No need for CAG audit of CBM blocks: Rangarajan panel
New Delhi: Amidst a row over CAG audit of Reliance Industries' KG-D6 gas block, the Rangarajan Committee has said official auditor CAG need not audit RIL's CBM blocks as they are governed by different contractual regime.
A panel headed by Chairman of Prime Minister's Economic Advisory Council, C Rangarajan, said in its report last week that Coal Bed Methane (CBM) blocks do not have elements of cost recovery and so CAG audit "may not be required".
In conventional oil and gas blocks like eastern offshore KG-D6, companies are allowed to first recover all their cost before government gets a share of profit. This cost-recovery model was criticised by CAG which said it encouraged operators to keep raising cost to defer government profit.
However, the government had bid out blocks for extraction of gas from coal seams, called CBM, based on the share of production a company offered from first day of production. The firm bidding the highest, got the blocks.
"As the element of cost recovery is not applicable to CBM blocks and nominated (oil and gas) blocks (given to ONGC and OIL), CAG audit for such blocks may not be required, and production monitoring through field surveillance may be considered adequate," the panel said in the report.
RIL, which had over the past few months bickered over the scope of second round of audit of its spending on the flagging KG-D6 fields, has two CBM blocks in Sohagpur in Madhya Pradesh for which it is seeking a price of almost USD 13 per million British thermal unit.
Even on conventional oil and gas blocks, the Committee said CAG should carry out audit "with a period of two years" of closing of annual accounts.
RIL had contended that the government can appoint an auditor, including CAG, to verify its expenses within two years of the spendings as had been provided in the Production Sharing Contract (PSC). Last month it relented to allow the official auditor to carry out scrutiny for 2008-09 and 2009-10 even though it was time-barred.
"Audit by CAG may be carried out within a period of two years of the financial year under audit, as specified in PSCs," the Rangarajan panel said. "Further, where investment is huge (a USD 1 billion threshold may be adopted), a suitable mechanism of concurrent audit may be considered."
It upheld RIL's contention that CAG audit should be as per Section 1.9 of the PSC that provides for only a financial scrutiny and not a commentative performance audit which can question technical decisions.
"Audit by CAG under Section 1.9 of the PSC should be prior to performance audit of the (Oil) Ministry so that corrective actions emerging from CAG audit could be taken by the government in order to protect the government revenue," it added.
The Rangarajan Committee suggested CBM-like bidding for future auction of oil and gas block. If adopted, this model would not require CAG audit of spending, it said.
"The Committee recommends a new contractual system and fiscal regime based on a post-royalty revenue-sharing to overcome the difficulties in managing the existing model (based on cost-recovery mechanism)," it said.
The extant fiscal model had been found to be a major bottleneck in expeditious performance of exploratory work, the report said, adding that the new model proposed would overcome the constraints inherent to the cost-based monitoring mechanism of the existing PSC.
For future oil and gas block auction, the Committee said bidders should be asked to quote the government's share of oil and gas production. The government share quoted should be post payment of royalty.
This, it said, would help the government capture economic rent in the form of royalty and revenue share of hydrocarbons right from the onset of production.
"The government will be able to secure a share of any windfall profits accruing on account of a price surge or a geological surprise by way of a huge hydrocarbon find," the panel's report added.