Tuesday, December 18, 2012

Executive summary of performance audit on ‘Functioning of Gujarat State Petroleum Corporation Limited’ are given below:

The Company was incorporated on 29 January 1979 for exploration, development and production of petroleum and carrying on business of all chemicals derived from hydrocarbons. The Company ventured in exploration activities under Pre-NELP in 1994 and participated in bidding with introduction of New Exploration Licensing Policy (NELP) from 1999. The Company is also engaged in gas trading activity and caters to industries engaged in power generation, steel and city gas distribution.

Blocks and hydrocarbon reserves

After surrender of four blocks (2006-10), the Company, as on 31 March 2011, had 64 blocks, of which 53 blocks are in India and 11 blocks are overseas. Of the 53 domestic blocks, the Company is operator in nine blocks and non operator in 44 blocks. The Company has 14 producing blocks which are domestic.

The proved and probable (2P) reserves in 11 out of 14 producing blocks are 3,376.9 MBbl of oil and 19.6 BCF of gas. Of the remaining 39 domestic blocks which are under exploration stage, one offshore block viz., Krishna Godavari (KG) block entered development stage and 2P of KG block is 18,303.7 MBbl of oil and 947.3 BCF of gas.

Bidding for hydrocarbon blocks

The Company with its consortium submitted bid for acquiring KG block without properly assessing related technical and financial issues. As a result, against the estimated drilling cost of US $102.23 million and the total depth committed of 45,348 meter in the minimum work programme (MWP), the actual drilling cost incurred was US $1,302.88 million (Rs.5,920.27 crore) and the total depth drilled was of 77,395.07 meters.

The main reason for the incorrect estimation was adoption of deficient
geological model prepared by a joint venture (JV) partner, Geo Global
Resources Inc., Canada (GGR). The Company on the ground that GGR was a
technical expert, admitted GGR in the JV without taking any financial contribution
from him during the exploration phase of KG block. As a result, the Company
incurred GGR’s share of US $ 175.07 million ( Rs. 780.81 crore) towards the
exploration cost and suffered loss of interest of Rs. 104.14 crore during 2007-11.


An unreasonable time of 14 to 106 months was taken (2006-11) for completing the environment impact studies (EIS) in eight out of nine domestic blocks where the Company was operator.

Against the estimated drilling rate of 27.76 meters per day, the actual rate was 22.49 meters per day in drilling (July 2004 to April 2010) 16 wells in KG offshore block.

This resulted in extension of tenure of drilling activity and consequential avoidable expenditure of Rs. 180.91 on drilling work.

Reliance Industries Limited (RIL) a private sector enterprise, installed Control
and Riser Platform unilaterally in the part area of KG block licensed to the Company on which no other operator has any right without the consent of the Company/GoI.

As per the mining lease conditions of GoI, the Company would be responsible for
safety and security of all structures in its block including RIL’s structure for its life

Further, in exploration activities, instances such as, drilling of well in area
belonging to other operator, acceptance of material against specifications, incurring of imprudent expenditure and payment of idle charges were noticed. Consequently, the Company incurred avoidable expenditure of Rs. 13.23 crore and also suffered loss of Rs. 12.45 crore.

Twenty-six unviable wells were not abandoned even after expiry of 166 to
1,610 days since completion of test (November 2006 to October 2010), so as to
bring the wells area to the pre-existing local environment as per the Regulation
59 of Oil Mines Regulations,1984.


The Company incurred total expenditure of Rs. 104.29 crore on drilling of wells
without obtaining approval of the Management Committee/GoI for the Field
Development Plan (FDP). In absence of necessary approval, the said expenditure could not qualify for recovery as ‘cost petroleum’. Further, delay of 12 months in finalisation of construction contract from the date of approval of FDP would have corresponding impact in commencement of production activities in KG block.


During 2006-11, the total revenue from trading of gas was Rs. 19,245.39 crore and the revenue from sale of its own production of gas and oil was Rs. 1,563.63
crore which indicated that Company was focusing mainly on trading rather than
production activity. In trading activities the Company failed to safeguard its
interest due to non-insertion of clause for recovery of Take or Pay (ToP) charges in the contracts for sale of gas with 25 to 36 customers out of 38 to 47 customers. This led to potential revenue loss of Rs. 502.19 crore in selected cases.

Though the Company purchased (2006-09) gas on spot price, it sold gas at a price which was lesser than the purchase price by Rs. 5.23 to Rs. 430.79 per MMBTU which resulted in extension of undue benefit of Rs. 70.54 crore to a private entrepreneur, Adani Energy (Gujarat) Limited.


Though exploration, development and production activities are of high risk and
capital intensive nature and requires long gestation period, the Company largely
utilised (2006-11) short term loans (constituting 38 per cent of the total
borrowings) on these activities. The dependence on short term loans for these
activities was not a prudent financial practice.

Instances of losses due to financial deficiencies such as, interest loss ( Rs. 3.14
crore) due to delay in raising claims for recovery of dues from JV partners and
avoidable payment of penal interest ( Rs. 4.17 crore) due to short remittance of
advance tax were noticed.

Internal Control and Monitoring Mechanism

The internal control and monitoring mechanism of the Company was weak in
several areas like non-submission of annual budget to Board of Directors,


Proper assessment of technical and financial issues was not done before
bidding for acquisition of KG block. Unreasonable time was taken in
completing environment impact study and wells were drilled beyond exploration
period. Improper management of exploration and development activities led
to incurring of avoidable expenditure/losses. Financial interest of the Company
was not safeguarded due to non insertion of clause for recovery of ToP charges in all the contracts for sale of gas. Proper internal control and monitoring system
was not in existence.


The review contains five recommendations which inter alia include properly assessing both financial and technical issues before bidding for the blocks, devising mechanism for improving the efficiency in the management of activities related to exploration and development, insertion of the clause for recovery of Take or Pay charges in all the contracts for sale of gas and improving the internal control and monitoring system.