The Krishna-Godavari gas basin controversy now has some numbers to go by – the Comptroller and Auditor-General of India has pegged “excess cost recovery” from the KG-D6 gas block operated by Reliance Industries Limited at $1,547.85 million or Rs 9307.22 crore.

The numbers have been mentioned in a chapter of the CAG report released on August 2. 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.”

That’s a roundabout way of putting things across. Straight up: Reliance Industries Limited owes the exchequer close to $1.6 billion.

What is ‘cost recovery’?

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 in this case) to first recover its costs by selling the gas. This appears fair since gas exploration is expensive and could dissuade 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.

Simply put, the cost petroleum is the total investment made divided by the price of gas per unit. The lower the price, the higher is the quantity of gas that the private party would have to sell to recover its costs.

If the cost petroleum is high, the profit petroleum is low. This is because the profit petroleum is calculated not by deducting the total expenditure from the total revenue made by selling gas, but by deducting the cost petroleum.

Where does it pinch the exchequer?

Take a look at the chart about the cumulative financial details of the KG-D6 block.

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.

Reliance pegged the cost petroleum, or cost recovery, at $10,108.40 million.

The profit petroleum calculated after deducting the cost recovery came to Rs $1,123.16 million.

But the CAG audit says the cost recovery is $1,547.85 million in excess of what it should be.

The higher the cost recovery by the company, the lower the profit that goes to the exchequer.

Further, the profit-sharing is itself lop-sided: the government’s profit share is a minuscule $112.31 million, and that of RIL is $1,010.84 million.

This is because of a production sharing contract where slabs of profit-sharing are designed so that the more capital intensive the project, the lower the government’s share of profit petroleum. 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.

What the CAG has said

The statements made in the report are significant on two counts.

First, the CAG had hitherto shied away from ascribing numbers to the “excess cost recovery” by RIL. This is the first time that the auditor has pinned down a specific number: $1.6 billion.

Second, the national auditor has also said unequivocally that many of the issues that had been pointed out in the earlier audits still persist.

For instance, the CAG found that non-compliance of the production sharing contract 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.

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.

The company has so far not responded to requests from this reporter for comment about the findings of the CAG.

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 to the “excess cost recovery”.

The most significant part of the report is a word of caution about a subject that is indirectly related to the cost recovery.

The CAG audit has remarked that if the independent report on the verification of allegations made by the Oil and Natural Gas Corporation is accepted, then the financials of the game would change adversely against RIL.

The report in question is that of a consultant called DeGolyer & MacNaughton, which submitted its findings on the dispute in November 2015. The D&M report itself was a fallout of a Delhi High Court directive that an independent panel should be constituted (with the consensus of both ONGC and RIL).

The D&M report had stated that 11.122 billion cubic metres of natural gas had “migrated” from ONGC’s 98/2 area to the adjoining KG-D6 block of RIL. The volume of the gas belonging to ONGC was $1.7 billion (Rs 11,055 crore).

If the 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 from the KG basin commenced.

RIL would be more worried about the Shah panel’s words than the CAG’s numbers.

Subir Ghosh is a Bengaluru-based journalist and researcher.