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CAG recommends Govt needs to recover USD 161 mn disallowed cost of three oil wells

By TIOL News Service

NEW DELHI, DEC 18, 2014: MINISTER of State (I/C) for Petroleum & Natural Gas, Mr Dharmendra Pradhan informed the Rajya Sabha in a written reply yesterday that Comptroller and Auditor General’s (CAG) report No. 24 of the year 2014 covering period 2008-09 to 2011-12 on Hydrocarbon Production Sharing Contracts, placed in the Parliament on 28th November 2014, has made certain observations on the expenditure and claims by the companies in respect of block, KG-DWN-98/3 [Contractors -Reliance Industries Ltd, Niko (NECO), British Petroleum Exploration (Alpha) Ltd.] ; Field, Panna-Mukta & Mid & South Tapti Fields [Contractors: BG Exploration & Production India Ltd, Reliance Industries Ltd, Oil and Natural Gas Corporation Ltd.] and block RJ-ON-90/1 [Contractors: Cairn India Ltd. & Cairn Energy Hydrocarbon Ltd. & Oil and Natural Gas Corporation Ltd.].

The CAG has recommended that MoPNG may ensure that the disallowed cost of three wells amounting to USD 160.81 million is recovered.

++ Normally the entire amount of USD 427.03 million would require to be disallowed for cost recovery since these activities were not in line with PSC provisions. However, from a pragmatic point of view, it has to be kept in mind that the exploration has resulted in a commercial discovery viz. D34 for which a development plan has already been approved. In three other cases viz. D29, D30 and D31 discoveries, review of commerciality is under finalisation. At this stage, keeping in mind the national interest and energy security, Audit recommends that MoPNG should accept sharing of exploration cost of only those of the above mentioned wells which resulted in a commercial discovery and disallow the cost recovery of USD 118.99 million already effected by the Operator on the remaining wells. As regards the well cost in respect of D29, D30 and D31 discoveries, since the matter regarding the DoC is under consideration in MoPNG, the same may also be considered for disallowance in case they are not found to be commercially viable subsequently.

++ Engineering, Procurement, Installation and Construction (EPIC) contract of offshore facilities was awarded to M/s Allseas Marine Contractors (AMC) at a lump sum and provisional price of Euro 699.09 million and Euro 64.99 million respectively. Due to various factors attributable to Operator, AMC and its sub-contractors, AMC could not achieve the milestones. Concessions of Euro 200 million approximately given to AMC by the Operator in order to expedite completion of the works were not allowable for cost recovery as the concessions were not in line with EPIC contract including provisions relating to `change in contract price`; and were in violation of Section 3.2 (ix) of Appendix C to the Accounting Procedure to PSC which states that, "amounts paid with respect to non-fulfilment of contractual obligations are not recoverable and not allowable".

++ Within four months from the date of signing the agreement, the Operator requested the FPSO vendor to extend the dry docking life of the FPSO from ten to fifteen years for a one-time compensation of USD 17.36 million. Since the FPSO was chartered for 10 years only, extension of dry docking to fifteen years is not justified and the cost recovery of USD 17.36 million may be disallowed.

++ Despite the FPSO vendor being unable to meet its contractual obligations, the Operator re-scheduled the date of first production of oil (DFPO), without imposing any penalty. In addition, though there was no provision in the agreement which entitled the vendor to any compensation or incentive for expediting deliveries, the Operator paid compensation of USD 45 million to the vendor for early mobilization of the vendor`s commissioning team and expediting deliveries of top side modules etc., which may be disallowed.

++ The FPSO has been leased for ten years. However, the Operator refurbished the existing living quarters and fabricated and installed additional living quarters, at a cost of USD 15 million with the intention to purchase the FPSO at a later date. Audit recommends that the cost recovery of USD 15 million may be disallowed.

++ As per the Onshore Terminal (OT) construction contract, no compensation was payable to the vendor on account of Plant and Equipment (P&E) provided by RlL in case the vendor was unable to mobilize the P&E. However, an amount of INR 22.7 million was paid to the vendor as compensation charges for Cranes which were hired by RIL by amending the contract to exclude these cranes.

++ In four cost-plus contracts relating to construction of OT awarded by RIL, in general, payment of compensation was to be made to the vendors only on the `cost` incurred by them. However, these contracts also provided for payment of mark-up to the vendor as a percentage of the value of free-issue material of some categories supplied by RIL such as cement, steel, etc. RIL incurred an expenditure of INR 1110.90 million on payment of such compensation.

++ Start-up and Production bonuses of USD 12.48 million were paid to employees from the revenue earned from the Block. Since the Start-Up and Production Bonus are onetime and of an ad-hoc nature, in Audit opinion, these bonuses should not be paid from the revenue earned from the sale of gas.

++ Despite having adequate drilling prospects and keeping in view the poor response received from the vendors for provisioning of the rigs indicative of the scarcity of deep-water drilling rigs, the Operator did not consider it prudent to consider the option of long-term hiring of the drilling rigs and availing the firm rate advantage of such long-term hiring. This resulted in additional expenditure of approximately USD 88.77 million in piece-meal hiring of deepwater drill ship "Deepwater Frontier" from M/s Transocean Offshore International Ventures Limited.

++ Operator paid bonus for time saved during the rig movement between wells with hanging Blow Out Preventor (BOP). As per the contract clause, any bonus payment was to take into account the sum total of time saved for all the operational activities for completion of a well rather than a single activity. Therefore, payment of bonus for rig movement with hanging BOP was not justified and resulted in additional expenditure of USD 2.83 million.

++ The Operator paid uptime bonus of USD 13.37 million to M/s. Aker Contracting FP AS, Norway (ACFP), which resulted in additional benefit to the vendor, as normally bonus payments are extra payments given as a reward or incentive for earlier completion of work or increase in production level, not for performing their contractual obligations. In this case, ACFP was contractually bound to make available FPSO during the charter period.

++ The PSC provisions relating to pricing and sale of Crude Oil and Condensate may be followed and decision on pricing and sale of Crude Oil and Condensate may be taken at the earliest.

++ Operator is charging the gas price at the rate of USD 4.340 mmbtu which includes 0.135 USD /mmbtu towards marketing margin from its consumers. Marketing margin is not being considered as revenue for the purpose of Cost Petroleum, Profit Petroleum and Royalty while Contractor has collected an amount of USD 261.33 million on this account for the period 2009-10 to 2012-13.

++ Closing stock of crude and condensate had not been accounted for in the books of the JV. Consequently, cost recovery of USD 12.80 million towards the value of closing stock had not been adjusted for the years 2008-09 to 2012-13 and there was a short remittance of USD 0.14 million of Profit Petroleum of closing stock for the years 2008-09 to 2012-13.

 


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