CAG And ‘Reliance’

Looting the KG Basin


The Comptroller and Auditor General (CAG) has now exposed how Reliance, in collusion with the Central Government, siphoned off money from KG basin, misled the country, looted natural gas, violated all its contractual commitments and caused serious damage to national interests.

CAG has brought out that Reliance, acting as a rogue operator, held the country to ransom, while the Government not only did not impose any penalty, but instead kept on giving into its wishes.

CAG has found the following :
1)    Reliance hugely overestimated the reserves.
2)   Reliance hugely increased its capital expenditure, which is cost recoverable.
3)   Most of the procurement made was over-invoiced.
4)   Reliance miserably failed to adhere to its production commitments.
5)   Reliance did not relinquish its fields as required by the contract.
6)   Reliance did not pay the full profit petroleum to the Government.

CAG starts its report by stating that Reliance did not cooperate with the audit, did not provide several important documents and records and also desperately tried to mislead the CAG by providing wrong information. This is despite the fact that audit by a government agency is a requirement under the Government-Reliance Contract (the PSC), and CAG has full right to examine the operation of the PSC since it impacted nation's resources and government revenues. (Paras to

CAG has stated that in complete violation of the contract (PSC), Reliance was allowed to retain the entire block area till as late as 2013, despite the fact that they had to relinquish 50% of the fields by 2005 and a majority of the remaining fields by 2007. They were allowed to retain the entire area in gross violation of the PSC by the Ministry and the DGH. CAG also points out that DGH revised its position in April 2013 and asked for relinquishment as per the PSC. However, with regards to the lucrative fields referred to as D29, D30 and D31, the Minister of Petroleum (Mr Moily) overruled the DGH and allowed Reliance to retain these fields. The CAG has stated that the actions of the Minister were against the technical advice of the DGH and would have a significant financial impact. (para 2.5.2 page 26 to 28)

It may here be pointed out that after the DGH stuck to its view that Reliance had not done the necessary exploration tests (which were a PSC requirement) and had to relinquish the fields, the UPA Government in its last days, while the model code of conduct was in force, moved a proposal for amendment of the PSC in order for Reliance to retain these fields. Though the said proposal could not be cleared, it shows that the DGH was right in its understanding of the PSC and the Government is desperate to bail out Reliance.

CAG points out that in 2004, Reliancel had filed an Initial Development Plan (IDP) as per the PSC that envisaged an expenditure of $2.39 billion and a production of 40 mmscm per day of natural gas. This was based on its claim that it has calculated the reserves with the best of studies by international experts. DGH, based on this, stated that the Original Gas in Place (OGIP) is 5.45 TCF with recoverable reserves of 3.81 TCF.

However, within 2 years, in 2006, Reliance filed an Addendum to the IDP (AIDP) stating that after more exploration it has come to know that OGIP reserves are actually 14.16 TCF with recoverable reserves of 12.04 TCF (four times the number given just two years ago with much fanfare). Therefore, Reliance stated that the expenditure be allowed to be increased to a whopping $8.4 billion and that they will produce 80 mmscm per day of natural gas. The Ministry and the DGH approved this AIDP in haste.

Everybody knows that this AIDP is the first major step by Reliance in this sorry saga of deceit and fraud. Reliance stated that gas reserves are 14.16 TCF, however now it states that reserves are only 3.6 TCF (OGIP). So either Reliance was lying through its teeth in 2006 to quadruple its sanctioned capital expenditure (which it has siphoned off) or is now deliberately hoarding the gas till its demand for price increase is met.

CAG points out that today the production is only a fraction of what Reliance had committed and yet the Government has not been able to impose any penalty on Reliance. Only on some part of it, Reliance has been denied cost recovery for the shortfall. CAG has noted with concern the declining production in D1-D3 fields. It has noted that Reliance has failed to adhere to the AIDP targets in terms of wells to be drilled and connected the gas production rate. Further the CAG has rejected Reliance's argument that the PSC does not stipulate that production has to be as per AIDP. CAG has noted that as per Articles 10.9, 10.12 and 10.13 of the PSC, the contractor has specific obligations and commitments as per the PSC. CAG has also noted that in spite of the government direction to Reliance to remit the additional profit petroleum within 30 days consequent to disallowing cost recovery of $1.7 billion, Reliance has not done so till date and has instead invoked arbitration. CAG has also noted with concern that the government has not been able to enforce its decisions in this matter. (para 2.6 page 28 to 38)

As has been brought out by the last CAG report of 2011, the operator of the field has great incentive to increase its capital expenditure (whose cost is recoverable) since it allows the operator to increase its share of profits enormously and deny the government of its share in the profits from natural gas. CAG in this latest report has found as to how Reliance indulged in extravagant expenditure and inflated its costs (gold-plating), in order to make illegitimate profits and defraud the government. In addition to that, the CAG has found that in violation of the Contract, the Management Committee (that includes Government representatives) completely failed to exercise its oversight over the expenditures.

As per the PSC, Reliance is required to place orders for its plant, machinery and other requirements through international competitive bids. In its 2011 report, CAG had pointed out that bids were arbitrarily rejected to favour some parties. Just one company namely Aker group got 8 out of 10 contracts. CAG had specifically mentioned 'serious deficiencies' in the award of $1.1 billion order for a floating production, storage and offloading (FPSO) vessel from Aker Floating Production, which had no prior experience of FPSO and was set-up after the tender had been floated. CAG also points out that many of the single bid contracts were handed out to the Aker Group companies amounting to more than $2 billion.

CAG, in its latest report, has attempted to calculate the inflation of costs in a few of the purchases made by Reliance:
a)   Reliance provided huge concessions to the vendor for Engineering, Procurement, Installation and Construction (EPIC) of offshore facilities. This amounted to 200 million Euros ($280 million). CAG has concluded that these concessions were outside the purview of the contract and a violation of the PSC and therefore should not be allowed for cost recovery. (para pages 44 to 50)
b)   Reliance made irregular payment of $45 million above the contract value for chartering the FPSO (Floating Production Storage and Offloading) to the vendors even though there was delay by the vendor and there was no such provision in the contract. (para pages 50 to 53)
c)   Irregular payment of Rs 111 crore ($19 million) was made by Reliance on Free Issue Material (material being arranged by Reliance and not the vendor) to the vendors even though they had not incurred any expenditure on these items. (para pages 54 to 56)
d)   Additional amount of Rs 489 crore ($82 million) was spent over the estimated cost by Reliance for the construction of the Offshore Terminal due to faulty planning and execution. (para pages 56 to 57)
e)   Reliance changed the terms of hiring the FPSO on payment of an additional $17.4 million to the vendor without sufficient justification. (para pages 58 to 60)
f)    There was improper expenditure of refurbishing of living quarters on the FPSO at a cost of $15 million. (para pages 60 to 61)
g)   Reliance never considered long term hiring of rigs which would result in substantial cost savings and incurred avoidable expenditure of $88.8 million. (para 2.7.4 page 61-62)
h) Reliance made irregular payment of bonus for rig movement to vendors totaling $2.8 million. (para 2.7.5 pages 65 to 67)
i)    Reliance made irregular payment of $15.5 million as uptime bonus to the FPSO vendors even though this was not provided for in the contract. (para page 67-68)
j)    Reliance paid $12.5 million as start up and production bonus to its employees even though the PSC does not provide for such payments. (para 2.9.8 page 88 to 90)

Thus the total inflated expenditure made by Reliance, on these major items, according to the conservative estimates of the CAG, is about $ 580 million.

a)   Reliance was charging the consumers a price of $4,205 per mmbtu even though the EGoM had fixed the price at $4.2 per mmbtu. This additional price resulted in excess billing of all consumers to the extent of $ 9.7 million for sale of natural gas until 2012-13. (para page 76-77)
b)   Reliance was charging a marketing margin of $ 0.135 per mmbtu from all customers even though there was no provision for making these charges either directly or indirectly under the PSC. In addition, they are also not including this amount as revenue for the purpose of cost recovery, royalty and profit petroleum in spite of directions from the Petroleum Ministry to do so. Based on sales till 2012-13, Reliance has thus collected marketing margin totaling $261 million in an irregular way. (para page 77 to 79)
c)   Upto the year 2011-12, CAG found that Reliance has booked expenditure of $ 101.4 million under "Corporate Office Support". This was earlier booked as"Parent Company Overheads". Even though this has been previously disallowed by the Management Committee, since such expenditures are not permitted under the PSC, Reliance continues to book these irregular expenditures. (para 2.9.2 page 82-83)
d)   Thus the total irregular expenditure made by Reliance, in the above category, as pointed out by the CAG, is $ 372 million.
e)   Reliance also did not produce records regarding expenditure of Rs 38.6 crore ($6.4 million) relating to interior decoration work in Gadimoga, the landfall point in Andhra Pradesh. It stated that these files are not traceable. In absence of these files CAG has refused to certify these expenditures. (para 2.3.3 page 19)
f)    Three wells were dug in violation of the PSC provisions by Reliance and its cost recovery was disallowed by the DGH and the government. Even though this decision was communicated to Reliance, it continued to claim cost recovery for these wells in its accounts for the years 2011,2012, 2013 and government was not able to enforce its decision. The total cost towards these wells is $160.8 million and cost recovery for this has to be disallowed. (para 2.4.2 pages 21-22)

In light of the above evidence of siphoning off huge sums of money, there is a clear suspicion that such amounts are being laundered and funnelled back into Reliance companies, which needs a thorough criminal investigation.

Indian High Commission in Singapore had written to the Central Government as far back as on 31st August 2011 requesting for such an investigation. The High Commission had stated that Rs 6530 crores have come into India from Bio Metrix Marketing Ltd, a one room company in Singapore that does not do any business. It was pointed out that this is a company with no assets, no equity and does not file an income tax returns in Singapore claiming to be a small company. Yet, this huge investment by this company of Rs 6530 crores is the single biggest FDI into India from Singapore. The High Commission had stated that all this money has gone into Reliance group of companies in India with the major chunk going to Reliance Gas Transportation Infrastructure Ltd which is a company 100% owned by Mr Mukesh Ambani personally. The Commission had pointed out that one Mr Atul Shanti Kumar Dayal effectively owns this company Bio Metrix (which has now closed down). Mr Dayal is nothing but a front for Reliance since he is a Director in 32 Reliance group of companies. Thus it became absolutely clear that Reliance is laundering its ill-gotten profits from KG Basin through Singapore and depositing the same into accounts of Mr Mukesh Ambani. On being asked as to the status of the investigation, the Government had told the Supreme Court in March 2014 that investigation is still going on.

From the latest CAG report, it is clear that Reliance has persistently violated its production sharing contract (PSC) with the Government and defrauded the nation. The Government instead of terminating the PSC, has allowed Reliance to siphon off huge amounts of money and showered them with undue benefits. The report of the CAG proves the facts argued on behalf of the PIL petitioners before the Supreme Court, and also the contents of the FIR registered by the Anti-Corruption Branch of Delhi.

Also, recently public sector 'navratna' ONGC (which holds the neighbouring KG Basin block) has been forced to go to Delhi High Court against its own government by stating that Reliance has simply stolen natural gas worth Rs 30,000 crores from its block and the Ministry & DGH have not taken any action despite ONGC's complaints. Mr Moily was furious with ONGC and on May 22, 2014 (just before new minister took over) wrote a big note calling for an inquiry why ONGC dared to escalate matters. Will the new government also target those who take on Reliance? And as the IB report indicates, will anyone who speaks against the loot of natural resources be termed as anti-national?

CAG has pointed out that government had itself told the Parliamentary Standing Committee on Petroleum (which gave a scathing report against Reliance) that the only remedy in case of default by the operator is to terminate the PSC. However no such action has been initiated.

Also, it has now become apparent that this current government is pushing for increasing the prices of gas as demanded by Reliance. In light of this CAG report, there is no justification for increasing the prices of gas that would only benefit this rogue operator and would have disastrous impact on the economy. The matter of gas prices is also sub-judice before the Supreme Court. The investigation by the ACB of Delhi is also under progress and the Delhi High Court has directed the Government and Reliance to cooperate with the investigation. If the prices are now increased, they would only show that the NDA government too is in the same grip of crony capitalism, just as the UPA government was.

Vol. 47, No. 1, Jul 13 - 19, 2014