NEW DELHI: Reliance Industries Ltd's investment plan for bringing its showcase Andhra offshore gas fields to production increased by almost $3 billion, a comparison between the cost of major elements of the company's initial and revised estimates shows.
Comparison of 13 elements of the two plans for D1 and D3 fields in the Comptroller and Auditor General's draft report shows estimates increasing from $2.39 billion to $5.19 billion. The comparison, carried as 'Annexure 4.3' in the report, a copy of which is available with TOI, points to "abnormal upward" revisions "without providing basis of such estimations".
Reliance discovered the field in 2002 and submitted the initial plan in 2004, envisaging a production of 40 mcmd (million cubic metres per day) of gas. It revised the plan in 2006, with an output of 80 mcmd.
Higher capex reduces government's returns from a field since companies are allowed to recover their costs before calculating profit. The annexure clearly puts a figure to the actual increase in Reliance's capex estimate. But the CAG report itself - first reported by TOI on June 13 - merely said the auditor is "unable to quantify" the government's loss which could be "huge".
Reliance did not respond to queries from TOI. Senior company executives, while maintaining they hadn't received the CAG report from the oil ministry, said the substantial rise in global rates for hiring drilling rigs, oilfield services and installations besides ships and helicopters contributed to the higher capex.
"The daily rate for a rig shot up to $500,000-550,000 around 2006 from $110,000-120,000 in 2004. Similarly, services cost of $125,000 per day in 2004 and rose to $150,000. With such a cost escalation, which is beyond RIL's control, obviously price of drilling a well would go up," an executive familiar with the fields planning said on condition of anonymity.
He said the company had one development concept in 2003, just a year after the "frontier discovery". But with subsequent inputs - data and domain knowledge from international experts - a new design concept was required in tune with the higher potential.
"This too may have contributed to the higher cost... CA or any auditor should have an understanding of the intrinsic characteristics of an industry before taking a critical view in isolation. There has been no wrong doing (in Andhra offshore field). Once we have a copy from the government, we will put all doubts to rest."
But the annexure points out delays in Reliance's tendering process and execution of contracts for engineering, design etc - activities that were under the company's direct control and may have contributed to the cost escalation.
Some of the major elements that saw substantial increase in costs are, development wells (from $944 million in initial plan to $1.16 billion in revised plan), production facilities ($1.34 billion-$2 billion), subsea control systems ($358 million-$722 million), deepwater pipeline ($142 million-$323 million), onshore terminal and site grading ($192 million-$550 million), control-cum-riser platform ($0-$446 million).
On development wells, CAG observed, "There was reduction in the number of wells from 34 to 22 in the revised FDP (field development plan) but cost per well was increased from $27.78 million to $52.94 million. Further, 18 wells were actually drilled till June 2009 with average cost per well of $56.8 million, ie actual cost more than double from FDP cost levels."
"Audit identified that one of the factors responsible for higher cost was non-finalisation of tenders, after bids invitation, for charter hire of deep drilling rigs... and piecemeal hiring," the annexure says on Reliance's project implementation.
Comparison of 13 elements of the two plans for D1 and D3 fields in the Comptroller and Auditor General's draft report shows estimates increasing from $2.39 billion to $5.19 billion. The comparison, carried as 'Annexure 4.3' in the report, a copy of which is available with TOI, points to "abnormal upward" revisions "without providing basis of such estimations".
Reliance discovered the field in 2002 and submitted the initial plan in 2004, envisaging a production of 40 mcmd (million cubic metres per day) of gas. It revised the plan in 2006, with an output of 80 mcmd.
Higher capex reduces government's returns from a field since companies are allowed to recover their costs before calculating profit. The annexure clearly puts a figure to the actual increase in Reliance's capex estimate. But the CAG report itself - first reported by TOI on June 13 - merely said the auditor is "unable to quantify" the government's loss which could be "huge".
Reliance did not respond to queries from TOI. Senior company executives, while maintaining they hadn't received the CAG report from the oil ministry, said the substantial rise in global rates for hiring drilling rigs, oilfield services and installations besides ships and helicopters contributed to the higher capex.
"The daily rate for a rig shot up to $500,000-550,000 around 2006 from $110,000-120,000 in 2004. Similarly, services cost of $125,000 per day in 2004 and rose to $150,000. With such a cost escalation, which is beyond RIL's control, obviously price of drilling a well would go up," an executive familiar with the fields planning said on condition of anonymity.
He said the company had one development concept in 2003, just a year after the "frontier discovery". But with subsequent inputs - data and domain knowledge from international experts - a new design concept was required in tune with the higher potential.
"This too may have contributed to the higher cost... CA or any auditor should have an understanding of the intrinsic characteristics of an industry before taking a critical view in isolation. There has been no wrong doing (in Andhra offshore field). Once we have a copy from the government, we will put all doubts to rest."
But the annexure points out delays in Reliance's tendering process and execution of contracts for engineering, design etc - activities that were under the company's direct control and may have contributed to the cost escalation.
Some of the major elements that saw substantial increase in costs are, development wells (from $944 million in initial plan to $1.16 billion in revised plan), production facilities ($1.34 billion-$2 billion), subsea control systems ($358 million-$722 million), deepwater pipeline ($142 million-$323 million), onshore terminal and site grading ($192 million-$550 million), control-cum-riser platform ($0-$446 million).
On development wells, CAG observed, "There was reduction in the number of wells from 34 to 22 in the revised FDP (field development plan) but cost per well was increased from $27.78 million to $52.94 million. Further, 18 wells were actually drilled till June 2009 with average cost per well of $56.8 million, ie actual cost more than double from FDP cost levels."
"Audit identified that one of the factors responsible for higher cost was non-finalisation of tenders, after bids invitation, for charter hire of deep drilling rigs... and piecemeal hiring," the annexure says on Reliance's project implementation.
