The comptroller and auditor general (CAG) office has ordered a review of the production sharing contracts (PSC) between the government and energy companies for oil and natural gas exploration.

The order comes in the wake of the CAG's contention that the conracts are designed to benefit private players at the cost of the government. The apex auditor has made the observation to highlight the alleged irregularities committed by  Reliance Industries Limited (RIL) and Cairn Energy in the Krishna-Godavari basin and Rajasthan respectively under PSC cover.

The PSC allows the private company to take a greater  share of the profits under the investment multiple (IM) clause - IM being the ratio between the net cash income and the exploration and development costs. So, if the company were to show a higher capital expenditure, the share of the profits for the government would come down proportionally.

CAG had rapped the oil ministry and the directorate general of hydrocarbon (DGH) on Sunday for letting RIL and Cairn overbill the government for their explorations.

Meanwhile, Tapan Sen, a CPI(M) Rajya Sabha MP, told Governance Now that he had been writing to the prime minister's office on the issue since 2006.

"The PMO was kept in the loop. But it chose to turn a blind eye to benefit the corporate," Sen said.

CAG has claimed that RIL doubled its exploration costs in the KG 6 gas basin, a charge that the MUkesh Ambani-promoted company has denied.

In its draft audit report of KG-D6 block CAG said the ministry and DGH also bent the rules to grant "huge benefits" to Reliance when it was allowed to retain entire block, but said gains cannot be quantified.

"The increase in (Phase-1) cost from (USD 2.39 billion proposed in the) Initial Development Plan (of May 2004) to (USD 5.196 billion) in the addendum to the Initial Development Plan is likely to have a significant impact on the government of India's financial take.

"However, at this stage, based on the information provided, we are unable to comment on the reasonableness, or otherwise of the increase in cost, both overall and in respect of individual line items," accounting watchdog CAG said in a draft report sent to the Oil Ministry for comments.

As per the Production Sharing Contract (PSC), the total contract area of Cairn India-operated RJ-ON-90/1 block in Rajasthan was 11,108 sq km. The oil ministry agreed to Cairn's request for grant of additional 852.2 sq km in August 2004 and 856 sq km in March 2005.

CAG in its draft performance audit of the Rajasthan block stated that according to the PSC, the government can extend the contract area to include a hydrocarbon reservoir that extends beyond the block boundaries.

"In our view, the contract area under the PSC is sacrosanct... It can by no means be argued that already discovered reservoirs extend over the entire extended area of 852.20 sq km (and) 856 sq km," it said.

On KG-D6, CAG said the submission of an addendum to the Initial Development Plan (IDP) instead of a revised comprehensive development plan, as well as lack of adequate details with regard to the Phase-II development cost of USD 3.3 billion, made it virtually certain that the operator will submit more addendums.

"The DGH also approved the Addendum to Initial Development Plan (AIDP), without questioning as to why the operator did not take action in line with the already approved IDP," it said.

The report has also said that the ministry and DGH allowed Reliance to enter successive exploration phases without the stipulated relinquishment of area and then allowed it to declare the entire contract area as "discovery area".

This was both "irregular and incorrect", since drilling of wells and consequential discoveries had not taken place in the major portion of the contract area, the CAG said.

"We recommend that government should re-examine delineation of the entire contract area as 'discovery area' and take immediate steps for relinquishment of excess area in line with provisions of the PSC, as also fix accountability for those responsible for this decision," it said.

The CAG said the benefit granted to Reliance is huge, but cannot be quantified. It also found a "similar irregular determination of the entire contract area" as 'discovery area' in the case of another block operated by Reliance, dubbed KG-OSN-2001/2.

The CAG's scope of audit covers the Production Sharing Contract (PSC) in respect of the KG-DWN-98/3 (KG-D6) block awarded to Reliance for two financial years -- 2006-07 and 2007-08 -- with access to the records of previous years linked to the transactions of these years.

Reliance, however, said that "as a responsible operator, it has fully complied with the requirements in the Production Sharing Contract (PSC) at all times in conducting petroleum operations, and refutes any suggestion to the contrary."

As per the Production Sharing Contract (PSC), the total contract area of Cairn India-operated RJ-ON-90/1 block in Rajasthan was 11,108 sq km. The oil ministry agreed to Cairn's request for grant of additional 852.2 sq km in August 2004 and 856 sq km in March 2005.

CAG in its draft performance audit of the Rajasthan block stated that according to the PSC, the government can extend the contract area to include a hydrocarbon reservoir that extends beyond the block boundaries.

"In our view, the contract area under the PSC is sacrosanct... It can by no means be argued that already discovered reservoirs extend over the entire extended area of 852.20 sq km (and) 856 sq km," it said.

On KG-D6, CAG said the submission of an addendum to the Initial Development Plan (IDP) instead of a revised comprehensive development plan, as well as lack of adequate details with regard to the Phase-II development cost of USD 3.3 billion, made it virtually certain that the operator will submit more addendums.

"The DGH also approved the Addendum to Initial Development Plan (AIDP), without questioning as to why the operator did not take action in line with the already approved IDP," it said.

The report has also said that the ministry and DGH allowed Reliance to enter successive exploration phases without the stipulated relinquishment of area and then allowed it to declare the entire contract area as "discovery area".

This was both "irregular and incorrect", since drilling of wells and consequential discoveries had not taken place in the major portion of the contract area, the CAG said.

"We recommend that government should re-examine delineation of the entire contract area as 'discovery area' and take immediate steps for relinquishment of excess area in line with provisions of the PSC, as also fix accountability for those responsible for this decision," it said.

The CAG said the benefit granted to Reliance is huge, but cannot be quantified. It also found a "similar irregular determination of the entire contract area" as 'discovery area' in the case of another block operated by Reliance, dubbed KG-OSN-2001/2.

The CAG's scope of audit covers the Production Sharing Contract (PSC) in respect of the KG-DWN-98/3 (KG-D6) block awarded to Reliance for two financial years -- 2006-07 and 2007-08 -- with access to the records of previous years linked to the transactions of these years.

(With PTI inputs)