Performance Audit of Hydrocarbon

Exploration efforts by ONGC

Audit Case Study
Session - I

Dr VISHAL DESAI IA & AS

Dy Director of Commercial Audit & ex-officio Member Audit
Board-II, Mumbai

Presentation plan
I.

Exploration of Hydrocarbons in India

II.

Basis of selection of Performance Audit(PA)

III.

Process of approval

IV.

Audit Plan

V.

Execution Process

VI.

Report finalization

VII.

Approval

VIII. Presentation to Parliament

2

I. Exploration of Hydrocarbons in India

Exploration activities are carried out in India in two
offshore basins and six onshore basins
Offshore
Western Offshore Basin
Eastern Offshore Basin

Onshore

Western Onshore Basin

Frontier Basin
Assam & Assam Arakan Basin
Mahanadi- Bengal- Andaman Basin
Krishna Godavari Basin and
Cauvery Basin

Exploration is carried out in blocks awarded on

nomination basis to National Oil Companies and NELP
blocks awarded to private / public sector on bidding
basis
3

I. Exploration of Hydrocarbons in India Indian Sedimentary Basins

Category-I:
Proved petroliferous basins with
commercial production
Category-II:
Basins with known occurrence of
hydrocarbons but from which no
commercial production has been yet
obtained
Category-III:
Basins with no significant
hydrocarbon shows but assumed
prospective on geological
considerations

Deep Waters

Category-IV:
Frontier basins with uncertain
prospects. Deemed prospective on
analogy with similar basins
4
worldwide

Exploration Activity Cycle

Reconnaissance/Gravity Magnetic
Seismic Data Acquisition (2D/3D)
Seismic Data Processing (2D/3D)
Data Interpretation & Integration
Generation of Prospects
Drilling
MHS

Well Logs

Reservoir Studies
Production
5

ONGC the Auditee

Oil and Natural Gas Corporation Limited (ONGC)Indian multinational oil and gas company headquartered
in Delhi, India.
One of the largest Asia-based oil and gas exploration and
production companies, and produces around 72% of
India's crude oil (equivalent to around 30% of the country's
total demand) and around 48% of its natural gas.
One of the largest publicly traded companies by market
capitalization in India.
ONGC was founded on 14 August 1956 by the Indian state,
which currently holds a 69.23% equity stake. It is involved in
exploring for and exploiting hydrocarbons in 26 sedimentary
basins of India, and owns and operates over 11,000 kilometers
of pipelines in the country. Its international subsidiary ONGC
Videsh currently has projects in 15 countries

I. Exploration of Hydrocarbons by

Oil and Natural Gas Corporation - E&P Activities

ONGC activities under exploration and production
include:
Exploration of hydrocarbon bearing zones by
acquisition of sub surface data through survey,
processing of the acquired data, interpretation of the
processed data and drilling exploratory wells in
prospective areas of various BASINS to establish
reserves for further exploitation.
Production of oil & gas by drilling development wells
and installing production and transportation facilities
(ASSETS) in proved fields.
Above activities are carried out in onshore as well as
offshore areas.
7

I. Exploration of Hydrocarbons in India

Petroleum
Blocks

Exploration

Licence

(PEL)

Nomination

Government of India (GOI) on nomination basis granted

PEL to National Oil Companies viz. ONGC and OIL for
exploration of the blocks
Granted for a period of four years with a provision for
extension for 5th year.
In March 2002, GOI decided grant of extension of fifth
year subject to surrender of 25 per cent of the original
PEL area held by the Company.
Grant of sixth and seventh year extension is for pursuing
the lead of hydrocarbon reserves with a condition that
maximum area retained can not exceed 50 per cent of
the original PEL area.
No regrant would be available after completion of
current grant cycle where neither leads have been
obtained nor discovery has been made.
8

I. Exploration of Hydrocarbons in India

New Exploration Licensing Policy (NELP) Blocks
The GOI introduced NELP in 1998 whereby blocks are
awarded on the basis of bidding by the parties.
Salient Features of the Policy

Production Sharing Contracts (PSCs) are entered into with

Government of India
The PSCs are for a period of seven years and normally
divided into three phases (3+2+2 years)
Phase-wise Minimum Work Programme (MWP) is specified
in the PSCs. Failure to adhere to phase-wise MWP attracts
surrender of area and Liquidated Damages (LD)
First extension of six months- without any Liquidated
Damages (LD),
Second extension of six months- payment of 10 per cent of
unfinished MWP and surrender of area as specified in the
PSC and
Third extension of six months- payment of 30 per cent of9
unfinished MWP

PEL and NELP blocks with ONGC as

on 1 April 2007 and 31 March 2010
No. of
blocks as
on
1.4.07

Area
(Sq.Km)

No. of
blocks as
on
31.3.10

Area
retained
(Sq.Km)

PEL

108

128442

62

81997

NELP

39

302644

71

423093

Total

147

431086

133

505090

10

II. Basis of selection of PA

Financial Materiality and Criticality
Previous Audits on Exploration
PA on Deep Water Exploration of ONGC in 2008
PA on Onland Exploration of ONGC in 2009
PA on Shallow water Exploration of ONGC in 2010
PA on Hydrocarbon Production Sharing
Contracts of Ministry of Petroleum and Natural
Gas in 2011
Physical and Finance Performance of ONGC during
2000-01 to 2009-10
11

II. Basis of Selection of PA: Criticality & Materiality

The main objective of exploration is to accrete reserves such that
production of hydrocarbons of ONGC is sustained.
Hence
exploration, establishment and exploitation of reserves is critical to
the overall performance of ONGC.
Year wise expenditure incurred by ONGC on exploration activities
Rs. In crore
Year

Seismic survey

Exploratory drilling

Total

2007-08

1656.29

2519.09

4715.38

2008-09

3071.83

4299.48

7371.31

2009-10

2158.72

7252.70

9411.42

2010-11

1656.74

8625.27

10282.01

Total

47748.34

22696.54

70444.88

12

II. Basis of Selection of PA - Previous audits

PAs on Deepwater, Onland and Shallow water Exploration

No firm reserve accretion target though ONGC in deep water exploration

since 1970
ONGCs 20 - year perspective plan envisaged (2003) four billion tons of
hydrocarbon reserve from deep water prospects - decided to pursue
aggressive exploration campaign in deep waters.
During 10th FYP, even after spending over Rs.5,769.12 crore in deep water
exploration, ONGC could add only 172.17 Million Metric tons of oil equivalent
(MMtoe) to Initially In Place (IIP) reserve out of which nearly 74 per cent was
from one block acquired by it from CEIL.
Pre drilling EIA studies took very long time ranging from 21 to 56 months. In
some cases EIA studies were not completed even after completion of Phase-I
of Minimum Work Programme (MWP).
Non completion of MWP targets led to slow progress in exploration,
relinquishment of blocks after paying liquidated damages (LD) towards
unfinished work in deepwater, onland and shallow water blocks
Delay in finalisation of contracts both for hiring of rigs/survey impacted the
exploration progress in deepwater, onland and shallow water blocks.
13

II. Basis of Selection - Previous audits

PAs on Deepwater, Onland and Shallow water Exploration

ONGC had not fixed standards/norms for assessment of performance of

Geophysical Parties (GPs) resulting in wide variation in geophysical field
activities in different basins.

ONGC took abnormally long time in finalising the shot hole drilling and data
acquisition service contracts resulting in idling of GPs for considerable periods
of time

ONGC had to relinquish prospective areas of nomination blocks due to delays

in exploration and failure to pursue the leads. Exploratory efforts in the five
nomination blocks which were in the last two years of exploration cycle were
slow
ONGC had identified 89 prospects and 33 prospective leads in 16 shallow
water NELP blocks. However, even after incurring an expenditure of Rs.1,632.48
crore, no hydrocarbon discovery was made in shallow water blocks
The achievement of MWP committed in the Phase I was incomplete in 9 out of
16 NELP blocks and the entire Phase I was consumed mainly for API of seismic
data and the wells committed in respect of nine blocks were not completed.
Consequently, the Company surrendered/proposed to surrender 10 NELP
blocks after incurring expenditure of Rs.1,461.36 crore

14

II. Basis of Selection - Previous audits

PA on Hydrocarbon Production Sharing Contracts2011-12

Government of India awarded 203 blocks under New Exploration

Licensing Policy (NELP) up to VII round.
ONGC got majority of blocks i.e. 92 out of 203 blocks
ONGC had only 13 discoveries which was much lower than the
overall average performance of all parties

HQrs reviewed (July 2011) the physical and financial performance of

ONGC and observed
Performance in physical terms indicated that the quantity of major
petroleum products sold had been almost stagnant with a
downward trend over the years from 2000-01 to 2009-10
Though there was a significant improvement in financial
performance this was attributable to upsurge in the international
price of crude oil and other petroleum products
Decision: To attempt the Performance Audit
15

III. Process of approval of PA

Preparation of
Issue Analysis
Study Design Matrix
Guidelines and plan of action
(Basis Performance Auditing Guidelines of
C&AG 2004)
Presentation to Audit Board/Chairman Audit
Board
Approval for taking up the PA
16

III.Process of Approval - Issue analysis,

Study design Matrix and Guidelines

Issue Analysis, Study Design Matrix, Guidelines and

plan of action for the PA on Hydrocarbon
Exploration efforts of ONGC prepared in August
2011 covering ONGCs efforts in exploration
activities during the four period from 2007-08 to
2010-11
The main focus of audit was proposed to be on the
role played by the top Management in the
exploration efforts and the oversight role of MoPNG
and DGH in addition to the exploratory efforts put in
at the field level
17

III. Process of Approval-Objectives/ Issues/

Themes for the PA

To ascertain whether ONGCs exploration efforts had been

taken up with proper planning and executed with efficiency

and effectiveness to achieve its own and the nations
envisioned hydrocarbon goal
Theme 1

Theme 2

Theme 3

Theme 4

Theme 5

To examine the
role of ONGC
leadership by
Management in
exploration
efforts
of
ONGC

To ascertain if
ONGC
exercised due
care in the
process
of
exploration

To verify the
reasonablene
ss of costs of
exploration

To
assess
ONGCs
capacity
(technology,
equipment
and
people)
for exploration

To enquire into
the results of
ONGCs
exploration
efforts

Role played by MOPNG and DGH in the exploration efforts of ONGC

Give perspective to and validate our previous audit findings ( PAs

on onshore, shallow water and deepwater exploration)
18

Objectives of the PA

19

III. Process of Approval-Audit Sample

Audit Sample
All the seven Basins in ONGC have been covered through sampling techniques
to select blocks, exploratory wells, contracts for good s and services.
Sl.
No.

Area

Block
'Basin'.

Sample size percentage

audit

at 25 per cent for onshore

and 50 per cent for
offshore blocks

Population

Sample
size

200

94 (Random
selection)

Contracts for hiring 25 per cent

for
goods
and
services.

191

Exploratory wells

457

88(based on
materiality in
descending
order)
93 (Random
Selection)

20 per cent

20

III. Process of Approval - Presentation to

the Audit Board & Approval

Presentation to the Audit Board

The audit scope, objectives, audit issues, audit
methodology were presented to Chairman, Audit
Board in August 2011
Deliberations PA topic was approved with
additional issues to be examined in the PA

Active participation of Board of ONGC in bidding for exploration

blocks
Hiring of experts
Judicious and effective utilization of resources by ONGC
Attitude of DGH to ONGC and other private parties in regard to
grant of licences, sanction for extensions etc.,
21

IV. Audit Plan

Intimation to conduct of Performance Audit
Ministry of Petroleum and Natural Gas (MOPNG)
Director General of Hydrocarbons (DGH)
ONGC Management

Entry Conference with MOPNG, DGH and ONGC held

in September 2011 at DG level with Management

Presentation made on audit objectives, time line with

emphasis would be on governance
Records requirement
Coordination for timely completion of the PA
Presentation made Management on Corporate Planning,
Infrastructure, Human Resources, Exploration Process, Role
of leadership and decision making in exploration process,
performance bench marking

22

V. Execution Process
Deployment of manpower
Identification of teams
Entrustment of themes

Conduct of field audits

Issue of Preliminary Observation Memos (POMs)
Receipt of responses from
Management/Ministry/DGH
Firming up of the issues
Periodical review of progress by Group
Officer/Principal Director
Submission of periodical progress reports
Mid term review by Headquarters
23

V. Execution Process- Deployment of Manpower

The PA was to cover entire exploration by ONGC including the MOPNG
and DGH. The distribution of work was made accordingly as given
below:
Team
No.

Composition

Area of audit

2 Sr.AOs& 2
AAOs

Corporate planning, Performance Bench Marking, Parliamentary Cell,

Costing Cell and Exploration, Development (E&D) Directorate and
MOPNG/DGH

II

2 Sr.AOs& 2
AAOs

Corporate Exploration Cell, Director (Exploration), Company Secretariat,

Corporate Budget Cell, Corporate Administration,

III

1 AO & 3 AAOs

Mumbai Basin and Drilling Services(offshore)

IV

1 AO & 3 AAOs

Mumbai Basin and Geophysical Services (Offshore)

1 Sr.AO & 2 AAOs

E&D Directorate, Exploration Contract Monitoring Cell, Frontier Basin

VI

1 Sr.AO & 2 AAOs

Assam-Arakan Basin, Mahanadi-Bengal-Andaman Basin, Drilling Services

and Corporate Geophysical Services

VII

2 Sr.AOs& 1 AAO

Institute of Petroleum Exploration, Geo-data processing and Interpretation

Centre, Western Onshore Basin, and Onland Drilling services,

VIII

1 Sr.AO& 2 AAOs

Krishna Godavari Basin and Cauvery Basin

24

V. Execution Process

Field Audit conducted from Mid September 2011

to Mid January 2012
Data and evidences collected and POMs issued
during the above period

Issues firmed up after considering the responses

25

VI. Report Finalization

Final Report
incorporating
ONGCs replies
sent to HQrs.
April 2012
Draft Report finalized
and issued to
MOPNG/ONGC
Management in
February 2012 with a
copy to HQrs

Responses
for the Draft
Report from
ONGC in
March 2012

Exit
conference
held in March
2012

26

VI. Approval
Report approved
by Chairman and
C&AG in August
2012

Scrutiny of report at
Hqrs

Visit of DG for
discussion June
2012

Second round of
discussion with
Chairman Audit
Board in July 2012

Document/
Evidences
verification June
2012
27

Laying of report

Laying of Report in both the Houses of

Parliament in August 2012

28

End of Session I

Thank you

29

Performance Audit of Hydrocarbon

Exploration efforts by ONGC
Audit Case Study
Session - II

Dr VISHAL DESAI IA & AS

Dy Director of Commercial Audit & ex-officio Member Audit Board-II,
Mumbai

Hydrocarbon Exploration Efforts of

Oil and Natural Gas Corporation Ltd What does the C&AG Report say An insight

Rationale for the PA

A key focus area of ONGC is HYDROCARBON
EXPLORATION
The Vision & Mission Document of the Company specifies Focus
on domestic and international oil and gas exploration and
production business opportunities as a key activity of the entity.

Govt. has set high expectations on ONGCs

exploration efforts through Hydrocarbon Vision
2020.
Audit Objective: to ascertain whether ONGCs
exploration efforts had the drive and zeal to
achieve these ambitious targets.
32

The Audit Questions

Were results of
exploration
satisfactory?

Was
exploration
process
efficient
and
cost
effective?

Does
capacity for
exploration
exist?

Was governance
framework robust?

33

Results of Exploration
Reserve Accretion
Reserve Accretion

Actual reserve accretion

only 29% of target.

80.99 MMT as against 276.48

MMT
4 of 7 Basins consistently fell
way behind targets over 200711
Only 2 Basins (W.Offshore and
W.Onshore) achieved target in
2010-11
One (Frontier Basin) had no
targets

Finding Cost

Monetization

Discoveries

Reserve
Replacement
Ratio

34

Results of Exploration
Finding Cost
Reserve Accretion

Finding Costs are

much higher than the
MOU targets (129
648%)

Finding Cost

Discoveries

Monetization

Reserve
Replacement
Ratio

35

Results of Exploration
Discoveries
Though ONGC made 99 discoveries
in NELP and Nomination blocks over
2007-2011, they accreted a reserve of
only 80.98 MMT.

Reserve Accretion

Finding Cost

A comparison of discoveries in the

NELP regime (upto Feb 2011) shows
that despite its large acreage and
rich experience in E&P sector, ONGC
made lesser discoveries than new Discoveries
entrants
Company

Oil

Gas

ONGC

13

GSPC

11

RIL

11

15

Monetization

Reserve
Replacement
Ratio

36

Results of Exploration
Monetisation
Monetised only 73 out of its 158
discoveries made during 2002
to 2011
The Company succeeded in
monetizing only 2 out of the 56
offshore discoveries
Non-monetised
offshore
discoveries
contain
major
reserve accreted
Success in monetizing marginal
fields is also limited. Only 53 out
of 165 marginal fields have so
far been monetized.

Reserve Accretion
Monetization

Finding Cost

Discoveries

Reserve
Replacement
Ratio

37

Results of Exploration
Reserve Replacement Ratio

Reserve Accretion

ONGCs RRR is above 1

RRR has steadily increased
from 1.32 in 2007-08 to 1.80 in
Finding Cost
2010-11
RRR
has
been
healthy
because:
Reserves are mainly accreted
through reinterpretation and
development drilling rather than
exploration

Discoveries

Monetization

Reserve
Replacemen
t Ratio

Production
has
remained
steady/ dipped somewhat

38

What is RRR?
RRR = Now Ultimate Reserve accreted during a year
Total production of hydrocarbon during a year

It is the significant parameter to indicate sustainability.

An RRR>1 implies that the company is able to
replenish its reserves from which it produces oil and
gas
One of the main objectives of the Hydrocarbon Policy
under India Hydrocarbon Vision is to achieve an
RRR>1
39

Efficiency of the exploration process &

reasonableness of costs of exploration
Was ONGC efficient in
conducting surveys?

Was
performanc
e
satisfactory
in NELP
blocks?

Was
explorator
y drilling
adequate
and
efficient?

Was performance
satisfactory in
nomination blocks?

40

Acquisition, Processing and

Interpretation-API (Survey)
Non fixation of norms for API cycle
Delay in hiring of offshore survey
vessels leads to shortfall in data
acquisition ( 18/20 contracts)
Delay in acquisition of offshore survey
vessel
Delay in award of service contracts for
onland survey
Deployment of GPs for onland survey
were less than norms
Time taken for API cycle ranges from 4
to 56 months.

ONGC takes upto 178

days to finalise
contracts for hire of
survey vessel as
Delay in hiring against the norm of
120 to 135 days
vessels

While field season for

offshore survey starts
from Oct to May ,
actual deployment
Deployment
does not match starts from Nov to
January

field season

Shortfall in
acquisition

Loss of field season

Shortfall in Acquisition
of Data

41

Exploratory Drilling
Planning was deficient

The availability of rigs was incorrectly assessed leading to a

shortfall of 30.25 rig months.
The time taken to re-hire rigs was incorrectly estimated
leading to a shortfall of 40 rig months.
Delay in mobilization as award of contract overlapped
with monsoon.

Implementation was inefficient

Delay in hiring of offshore rigs

Time taken 203 to 520 days/normal of 180 days

Delay in acquisition of rigs

10 onland rigs proposed for induction between 2003-2006 are yet

to be ordered
4 offshore jack up rigs proposed for purchase in 2002/2006 is yet
to materialize

Delay in refurbishing of onland rigs

42

Exploratory Drilling

NPT
Average non productive time of rigs was
19 % against 10% planned by ONGC
during 2008-2011.
International norm is 5 %.

Drilling efficiency of own rigs was

lower than that of hired rigs
Age of own rigs more than 17/18 years
Dated technology & equipment
Acute shortage of drilling personnel

Variance analysis of well costs not

done by basins
43

Performance Comparison with Peers

Area

Drilled
Depth
range
(in meters)

Average m/day (well depth/total drilling

days)

ONGC

Private/JV operators

1000-2000

61.9

2000-3000

54.43

GSPCL
SELAN
GSPCL

65.37
63.00
56.45

Mehsana
Cambay

2000-3000
1000-2000

35.4
48.58

Jodhpur

2000-3000

27.27

JOGPL
NIKO
SELAN
EOL
PEL

62.17
40.20
66.65
49.50
42.58

KG (off.)

2000-3000

47.36

Assam-Arakan

3000-6000

14.84(Sivasagar)

Assam-Arakan

3000-6000

32.35(Jorhat)

HEPI
GAZPRO
OIL
Canoco
OIL
Canoco

40.48
16.44
56.42
28.37
28.68
31.13

Ahmedabad

44

Performance in NELP
ONGC lost 69 blocks due to lack of aggression in
the NELP bids (lower work commitment). In 17 of
these, others made 67 discoveries.
ONGC paid liquidated damages of Rs 133.03 crores
for non-completion of MWP in respect of 13 blocks.
Poor performance in deepwater blocks (37% of
ONGCs blocks are deepwater blocks) even
though these have high prospectivity.

45

Performance in Nomination Blocks

ONGC relinquished nomination blocks
without fully exploring prospectivity even
after holding them for over 12-14 years.
Progress of exploration was slow. Exploration
is yet to be completed in six blocks that
were with ONGC for 13-25 years (as against
the NELP norm of 7-8 years).

46

Capacity for exploration

Human resources

Technology

Financial
resources

47

People for exploration

Shortfall at cutting edge
Shortfall in drilling services
Shortfall in rigman, topman cadres
Q3 executives employed for Q1 and Q2 positions
High rate of attrition at middle levels
Lack of succession planning at top management level
Transparent system of hiring consultants is not adhered to.
~50% consultants hired were ex-ONGC employees

48

Financial Resources
Sufficient financial resources for exploration. Alloted budget
not spent as high as Rs.1324 crore (12.2 per cent) in 2009-10 .

Shortfall in budget utilisation to be viewed in context of underperformance on targets of survey (upto 60 per cent) as well as
exploratory drilling (upto 29 per cent).

49

Technology
ONGC unable to provide assurance on
status of technology to Planning Commission
Independent assessment by third party not
done.

50

Governance framework and leadership role

Was vision of
Government and
ONGC emphasis in
exploration aligned?

Was the
reporting
against
these
targets
correct?

Whether
the MOU
targets
were fixed
properly?

Performance
measurement
systems in ONGC

51

Planned targets do not stretch

Hydrocarbon Vision
ONGCs Exploration & Production Strategy
Doubling
of
in
place
volume
of
hydrocarbons (IIH) from 6 Billion Tonnes (BT)
to 12 BT by 2020. This doubling is to be done
in three phases 1.2 BT by 2007, 2.2 BT by
2014 and 2.6 BT by 2020.
ONGCs XI five year plan target

While
ONGCs
strategy
objective
envisaged 2.2 BT by 2014, ONGCs XI five
year plan 2007-2012 planned for only 1.001
BT IIH. This leaves 1.2 BT IIH to be achieved
in the remaining two years if the strategic
objective is to be met. Achievement of IIH
of 1BT in two years is remote considering
the achievement during the four years
(2007-11) which was only 0.95BT (averaging
0.239BT per year).
52

Differing criteria for target setting & reporting

MMToe
Target Setting
for MOU

Reporting on
MOU Targets

Ultimate Reserve Accretion

Year

Target

Reported
Achieve
ment

Achievement
through
Exploration
Efforts

2007-08

55

63.82

22.22

2008-09

64.5

68.9

8.67

2009-10

72.65

82.98

18.34

2010-11

76.9

83.56

31.77

Reserve Accretion through exploration is only

13% to 38 % of the reported ultimate reserve
accretion
53

Issues in Performance Measurement

Internal
Basins get full marks on some KPIs where targets are not fixed
Eg, no activity on 2D seismic acquisition of data happened in W offshore.
Hence there could be no targets. However, full marks given for
performance against this parameter.

Uniform target of 33 percent exploratory wells success ratio for

all seven basins
Basin targets for finding costs are based only on previous
years performance, rather than current years projections.
External
Absence of performance benchmarking of E&P activities vis-vis international norms despite EC directions.

54

Conclusion
ONGCs current exploration efforts are not
adequate to achieve envisaged strategic goals.
The current MOU performance indicators do not
highlight this inadequacy of exploration efforts
leading to a false sense of accomplishment.
ONGC mainly operates in its producing fields to
meet both, reserve accretion and production
targets. Lack of adequate efforts and results in new
fields, coupled with the ageing of producing fields,
is a matter of concern for future sustainability.

55

Conclusion
Producing Fields
Ageing Fields from where
Reserve Accretion (
reiniterpretation &
development drilling) and
Production ( IOR/EOR) mainly
takes place

New Fields
Shortfall in exploration
efforts, low reserve
accretion, few discoveries,
diminishing find size and
delay in monetization

56

Recommendations
Strengthen the performance accountability framework for
exploration
Setting MoU targets and measuring them accurately
Suitability of RRR as a KPI

Introduce a MOU parameter for monetisation of discoveries

Benchmark Exploration Performance
Internal and peer benchmarking suitably

Improve efficiency of Exploration Process

Systemic lacunae in tendering and award of contracts
Setting appropriate targets
Overcoming delay in acquisition/ hiring
Independent assurance on Technology
57

Thank You

58

Audit of Hydrocarbon Production Sharing

Contracts
C&AGs Audit Reports
No 19 of 2011-12 and No 24 of 2014

Background

First report was presented to the Parliament on 08th September 2011

and the second report was presented on 28th November, 2014,
First audit was done as per MoPNGs request (received in November
2007):
Audit was a performance audit of Implementation of Hydrocarbon
PSCs at MoPNG and DGH covering the period 2003-04 to 2007-08
Supplementary scrutiny of records of the operators of four blocks
viz. KG-DWN-98/3, Panna-Mukta, Mid and South Tapti and RJ-ON90/1 for the years 2006-2008,
Total 7 PAC meetings have been held on the report,
Second audit was done as per MoPNGs request (received in April
2010); and period covered was 2008-2012,
Audit was a performance audit of Implementation of Hydrocarbon
PSCs at MoPNG and DGH
Financial and Propriety audit vis--vis PSC provisions of Operators of
Blocks viz. KG-DWN-98/3, Panna-Mukta, Tapti and RJ-ON-90/1.
2

Audit Objectives
A.

B.

Performance Audit was conducted to obtain an assurance that:

the systems / procedures of MoPNG / DGH were adequate and
effective in monitoring and ensure compliance with PSC terms;
and
the revenue interests of the Government (including royalty and
GoI share of profit petroleum) were properly protected, and
adequate and effective mechanisms were in position for this
purpose,
Audit of the Operators books and records was conducted:
To verify whether the Governments revenue in the form of profit
petroleum and royalty was correctly calculated and
To obtain an assurance that the expenditure incurred was in
compliance with PSC provisions, accurately and reliably reflected,
and these amounts were supported by adequate documentation
3

Audit criteria

The criteria adopted was drawn from the following sources:

Relevant Production Sharing Contract,
Joint Operating Agreement,
Oil Field (Regulation and Development) Act, 1948,
Petroleum and Natural Gas Rules, 1959,
NELP and subsidiary instructions of MoPNG,
Directives/Notifications issues by MoPNG/DGH,
Policies framed by GoI for petroleum operations,
Generally
Accepted Accounting Practices/Accounting
Standards.

Block - KG-DWN-98/3
Operator - RIL
JV Partners RIL (60%), BP (30%), Niko
(10%)

Introduction

The KG-DWN-98/3 (also referred to as KG-D6) block, with a

contract area of 7645 square km (sq. km.), is an offshore block in
the Krishna-Godavari (KG) basin in the Bay of Bengal,
The Block is classified as a deepwater block, with water depth
ranging from 400 metres (m) in the north-west to 2700 m in the
south-east,
In April 2000, GoI awarded the block to a consortium led by
Reliance Industries Limited (RIL) under the NELP I:
Till August 2011, the only other member of the consortium was
a Canadian company, namely Niko Resources Limited (NIKO).
In 2011, RIL assigned its 30 per cent PI to BP Exploration
(Alpha) Limited (BP)
RIL, however, continued to remain the Operator of the Block.
6

Report no 19 of 2011-12

Non-relinquishment of area

PSC stipulated relinquishment of 25% each of total contract

area at end of Exploration Phases I and II,
Contractor entered Phases II & III without relinquishment
treating entire area as Discovery Area,
In May 2004, DGH did not agree to operators proposal. A
year later, DGH waived its earlier objection and advised
operator to complete 3D seismic survey in entire block
(instead of drilling wells in all parts of the contract area)
In July 2006, DGH completed its about turn, and agreed to
the operators proposal,
Subsequently, in February 2009, GoI approved treating
entire contract area (7645 sq km) as Discovery Area
Post contract concession of non relinquishment of area was
given to RIL (comparison).

Development activities

MC approved the Initial Development Plan (IDP) in November 2004.

However, immediate action for procurement of major equipment/
materials/services was not initiated, and progress in field
development work was not as per IDP,
Operator submitted Addendum to IDP (AIDP) in October 2006:
Particulars

IDP 2004

AIDP - 2006

Estimated Capex

$ 2.4 billion

$ 8.8 billion

Gas Production Rate

40 mmscmd

80 mmscmd

First Gas Production

August 2006

Mid-2008

Activities in respect of AIDP were initiated even before submission/

approval of AIDP.
The scale of revision of IDP through the addendum in such a short
time span cast doubts on the robustness of the data and
assumptions underlying the development plans
9

Profit Sharing Formula

The PSC is based on a scaled formula for profit sharing between GoI
and the private contractors:
This is based on a critical parameter the Investment Multiple
(IM) which is essentially an index of the capital-intensive nature
of the project i.e. IM = Cumulative Net Cash Income/ Cumulative
Exploration & Development Costs,
The more capital intensive the project, the lower the IM and GoI
share of profit petroleum (as low as 10%) and Higher the IM,
higher the GoI share (as high as 85%),
Private contractors have inadequate incentive to reduce capital
expenditure, and substantial incentive to increase/ front-end capital
expenditure
So as to retain the IM in lower slabs or to delay movement to
higher slabs.
10

Procurement activities

Audit could not derive assurance as to reasonableness of costs,

primarily due to lack of adequate competition:
Award on single financial bids - There were instances where
multiple vendors were pre-qualified. However, when technical
bids were received, all vendors (except one) were rejected,
and the contract was finally awarded on a single financial bid,
Major revisions in scope/ quantities/ specifications post-price
bid opening, substantial variation orders,
Any commercially prudent private acquisition would attempt to
generate competition. Such concern for cost-effective acquisition
was not perceptible in these cases with consequential adverse
implications for cost recovery and GoIs financial take.
11

Report no 24 of 2014

12

Audit constraints
Incomplete list of Purchase Order
Audit uses sampling techniques for selection of cases for
detailed examination. In response to audit requests, the
Operator provided several lists of POs but none of the lists was
complete,
Due to this there could be some POs which may have fallen
outside the population and, therefore, were not picked up for
detailed scrutiny in Audit,
Restricted access to SAP
The Operator, inspite of having information on audit schedule,
gave restricted access to SAP and provided fragmented
information
13

Exploration, appraisal and relinquishment

Exploration

Discovery

Appraisal

Declaration of
Commerciality

In this audit, C&AG observed that Ministrys decision treating

entire contract area as discovery area as per PSC
provisions meant that the Operator cannot do any further
exploration activity except appraisal activities relating to the
discoveries made till July 2006 in the discovery area,

14

Exploration, appraisal and relinquishment

However, the Operator was improperly allowed to do further

exploration activities in the discovery area at an
expenditure of US$ 427.03 million to be recovered from the
revenue of the commercial discoveries already made in the
block,
C&AG has recommended disallowance of US$ 118.99
million already effected by the Operator on four exploration
wells that did not result in commercial discovery.

15

Declaration of Commerciality (DoC)

As per the PSC, the review of proposal for DoC in respect of

three discoveries (viz. D29, D30 and D31) was to be completed
by Management Committee by August 2010,
DGH rejected the proposal in October 2010 due to nonproduction of sustainable production data by Contractor. In
August 2013, Secretary, MoPNG agreed with DGH,
However, later, in October 2013, MoPNG allowed the Contractor
to retain 298 sq. km. contract area for these three discoveries
under a tentative Petroleum Exploration License. Accordingly,
Operator proposed an expenditure of $100 mn in the budget,
Despite technical advice by DGH, the issue was reopened after
around 3 years and the issue had not been finalized even after
four years.
16

Disallowed appraisal wells

Expenditure of US$160.81 million incurred on account of

three appraisal wells was not eligible for cost recovery as
two wells were drilled post submission of DoC proposal and
one well was drilled outside the MC reviewed appraisal area.
This had been disallowed by MoPNG
Audit observed that even after the MoPNG communicated
its decision, the Operator continued to claim the cost
recovery, as seen in the final accounts for the year ended
2013,
As of June 2014, the MoPNG had been unable to enforce its
decision.
17

Estimation of D1-D3 gas fields

MoPNG and DGH are responsible for scrutinizing development

plans prior to their approval,
It was noticed that there was uncertainty in the recoverable
gas reserves estimates and substantial changes were made to
it after the approval of the development plan,
Plan
IDP
AIDP
RFDP

Month/Year
May 2004
October 2006
August 2012

Recoverable Reserve
3.81 tcf
10.03 tcf
2.90 tcf

This raises questions on the process of examination,

consideration and acceptance of gas estimates by the DGH
The DGH went along with the estimates of the Operator even
when its own consultants had expressed reservations against
it.
18

Decline in Gas production

The Operator was required to drill, connect and put on stream 22 wells as
per approved Phase I of AIDP, however, the Operator had drilled,
completed and connected only 18 wells,
Production from the D1-D3 field commenced in April 2009 and started
declining in August 2010. While production level achieved in 2010-11 was
90 per cent of approved production profile, this decreased to 57 per cent
in 2011-12 and 26 per cent in 2012-13,
C&AG noticed that that, as of March 2012, out of 18 wells connected,
only 12 wells were producing gas and six wells had ceased to flow due to
water and sand ingress,
Due to non-drilling of wells and decline in production of gas, the facilities
created by the Operator remained underutilized / unutilized.
The Operators decision to not drill and connect the committed producer
wells as per the approved AIDP even after repeated reminders by the
DGH is a matter to be seriously considered and resolved by the MoPNG to
ensure the energy security of the country
19

Work Programme and Budget (WP&B)

Approval of the WP&B is a key function of the MC,

In none of the four years the WP&B was approved before
start of the financial year,
In 2008-09 (BE), 2010-11 (BE) and 2011-12 (BE / RE), due to
delays, the Operator incurred expenditure before MC
approval
For 2008-09 and 2009-10, the revised estimates were
approved after end of the respective years.

20

Disallowances : Expenditure issues

Contract for EPIC of offshore facilities EURO 200 mn.,

Contract for chartering FPSO US$ 77.36 mn.,
Unjustified compensation on free-issue material in
construction of OT - INR 1110.09 mn.,
Start-up and Production bonuses of US$12.48 million,
Payment of bonus for rig movement of US$ 2.83 million,
Uptime bonus for providing contractual obligations of US$
13.37 million,
Improper allocation of expenditure on risk advisory services
US$ 1.17 million.

22

DISALLOWANCES : REVENUE ISSUES

Marketing Margin on gas produced and sold

The Operator is charging the gas price @ US$ 4.340 mmbtu (which
also includes 0.135 US$/mmbtu towards marketing margin) from its
consumers. However, while computing the Profit Petroleum and
Royalty, the Operator is considering the price of US$ 4.205 instead
of the actual price of US$ 4.340 being charged,
It had collected an amount of US$ 261.33 million towards the
Marketing Margin, which has not been accounted for in the Books
of JV,
Consequently, cost recovery of US$ 235.20 million (90 per cent) had
not been adjusted in the recovered cost up to 2012-13 and there
was a short remittance of Government share of Profit Petroleum
and Royalty by US$ 2.61 million and US$ 13.11 million respectively
for the years 2009-10 to 2012-13.
23

DISALLOWANCES : Accounting ISSUES

The Operator had been charging Parent Company Overhead (PCO)

since 2002-03 to 2007-08. MC disallowed (November 2008) the
expenditure of US$ 40 million upto 2007-08 on the ground that the
Operator had no Parent Company. The Operator, during 2008-09
accounts, reversed the disallowed cost upto 2007-08 and booked it
under Corporate Office Support in the year 2008-09 by reclassifying
the said disallowed cost and upto 2011-12, has charged US$ 101.41
million. Further, this expenditure couldnt be vouched by audit in
absence of documentary evidence.
The Operator had not accounted for the value of closing stock of
Crude and Condensate valuing to US$ 14.22 million,
Consequently, cost recovery of US$ 12.80 million towards the value
of closing stock had not been adjusted and there was a short
remittance of US$ 0.14 million.
24

Conclusion

Despite the Government of India being signatory to the PSC,

a regulator in the E&P field and also trustee of sovereign
natural resources, the PSC provides few intermediate
measures to protect its interests,

MoPNG/ DGH have been unable to take effective and result

oriented punitive measures against the Contractor in such
cases,

Therefore, we are of a view that the future PSCs need to be

strengthened by incorporating sufficient mechanism for
overseeing activities and imposing punitive measures, where
the occasion so demands.
25

Thank you

26

Discovery area

Discovery Area (as per PSC)

..

That part of the contract area about which,

based on discovery and results obtained from a
well or wells drilled in such part, the contractors is
of the opinion that petroleum exists and is likely to
be produced in commercial quantities
Discovery is defined as the finding, during
petroleum operations, of a deposit of petroleum not
previously known to have existed, which can be
recovered at the surface in a flow measurable by
conventional petroleum industry testing methods
27

Comparison of blocks operated by ONGC and RIL

Note: reference to ONGC block (KG-DWN-98/2) drawn by MoPNG in its reply.

Exploratory wells were drilled in the entire contract area of the ONGC operated block
(left). In fact, ONGC had relinquished a part of the contract area as required under the
PSC.
In the RIL operated KG-DWN-98/3 (right), exploratory wells were drilled in the north
western part only. Post contract concession of non relinquishment of area was given to
RIL whereas this was not the case in respect of ONGC block.
28

Interpretation of discovery area

Implementation of this interpretation (which is incorrect, in

our opinion) required cessation of exploration activities,
commencement of appraisal from July 2006 and completion
thereof by July 2009.
After this point of time, the contractors only course of action
was to prepare development plans on the basis of appraisal,
identify development areas for development, and relinquish
the balance area forthwith within the PSC-stipulated
timelines. This was also not done.
DGH and MoPNG chose to go along with differing
interpretations of the operator concurrently to continue
with exploration activities, side by side with declaration of the
entire contract area as discovery area.

Profit Sharing Formula

Investment Multiple (IM)

Government
Share

Contractors Share

Less than 1.5

10 %

90%

1.5 to less than 2.0

16 %

84 %

2.0 to less than 2.5

28 %

72 %

2.5 and above

85 %

15 %

IM = Cumulative Net Cash Income/ Cumulative Exploration & Development

Costs
The more capital intensive the project, the lower the IM and GoI share of
profit petroleum as low as 10% and Higher the IM, higher the GoI share as
high as 85%.
30

Contract for EPIC of offshore facilities

Operator awarded a contract relating to Engineering,

Procurement, Installation and Construction (EPIC) of offshore
facilities to a vendor on a lump sum contract, signed after
detailed pre-bid meetings,
Vendor defaulted on milestones,
The Operator gave concessions of Euro 200 million
(approximately) to the vendor which were not allowable for cost
recovery, being not in line with:
EPIC contract; and,
Section 3.2 (ix) of Appendix C to the Accounting Procedure to
PSC.
31

Contract for chartering FPSO

The Operator signed chartering of a Floating Production, Storage and

Offloading (FPSO),
o Despite the fact that FPSO was chartered for 10 years only, the
operator extended the dry docking life of the FPSO from 10 to 15
years for a one-time compensation of US$ 17.36 million,
o FPSO vendor committed the date of first production of oil for 27 April
2008. Vendor was to be paid lease rental from DFPO date only. So it
was in vendor's interest to achieve DFPO. Despite MC approval of
DFPO for June 2009 Operator paid unnecessary compensation of US$
45 million for DFPO at September 2008.
o Avoidable refurbishment of existing living quarters despite non
exercise of purchase option resulting in expenditure of US$ 15
million.
Recommendation : The cost recovery of US$ 77.36 million may be
disallowed
32

Additional expenditure on hiring of rig

The Operator did not consider long-term hiring of

drilling rigs and availing the firm rate advantage of longterm hiring
Despite having adequate drilling prospects and the
market having scarcity of deep-water drilling rigs
This resulted in additional expenditure of approximately
US$ 88.77 million

33

Unjustified compensation

The Operator awarded four contracts relating to construction

of Onshore Terminal (OT) on cost-plus basis,
Payment of compensation was to be made to the vendors
only on the cost incurred by vendor plus a mark-up on such
costs,
The Operator, however, also paid the vendor Rs.1110.90
million as mark-up compensation on the value of free-issue
material such as cement, steel, etc supplied by the Operator.

Recommendation: The cost recovery of amount of INR 1110.90

million may be disallowed.
34

Case Study
As a part of its Redevelopment Plan, M/s Sea Oil Company invited international
competitive bids (ICB) in September 2002 for installation of platforms and laying
of pipeline segments in its Offshore Field. The likely date of issue of Notification
of Award (NOA) was 31 January 2003 with the completion of the project
scheduled by 30 April 2004. Offers from ten bidders were received.
Technical bids were opened on 3 January 2003 after one month of the scheduled
date.
Only two bidders viz., M/s Aqua and M/s Beta were found technically qualified.
Tender Committee (TC) revised the date of NOA to 14 March 2003 and
recommended (January 2003) opening of price bids of M/s Aqua and M/s Beta.
The bidders were asked to confirm unconditional compliance with the original
project completion schedule i.e. 30 April 2004, despite revision in the date of
NOA. As M/s Aqua did not agree, its offer was rejected. M/s Beta confirmed (4
March 2003) compliance with the project completion schedule with revised NOA
with a request for a grace period of 15 days before levy of liquidated damages
(LD).
On evaluation, TC recommended (13 March 2003) the award of work to M/s Beta
with grace period of 15 days. In view of likely delay in the award of contract, the
Apex Purchase Committee (APC) of M/s Sea Oil Company asked (31 March 2003)
M/s Beta to re-confirm project completion schedule of 30 April 2004 with NOA
by 15 April 2003 along with the negotiations for price reduction. During
negotiations M/s Beta did not offer any price reduction but confirmed (3 and 4
April 2003) compliance with the completion schedule subject to issue of NOA by
7 April 2003 with grace period of 15 days. TC recommended (4 April 2003)
placing of order on M/s Beta for $100 million stating that re-tendering would
delay the project by one year and would involve loss of oil production of 0.13
MMT1.
The APC, however, approved the award of contract to M/s Beta on 9 April 2003
without grace period. Accordingly, M/s Beta was asked (9 April 2003) by the TC
to confirm unconditional compliance with the original completion schedule
without grace period. As this was not in conformity with their offer, M/s Beta
refused the offer. Subsequently the offer (12 April 2003) by the TC with a grace
period of 15 days was also rejected by M/s Beta.
M/s Sea Oil Company re-invited (May 2003) fresh tenders and awarded Contract
(January 2004) to M/s Beta at a price of $147 million for installation of the same
facilities viz., platforms, laying of pipelines in Offshore Field.
Questions
1. How do you assess approach of M/s Beta in the above case?
2. Your comments on issue of NOA by M/s Sea Oil Company on 09 April 2009.

Million Metric Tonne

3. In your opinion, what were the financial implications for M/s Sea Oil
Company in the above case?
4. Do you think APC was right in its wisdom in non-allowing the grace period of
15 days to the bidder for completion of the said contract?
5. Do you have any suggestions for M/s Sea Oil Company as a way forward in
such cases in future?

Session 4 Audit Evidence in Financial Audit

Objective: Detail the Audit Evidence and the type of evidence for sustaining the objections.
Estimated time required:
Discussion in sub-group: 15 minutes
Discussion in plenary: 15 minutes
Instructions: Read the described scenario carefully and discuss your response to the six
objections posted at the end of the scenario. Try to arrive at a consensus at your table and
detail the evidences you may have to produce for sustaining the objections. Also specify the
type of audit evidence.
Background:
The Ministry of Housing and Urban Poverty Alleviation, with a view to provide affordable housing to all,
started a project Viz: Integrated Housing and Slum Development (project IHSD) at a total estimate of Rs.
25 crore. The project which started in May 2006 is still under progress.

Page

1. As part of the project plan, a sub-way was to be built in one of the slum area. For this
purpose, an expenditure of Rs. 31.86 lakh was incurred. The components of the above
expenditure include equipment costing Rs.9.83 lakh imported and stored at the Customs
bonded warehouse and other related expenditure of 22.03 lakh. The title to the equipment
has already been relinquished by the Company (4/2009) and the work has also been
abandoned due to other administrative reasons. Hence the cost of the asset and the
expenditure has to be written off. This has not been done which resulted in over statement
of miscellaneous expenditure and profit to that extent.
2. For the above project ADB has sanctioned a loan amount of Rs.12.90 crore. On verification
of the Balance Sheet, it was found that unsecured loans do not include interest amounting
to Rs. 1.15 crore payable on the project loan of Rs. 12.90 crore for the period from 1.04.10
to 28.03.11. Non provision has resulted in understatement of unsecured loans and
overstatement of profit to that extent.
3. The Development Reserve Fund includes a sum of Rs.4.22 lakh being the maintenance
expenses, which are of revenue nature (such as electricity charges) etc and to be charged to
Profit and Loss account under Prior period expenses. Consequently, profit is overstated
to the same extent.
4. For the purpose of development of housing, the Company has acquired land from owners
by paying the cost of the land at guideline value. However, the private land owners did not
accept the rate offered by the Company and have approached the court and won the case.
As per the Accounts the Free hold land is shown at Rs. 6430328/This does not include a sum of Rs. 54,88,756 being the difference in land cost between cost
already accounted for and higher rate of compensation payable along with interest as per

During the course of the audit of financial year 2010-11 following audit conclusions were derived:

Session 4 Audit Evidence in Financial Audit

Page

the Government Order. This has resulted in understatement of current liabilities and fixed
assets to that extent.
5. Capital Work in progress Rs. 36.50 lakh : This represents expenditure incurred on
construction of bore well during 2007-08 which has been abandoned due to dry well. Since
the company has not made use of this, it should have been written off. Non writing off has
resulted in overstatement of Capital Work in Progress and over statement of profit to that
extent.
6. Gross Block Rs.2,39,65,454/a) This does not include Rs. 19,06,695/- being the value of work completed during the
year at stage 1 of the project. This resulted in understatement of Fixed Assets.
Further depreciation and loss for the year is also understated by Rs. 59,523 while
Capital WIP stands overstated to the same extent.
b) The establishment cost of the officers in construction wing of the company had not
been apportioned to the respective capital works completed. The fact has also not
been suitably disclosed.