Mukesh Ambani, chairman of Reliance Industries (RIL) and India’s richest man, on Friday met Prime Minister Manmohan Singh following criticism from the Comptroller and Auditor general (CAG) that his company failed to meet production targets from the Krishna-Godavari basin and gold-plated the expenditure incurred on developing that field for gains.

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Officials in the Prime Minister’s Office (PMO) said the meeting happened around noon but offered no further detail. RIL, too, offered no comment on the meeting.

Sources, however, said Ambani apprised the Prime Minister of his company’s stand on the CAG draft report and assured him of full cooperation in the investigations. Ambani also expressed concern over the negative publicity of his company in the media that has dented its reputation.

The CAG has criticised the yarn-to-oil conglomerate, the operator of the KG D6 block, for not only keeping a large area under its control, against the conditions of the production sharing contract, but also increasing its capital expenditure without any justification.

According to the draft audit report, in the KG-DWN-98/3, or KG-D6, block, the Directorate General of Hydrocarbons (DGH) allowed RIL to hike capital expenditure for developing Dhirubhai-1 and 3, the largest of 18 gas finds in the block, by 117%. The block, awarded to RIL in the first round of bidding under the National Exploration and Licensing Policy, houses India’s largest gas discoveries and also a large oilfield discovery (MA oilfield).

Earlier this week, RIL had written to the ministry saying the reported comments from the leaked report reflected a “complete misunderstanding of legal and contractual issues” and hurt its reputation.

RIL shares have shed nearly 8% since the draft CAG report first appeared in media, on June 13.  On Friday, the stock ended almost flat at `870.40 even though the BSE Sensex rose 2.89% —- at this level, it is down around 18% from the 52-week high of `1,112 per share seen on November 8.

Analysts see the fall continuing until the issues are resolved.The CAG has also blamed the investment multiplier (IM) formula used in the production sharing contract, or PSC, for motivating the operator to increase capital investment.

According to the CAG report, RIL did not comply with the PSC provision as it did not submit a “comprehensive” development plan — it submitted the IDP and the AIDP instead. Further, all the procurement activities were delayed by the company.

“The submission of an “addendum” to the “initial development plan” (rather than a revised comprehensive development plan) as well as the lack of adequate details for Phase-II (estimated to cost $3.3 billion) makes it virtually certain that the operator will submit more “addendums” to this development plan in course of time,” the CAG report said.

According to an analyst, the four-fold increase in the capital cost for doubling production (from 40 mmscmd to 80 mmscmd) was not in sync with economies of scale. 

“There was no logic to justify such a hike in capital expenditure,” the analyst said, requesting anonymity.RIL which was expected to ramp up gas output from the block to 80 mmscmd by end-March 2010, currently produces only 49 mmscmd, with production likely to remain the same over the next two years. The sudden decline in production of natural gas from KG basin has badly hurt sectors like power, fertiliser and steel. The government has said that it will first meet the demands of the priority sectors. However, private sector companies have moved court seeking that the gas supply commitment for their projects be met, too. RIL has spent over $5.5 billion on development of the block so far, out of a total planned investment of $8.8 billion. The company, which has cited technical problems for not being able to drill 22 wells as per the target for April 2011, may have to increase capital expenditure further if it has to ramp up production.Also, according to the CAG, “the PSC envisaged that if the company did not develop certain areas within the contracted area within the stipulated time, it should have been relinquished. However, the DGH, along with Ministry of Petroleum and Natural Gas, allowed the whole area to be designated as “discovery area” in violation of the contract, the CAG said. “The undue benefit granted to the contractor through this irregular and incorrect decision is huge, but cannot be quantified. If the ‘discovery area’ had been properly delineated, and the remaining portion of the contract area relinquished, the government would have had the opportunity of awarding this relinquished area through subsequent NELP bidding rounds to new contractor(s) on substantially better financial terms,” it said.The allegations made in the CAG report are still not final and the petroleum ministry is preparing its response to the questions raised by the government auditor. Still, the report raises doubts over the Reliance-British Petroleum deal as the government has still not cleared the sale of 30% stake by RIL in its 23 oil and gas properties for $7.2 billion to the UK-based explorer.