CAG: Reliance increased the capex cost

Stocks

oi-Shoaib MD

By Shoaib Md

Published: Thursday, June 23, 2011, 11:25 [IST]

Reliance Industries production cost increased by $3 billion for its Andhra Offshore gas fields. This was found on comparison between the cost of major elements that the company's initial and revised estimates showcases, according to reports by a section of the media.

The Comptroller and Auditor General's draft report shows on comparisons between the 13 elements of the two plans for D1 and D3 fields. The reports annexure 4.3 show how the estimates increased from $2.39 billion to about $5.19 billion, according to Times of India.

The discovery of the oil field was made in 2002 and plan for development of production facility of 40 mcmd (million cubic metres per day) of gas, was made in 2004. The plan was revised for an output of 80 mcmd in 2006.

The company defends itself by stating that the increase in cost were not under its control.

An executive familiar with the fields planning said on condition of anonymity, "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."

The reports explains that though the CAG accepts that certain aspects of costs did increase because of reasons beyond the company's control. But delays in tendering process and execution of contracts and other activities that were under the company's direct control may have also contributed to the cost escalation.

CAG also observed in its report that, "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, i.e. actual cost more than double from FDP cost levels."

Apparently the annexure on the Reliance's project implementation states "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".

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