&M report and the ministry accepts it as well, then all the numbers will go haywire with retrospective effect (since April 2009 when production commenced).
RIL would be more worried about the Shah panel's words, than the CAG's numbers.
