CHAPTER 17
MINISTRY OF PETROLEUM AND NATURAL GAS

BPCL’s failure to take adequate measures to protect the underground fibre optic cable led to scrapping of the Telecommunication System and resulted in infructuous expenditure of Rs.3.89 crore.

Bharat Petroleum Corporation Limited (BPCL) commissioned (September 1991) Fibre Optic Telecommunication System (System) at a cost of Rs.3.89 crore for providing reliable voice communication and data transmission. The System was based on PDH (Plesiochronous Digital Hierarchy) technology and comprised of 8 Mbps (Megabyte per second) optical line terminal equipment and associated digital multiplexing equipment. The System was conceived as an essential operational requirement of new oil installations at Irimpanam interlinking 7 stations of Oil Companies in Kochi - Ernakulam area.

The fibre optic cable suffered damages as early as in October 1997 due to digging by service agencies, cutting of cable by rodents and the Company was unable to locate the fault. BPCL informed (January 1998) the Department of Telecommunications (DOT) that 90 to 95 per cent of the investment was redundant and only a small portion was operative. The Company finally decommissioned the System in March 1998. Since then BPCL was operating with alternative means of communication.

Management stated (August 1999) that the System was in operation except for some connectivities which were not functioning due to damage in cable and that the rectification work was in progress. Ministry concurred (February 2000) with the views expressed by Management.

The reply is not tenable as BPCL had informed the DOT (March 1998) that it had decommissioned the System linkages. A severely truncated System could not claim to fulfil the operational needs for a good communication system necessary for safety requirements of hazardous operations.

Management further stated (May 2001) that they had engaged M/s. Alcatel, the original equipment manufacturer for inspection and assessing the technical health for repairs of the System. Their report recommended total replacement because the existing equipment was based on obsolete technology, large amount of faulty modules and was not Y2K compliant due to which supply of spare modules could not be supported.

Further, a Committee constituted (December 2000) by BPCL recommended scrapping of the System. Apart from this, the Company sought the opinion of a Chartered Engineer to determine the feasibility of operating the existing System, who opined (February 2002) that the System was obsolete and beyond economic repairs and had to be scrapped.

Based on these recommendations, BPCL had scrapped the System and had written off (June 2002) its book value of Rs.2.20 crore.

BPCL had not worked out carefully the installation of the System and its maintenance. Further instead of accepting its lapse, the Company advanced logic like obsolescence of technology and non Y2K compliant equipment.

The reply is not tenable because the PDH based Systems up to 140 Mbps capacity are being used in DOT and Systems such as 34 Mbps and 8 Mbps are still being procured by the DOT.

Thus, the logic given for write-off of the equipment was an afterthought. Since the technical assessment of the equipment was conducted after undue delay of 3 years after its decommissioning, chances of failure of the equipment, inoperative for more than 4 years, were very high.

In essence it was BPCL’s failure to assess the risk of damage to the underground cable, passing through the heart of Kochi city, due to road cutting by service agencies etc. and take adequate measures to protect the underground optical fibre cable that led to decommissioning of the System. As such the entire expenditure of Rs.3.89 crore was rendered infructuous. A thorough investigation is needed to establish responsibility in this case.

17.2.2    Undue favour to a customer

Enkay Texofood Industries Limited (ETI) was the customer of BPCL for petroleum products like high speed diesel (HSD), furnace oil and lubes since 1994-95. In January 1996, ETI requested BPCL for extension of credit facility against post-dated cheques for purchase of these products. Accordingly, a proposal to this effect was made by Chief Divisional Manager, Ahmedabad to the General Manager (Western Region), in February 1996. However, the approval communicated by BPCL stated (April 1996) that the cheques for the supplies to be made in the first, second, third and fourth week of a month were expected to be received by tenth, eighteenth, twentysixth day of the month and third day of the succeeding month.

It was observed in Audit that approval of the competent authority was not on record for extension of credit facility without financial security. Also, BPCL entered into no agreement with ETI for allowing such credit facility. In the absence of these formalities and as such terms of payment of interest during the period of credit and financial security in case of default/delay in payment etc remained unsettled with ETI.

Further, a test check of records of BPCL revealed that from November 1998, it started supplying HSD to ETI without collecting cheques and supplied 166 consignments of HSD valuing Rs.1.70 crore up to April 1999. Thereafter, ETI stopped lifting material since May 1999.

Finding it difficult to recover the payment of Rs.1.70 crore against the supplies made to ETI in the absence of any agreement and any other financial security against the supplies made, BPCL filed (November 2000) a legal suit for recovery of the amount along with interest of Rs.14.71 lakh. Meanwhile ETI was referred to BIFR in May 2001. Keeping in view the remote chances of recovery, BPCL made provision in its books of accounts.

Management in its reply (May 2002) stated that:

1. BPCL had extended credit facility to ETI with future prospects of getting enhanced business and to avert the threat from the competitors;
2. formal agreements are executed with major customers only and therefore, in the instant case the terms of credit facility was conveyed to the ETI and no formal agreement was executed; and
3. there was no belated action in filing the legal suit as the legal suit was filed only after having exhausted all other avenues for recovery of dues.

Management’s reply is not tenable in view of the fact that it extended open credit facility to a private party (ETI) without any agreement to safeguard BPCL’s interest against default by the customer and that it practically endorsed such dubious practices much against its own procedures. Similarly while Management stated that there was no delay in initiating legal proceedings, the fact is that there was delay of over 18 months in initiating the legal action for recovery of dues. This was specifically unwarranted, as ETI had defaulted in its payment for early supplies and the dues accumulated to Rs.1.70 crore over a period of 6 months.

The entire case needs thorough investigation, as Management had not taken things seriously and is casual. Thus, the extension of the open credit facility to ETI without any agreement to safeguard BPCL’s interests constituted an undue favour to a private party eventually resulting in a loss of sales revenue of Rs.1.70 crore and interest thereon.

The matter was referred to Ministry in May 2002; their reply was awaited (September 2002).

Engineers India Limited

17.3.1    Loss of Rs.90 lakh in the execution of pipeline work

Engineers India Limited (Company) had been awarded (April 1992) the work of consultancy by Indian Oil Corporation Limited (IOCL) for setting up of 5 Tap Off points along Kandla-Bhatinda Pipeline for a total value of Rs.10 crore. As against the stipulated date of completion, being June 1994 for 3 points and April 1995 for 2 points, the Company completed the work between January to June 1996. The Company attributed the delay to delayed approval of drawings, changes in hydro testing procedure etc.

On account of the delay IOCL levied liquidated damages and withheld (April 1995) an amount of Rs.1 crore from the regular invoices raised by the Company. In this connection, it is seen that, as against the contract value of Rs.10 crore the Company had incurred, besides the charge of Rs.1 crore liquidated damages, a total expenditure of Rs.9.90 crore in the execution of the project resulting in a loss of Rs.90 lakh.

Management replied (June 2002) that the delay was on account of certain additional works done by them and that the Committee appointed by IOCL had recommended (December 2000) a levy of penalty of Rs.60 lakh only. Management also replied that the recommendation of the Committee was under active consideration of IOCL. The reply of Management is not tenable, as IOCL had not taken any concrete action on the recommendation of the Committee even after a lapse of over 18 months and the Company had written off the loss as irrecoverable in its accounts.

Thus, undertaking of additional works on the contract without explicit approval resulted in a loss of Rs.90 lakh.

The matter was referred to Ministry in July 2002; their reply was awaited (September 2002).

Hindustan Petroleum Corporation Limited

17.4.1    Infructuous expenditure on creation of a pipeline

Ministry of Environment and Forests, Government of India, while giving (May 1989) environmental clearance to Lube Augmentation Facilities Project at Mumbai refinery of Hindustan Petroleum Corporation Limited (Company), directed that “all bulk quantities of refinery requirements/products should be transported through well designed pipeline to avoid road congestion and hazards through road transportation”. The Detailed Feasibility Report (February 1995) envisaged laying of 22 km long pipeline from Mumbai Refinery to Vashi with a design capacity of 1500 TMT(Thousand Metric Tonnes) per annum. Oil Co-ordination Committee (OCC) while approving the proposal for the project directed the Company (May 1995) that after commissioning of the pipeline, no black oil (Furnace Oli, Light Diesel Oil and Bitumen) truck/wagon would be loaded at Hindustan Petroleum/ Bharat Petroleum refinery terminals. The project was commissioned in April 1998 at a total cost of Rs.42.30 crore.

The pipelines laid down for transporting FO and LDO from black oil terminal, however, remained grossly under utilised as more than 80 per cent of LDO/FO produced at Mumbai Refinery continued to be transported by rail, road and tankers whereas the maximum utilisation of black oil pipeline was only 18 per cent so far as can be seen from the details given below.

(In thousand MTs)

The Company also, incurred an operating expenditure of Rs.80.13 lakh for maintenance and repairs, security, salaries, electricity etc. on the said pipeline during the above period.

Management admitted (January 2002) that the projected throughput of FO ex-Vashi Terminal could not be achieved and attributed following reasons for low utilisation of the pipeline:

1. Dismantling of administered price mechanism (APM) for FO by Government in April 1998 and hence consumers made their own arrangement by imports;
2. The expected volume of lifting by Indian Oil Corporation Limited to be fed from Vashi terminal shifted to Indian Oil Tanking Limited (IOTL), a joint venture of IOCL, which came up with a large terminal in 1997;
3. FO/LDO could not be transported to coastal terminals and rail-fed locations as these facilities were not available at Vashi and therefore, supplies by ocean tankers and rail were made ex-Mahul only; and
4. Sale of FO/LDO during the period 1998-2001 contributed a gross margin of Rs.50 crore to the Company

The reply of Management is not tenable because:

1. The adverse impact of new facility of IOTL for importing storing and distributing FO was not surprisingly considered by Ministry of Petroleum and Natural Gas/ OCC although both HPCL and IOCL function under the same Ministry;
2. The dismal performance of the project since commissioning of pipe line in April 1998 was never discussed/reviewed by the Board of Directors of the Company;
3. The project did not envisage upliftment by rail/road at all except for local requirement for Mumbai, which was to be met from other installations; and
4. The reported gross earning of Rs.50 crore (approx.) for FO and LDO was not due to better utilisation of black oil pipeline but due to higher gross margin subsequent to decontrol of these products effective April 1998.

Thus, a major volume (82 per cent) of FO and LDO produced at HP refinery continued to be supplied by truck/wagon loading which defeated the basic objectives of the construction of pipeline and resulted in infructuous expenditure of Rs.42.30 crore besides operating expenditure of Rs.80.13 lakh till March 2001.The Company had not taken into account the effects of future deregulation in the oil industry and the consequent increased competition despite such knowledge being in public domain since 1975.

The matter was referred to Ministry in April 2002; their reply was awaited (September 2002).

17.4.2    Infructuous expenditure due to delay in surrendering of surplus land

The Company had inherited 25.253 acres of land from erstwhile private companies at Shakurbasti, New Delhi, which was on lease from Railways. Out of 25.253 acres of land, 4.493 acres was used for LPG (Liquified Petroleum gas) bottling plant and remaining land was used for POL (Petroleum, oil and lubricants) terminal.

Vasudevan Committee appointed by the Government of India to enquire into a major fire incident that occurred in the Indian Oil Corporation Limited LPG plant in May 1983 recommended various safety measures to avoid recurrence of such incidents in future. This included, inter alia, shifting of LPG plants of all oil companies from the thickly populated areas, which was accepted by Government of India in August 1983. The Company shifted (August 1993) its plant to Bahadurgarh and closed its LPG operations at Shakurbasti (September 1993). The land that became surplus was used for some time to store the scrap material before its disposal and for storing and distributing of lube thereafter. The Company did not surrender the surplus land till 29 October 2001 when lube activity was transferred back to POL terminal from where it was transferred. The Company incurred an avoidable expenditure of Rs.10.93 crore on rent during the period from April 1994 to October 2001.

Management replied (November 2001/January 2002) that land which became surplus after shifting the LPG plant from Shakurbasti was utilised to decongest the POL terminal and after steep rise in the rental by Railways, handling of lube activities at LPG plant area became unviable and it had surrendered the same and had also taken up the matter of steep rise in rental with the later. Ministry endorsed (September 2002) the views of Management.

Reply of Management/Ministry is not tenable as the Company took more than 6 years after the increase in rental by Railways in August 1995, in surrendering land, which had in effect become surplus after shifting of LPG plant from Shakurbasti. Further, the fact that lube activity, prior to closure of LPG plant and after surrendering of land, was carried out at POL terminal indicated that the activity could have been carried out at POL terminal in the intervening period also.

Thus, due to delay in surrendering the land that became surplus after closure of LPG plant in September, 1993 and using it for insignificant activity, not comparable with exorbitant rental, the Company had incurred avoidable expenditure of Rs.10.93 crore towards lease rent during the period from April 1994 to October 2001.

17.4.3    Loss of Rs.1.33 crore due to failure to utilise or properly store unused steel coils

Visakh Refinery of the Company procured 5400 MT of cold rolled steel coils during May to July 1997 for Rs.10.23 crore for fabrication and manufacture of drums for Asphalt. M/s. Hind Containers, Visakhapatnam were engaged for the purpose. The workshop of the said firm located in the vicinity of the unit was damaged in a fire accident (September 1997) in the Refinery and thereafter it was not reopened. The Unit resumed its operations in February 1998. It, however, did not engage any other manufacturer for the fabrication of drums and allowed the balance 699.4 MT of cold rolled steel coils valued at Rs.1.62 crore to lay in the open yard outside the store shed.

A certified valuer inspected the material in April 1999 and thereafter in March 2000. Based on the surveyors’s report, the Company wrote off Rs.14.32 lakh and Rs.17.56 lakh towards loss in weight of material by 62 MT and 76 MT during 1998-99 and 1999-00 respectively. Its efforts to dispose of the damaged material in May 2000 did not materialise. While IOCL, after inspection of the material, informed (May 2000) that it was not suitable for them; the Mumbai Refinery informed (August 2000) that they did not need it. When the Company once again got the material inspected by another certified valuer, it was reported (March 2001) that the material was fully damaged and would have to be disposed of as scrap. The Company wrote off Rs.45.33 lakh representing the loss in weight of the material by another 196 MT during the year 2000-01 and the balance amount of Rs.84.70 lakh in the accounts for 2001-02 on the grounds that the material was no longer useful for the purpose for which it was procured although the valuer indicated a realisable value of Rs.29.27 lakh.

Management, while confirming that the cold rolled steel coils had been stored in the open, stated (June 2002) that in the aftermath of fire accident of September 1997 the Company had given priority to restart the production and revive infrastructure. The available closed space was utilised for storing catalysts and chemicals, which could not be left in the open.

Management’s reply is not tenable. Though the circumstances immediately after the fire accident were undoubtedly extraordinary and it would be reasonable to expect the Company to give priority to restarting the facilities; it is, however, stretching the argument too far if it is claimed that in the five years following the accident it could not either dispose of the material or store it properly. Surely this reflects negligence on Management’s part.

Thus, the Company lost Rs.1.33 crore after considering the realisable value of Rs.29.27 lakh as assigned (March 2002) by the valuer due to improper storage.

The matter was referred to Ministry in July 2002; their reply was awaited (September 2002).

17.4.4    Extra expenditure of Rs.1.22 crore due to premature failure of Trim Cooler

In order to conform to specifications of sulphur content in diesel, the Company decided to set up a Diesel Hydro Desulphurization (DHDS) Unit at its refinery unit in Vishakapatnam. The Company acquired the right from M/s. Kinetics Technology International BV, Netherlands (KTI), the process licensor to utilise the technology for a hydrogen manufacturing unit (HMU) which formed part of DHDS Unit. The Company entered (May 1996) into a contract with Engineers India Limited, (EIL) New Delhi to execute the entire project. It placed (February 1998) an order on Larsen and Toubro Limited (L&T) for design, engineering, supply and commissioning of DHDS Unit including HMU on a turnkey basis.

The HMU included a Trim Cooler, which is a heat exchanger used for removing the heat from the process gas containing hydrogen by means of re-circulating sea water. For the construction of the Trim Cooler, KTI initially specified the use of stainless steel of specification 3RE60 or Titanium. However, in the technical review meeting (February 1997), which was attended by representatives of the Company, KTI and EIL, it was decided that the tube metallurgy for the cooler should be of titanium only. Despite this, neither KTI, who was responsible for furnishing the Basic Design and Engineering Package (BDEP) nor the Company ensured that the above correction was carried out in the BDEP forwarded to L&T. Consequently the data sheet enclosed with the BDEP forwarded to L&T gave an option of using either 3RE60 or Titanium in the manufacture of Trim Cooler. Accordingly, L&T opted to use grade 3RE60 for manufacturing the Trim Cooler.

During the commissioning of the DHDS Plant a leakage in the Trim Cooler was observed during March/April 2000. On investigation, the cause for the premature failure of the Trim Cooler was attributed (July 2000) to the use of 3RE60, which was unsuitable for sea water service. Since full capacity utilisation of the Hydrogen Plant was not possible in the absence of Trim Cooler, the Company placed (October 2000) a separate order on L&T for re-tubing of the damaged Trim Cooler with material of superior metallurgy at a cost of Rs.72 lakh. With duties and other charges, it finally cost Rs.98 lakh. Another Rs.24 lakh was also due to be paid to KTI towards the cost of its supervisors’ stay during the trim cooler repair. The DHDS Unit was finally commissioned (April 2001) after re-tubing the Trim Cooler.

While seeking the approval of the competent authority for the replacement of the damaged Trim Cooler, the Company was silent on fixing responsibility internally for the failure to ensure incorporation of correct specification. Instead, it was stated that necessary steps would be taken subsequently to recover the replacement cost as per the terms of the contract from the defaulters. In the meanwhile, it had charged off the entire expenditure of Rs.98 lakh to the cost of project in the accounts of the year 2000-2001.

Management stated (July 2002) that KTI was solely responsible for the omission and the consequent additional costs. However, clause 9.1.4.2 of the contract restricted the total cumulative liability of KTI to 50 per cent of BDEP price, which worked out to Rs.62 lakh. The Company had withheld payments to the extent of Rs.80 lakh and was confident of recovering 50 per cent BDEP price.

The above reply of Management is not tenable. Firstly, Rs.62 lakh recoverable from KTI under the provisions of the contract would not compensate the Company towards the additional expenditure incurred on repairing the trim cooler. Further, the penalty for not achieving the performance parameters (Rs.10 lakh) also needs to be accommodated within the above amount. Secondly, the Company was aware of the requirement that only material of higher metallurgy was to be used for Trim Cooler. It could have ensured that the necessary correction was carried out in the data sheet supplied to L&T. It is no consolation that the proces licensor takes responsibility for any omission, because such liability is restricted to a ceiling of 50 per cent of BDEP price. Lastly, considering all the liabilities that have to be met by the process licnsor (Rs.98 lakh, Rs.24 lakh and Rs.10 lakh) and the ceiling amount (Rs.62 lakh), the Company would stand to lose Rs.70 lakh.

Thus, the failure of the Company in ensuring the incorporation of the correct specification of the material to be used in the manufacture of Trim cooler in the data sheet enclosed to BDEP resulted in avoidable expenditure of Rs.1.22 crore (Rs.98 plus Rs.24 lakh).

The matter was referred to Ministry in July 2002; their reply was awaited (September 2002).

IBP Co. Limited

17.5.1    Infructuous expenditure on floating roof tanks

Construction of two floating roof tanks before OCC’s decision to confer the Primary Pricing Point status to Cauvery Basin Refinery resulted in infructuous expenditure of Rs. 1.16 crore.

The Cauvery Basin Marketing Terminal (CBMT) of IBP Co. Limited (Company) adjacent to Cauvery Basin Refinery (CBR) installed two floating roof tanks in the year 1993 at a cost of Rs. 1.16 crore. These tanks had the capacity to store 6181.791 KL motor spirit (MS). The huge storage capacity was created in anticipation of Oil Coordination Committee (OCC) conferring the Primary Pricing Point (PPP) status to CBR which would have necessitated the re-demarcation of economic area of distribution, thereby increasing the CBMT fed area and increase in demand. CBMT had two additional underground tanks to store MS with a capacity of 70 KL each.

The Company established such a high storage facility inspite of the fact that MS was not in the product range of CBR and would have to be moved by road/rail. The sales in the three districts fed by CBMT, as per detailed feasibility report, was low and the expected demand in 1993-94 was 11187 MT with an annual growth rate of 6 per cent. The average daily off-take in 2000-2001 was 110 KL only. The storage was handled through two underground tanks of 70 KL each which were more than adequate. OCC refused (January 1994) to accord PPP status to CBR on the ground that Pool Account would experience additional outgo. Therefore, the anticipated spurt in demand did not materialise and the two floating roof tanks installed in 1993 remained unutilised for nine years (July 2002).

Management stated (March 2001) that the MS tanks could be used for storing Naphtha whose production was substantial and demand in the area around CBR was hardly sufficient leading to containment of the product at CBR and CBMT. Ministry stated (January 2002) that these tanks could not be used for storing Naphtha due to high inventory carrying cost. It further stated that these tanks would be used for storing MS/Naphtha after the CBR expansion was complete.

The reply is not tenable because CBMT had three tanks earmarked exclusively for Naphtha with storage capacity of 28719 KL sufficient to meet the containment problem. Further, due to high inventory carrying cost tanks under reference could not be used for storing Naphtha.

Ministry’s contention that the tanks would be used for storing MS/Naphtha after the CBR expansion is not borne out by the facts as the post expansion product pattern of CBR does not envisage production of MS.

Thus, construction of two tanks without OCC’s decision to confer PPP status to CBR resulted in infructuous expenditure of Rs.1.16 crore on construction of MS floating roof tanks.

Indian Oil Corporation Limited

17.6.1    Infructuous expenditure on setting up of propylene separation unit

Board of Directors of Indian Oil Corporation Limited (Company) approved (October 1995) setting up of propylene separation unit (PSU) of 25000 TPA at Panipat Refinery at an estimated cost of Rs.45.35 crore on the basis of estimated demand and supply analysis. As per expert group report on petrochemicals prepared by Rakesh Mohan Committee appointed by the Government, there would be a deficit of 764 TMT of propylene by the end of the century. The Company also approved (December 1995) setting up a downstream acrynolonitrile (ACN) plant at Panipat, which would use entire propylene produced by this unit and by the Mathura unit as its input. This project could not materialise due to technical/safety reasons. However, the Company did not review the decision to set up PSU.

It was noticed in Audit that an existing PSU at Mathura refinery could only produce 2013 MT (8.39 per cent) and 5510 MT (22.96 per cent) only in 1996-97 and 1997-98 respectively against the installed capacity of 24000 MT. However, even at this stage the Company did not review project viability. In August 1998, Marketing Division recommended that the implementation of PSU be kept in abeyance until firming up of downstream project. This was not done on the logic that sufficient progress had already been made on the implementation of the project.

The plant was finally commissioned in August 2000 at a cost of Rs.36.44 crore. However, due to delay in construction of despatch facilities required for selling propylene in the open market, the commercial production could commence only in May 2001.

Against the installed capacity of 25000 MT, actual production in 2001-02 was 1469 MT only while the Company could not sell 636 MT by 31 March 2002. Thus, Management’s failure to appreciate the situation arising out of non-materialising of ACN project, downward price trends of propylene in the international market, under-utilisation of existing PSU at Mathura resulted in infructuous expenditure of Rs.36.44 crore on setting up of an unviable PSU at Panipat.

Ministry endorsed (February 2002) the reply of Management that from April 1997 there was a downward trend in the demand and price of propylene due to (i) overall slow-down in economy of Asia-Pacific region and (ii) sale of propylene at cheaper rate by other manufacturers whose cost was lower as compared to the Company. While the project was under implementation (August 1998) various customers like IPCL and Liberty Footwear approached the Company for the supply of propylene. Therefore, it was not prudent at that stage to discontinue the project as the Company had spent substantial amount on PSU. Management further replied (March 2002) that project had been declared as completely idle, economically unviable and possibility to shift it to Haldia Refinery was being explored (March 2002).

Management in its reply had admitted that there was slow-down in the economy from April 1997. Further, the Company was expected to consider the market demand, supply and sale price of its competitor at the time of assessing the viability of the project. Moreover, by its own admission, the Company has found the project was economically unviable and justifications by the Company for the continuation of a unviable project are not tenable as purchases by the customers was not enough to utilise even existing capacity available at Mathura. Further delayed review of the project resulted in this fait accompli.

17.6.2    Avoidable expenditure on construction of terminal rendered idle

Ministry of Petroleum and Natural Gas (MOP&NG) decided (July 1997) to allocate fuel to Independent Power Producers (IPPs), on the recommendations of Ministry of Power, through the Company. The MOP&NG wrote (July 1997 and August 1998) to the Director (Marketing) of the Company confirming Naphtha fuel linkages to 3 IPPs. The linkage was subject to achievement of financial closure of the project and finalisation of fuel supply agreement for firm fuel linkage within six months from the date of issue of the order of allotment failing which the linkage was to be cancelled. The Fuel Supply Agreement (FSA), approved by MOP&NG, stipulated that the Company would commence supply of fuels to the IPPs not earlier than 15 months nor later than 24 months in respect of IPPs announcing financial closure. The FSA could be terminated if financial closure did not occur within three months of the agreement.

The Company signed FSAs with 5 IPPs in December 1997 and with one IPP in November 1998 for supply of Naphtha/Furnace Oil (FO). None of the IPPs achieved financial closure, which was a precondition prescribed by the MOP&NG while allocating fuel linkages and also in the FSA. However, the Company proposed (February 1999) to construct a terminal at Kakinada with 42,750 KL storage capacity of Naphtha (3 x 14250 KL) and allied facilities at a cost of Rs.44.42 crore. The Board of Directors of the Company approved construction of the terminal in March 1999, before IPPs had achieved the financial closure. The project was to be completed in a period of 24 months.

Construction of two Naphtha tanks with allied facilities was completed by March 2001. In the meanwhile the 3 IPPs who had confirmed Naphtha fuel linkages were instead allocated gas linkages by MOP&NG in June 2000. In view of the changed scenario, the Company made a mid term review and the third tank was converted for storing FO, without obtaining clearance of the State Pollution Control Board and without clarifying this situation to IPPs which were to be supplied FO. The third tank was completed in September 2001

Meanwhile, the Company obtained (August 2001) environmental clearance for storage of High Speed Diesel (HSD) from Ministry of Environment and Forest, when the terminal already stood constructed to handle Naphtha and FO. The revised ‘No Objection Certificate’ from State Pollution Control Board for storage of HSD as stipulated by Ministry of Environment and Forest while granting environmental clearance was still to be obtained. The Company stated (August 2002) that clearance of State Pollution Control Board for storage of HSD and FO was awaited.

The total cost of the terminal including land cost was Rs.31.07 crore with 2 floating roof tanks for Naphtha with allied facilities and 1 cone roof vertical tank for FO without dockline. The entire facility is lying idle till date (August 2002).

The Company stated (August 2002) that it had decided to construct terminal before IPP’s closure as a marketing strategy, a proactive step to ensure that they do not lose business for want of facilities to other Oil Marketing Companies. The Company further added that very valid assumptions of Naphtha did not materialise only due to discovery/availability of a new fuel, which could not have been anticipated earlier.

The Company was not justified in dismissing the fundamental requirements of IPPs achieving financial closure. Financial closure was a condition precedent to the obligation of the parties to the FSA coming into force and effect. As the FSA provided for payment of substantial commitment charges by IPP’s on their financial closure to the Company, this alone would have ensured commitment of the IPPs to the usage of infrastructural facilities developed for supply of fuel. Further, the FSA itself provided the IPPs with the option to switch over to liquified natural gas / natural gas. Hence, the Company cannot claim that it could not have anticipated the allocation of gas linkage to IPPs. In view of the above, the change in fuel which happened 2 to 3 years after fuel supply linkages, had no connection with injudicious decision of the Company to make huge investment.

In reality, no IPP had come into existence and as such demand for neither Naphtha nor FO materialised. The Company had no viable utilisation plan, products to be handled etc. resulting in infructuous expenditure of Rs.31.07 crore.

The matter was referred to Ministry in May 2002; their reply was awaited (September 2002).

17.6.3    Injudicious investment in residential accommodation

The decision of the Company to acquire residential accommodation for officers at Kolkata without a realistic assessment of future demand, led to blocking of Rs.5.60 crore due to non-completion of the project coupled with decreasing demand for accommodation.

Considering the acute housing problem in Kolkata and shortage of flats for officers, the Company decided (August 1994) to acquire 104 flats at Kolkata for its officers at an estimated cost of Rs.18.25 crore. Accordingly, the Company entered (September 1995) into an agreement with Kolkata Improvement Trust (CIT) for the purchase of 104 flats on a long-term lease of 75 years against a premium of Rs.13.99 crore. The construction of all the flats with ancillary facilities was scheduled to be completed within 30 months of the date of agreement (i.e. by March 1998). The agreement provided progressive payment against different stages of completion of flats. Accordingly, the Company released Rs.5.60 crore by September 1995.

Although the flats were to be completed by March 1998, CIT made a demand (December 1998) of second instalment of 25 per cent of the total premium for the flats and car parking totalling to Rs.4.78 crore. The Company, however, did not release any payment. Instead, it reassessed (March 2001) the requirement of flats in view of substantial reduction in demand for Company accommodation due to attractive self lease scheme as well as downsizing of manpower and it was felt that there would be no additional requirement of flats in the coming years. Finding it difficult to recover the amount from CIT, the Company requested CIT to hand over the completed flats equivalent to the amount of advance already paid. Though the CIT agreed (December 2001) to hand over 40 flats completed in all respect at a cost of Rs.5.37 crore, the Company had not accepted the same as yet (August 2002). The revised proposal for reducing the purchases to 40 flats had not been put to the Board yet for ratification of their earlier approval for purchase of 104 flats.

Thus, failure to synchronise the requirement of flats for the officers with the changed circumstances resulted in blockage of Rs. 5.60 crore since September 1995.

Management while accepting the facts, stated (August 2002) that:

1. CIT had not yet completed construction of 40 flats; and
2. presently the Company-owned accommodation were fully occupied and the 40 flats, as and when completed, would be utilised for residential and other official purposes.

The contention of Management is at variance with their stand before the CIT since even though CIT had agreed to complete the flats in all respect within one year of the date of confirmation by the Company in this regard, the latter had given no such confirmation so far. Further, while reassessing the requirement of flats, the Committee had felt that with the availability of 62 Company owned flats, there would be no additional requirement of flats in the coming years.

Thus, the Company apparently has to make up its mind so that its blocked funds of Rs.5.60 crore since 1995 can be put to productive use. As stated earlier, however, against the booking of 104 flats, the utilisation of the reduced requirement of 40 flats is also far from certain. The Company had not confirmed the acceptance of these flats so far (August 2002) even though the offer was received from CIT in December 2001.

The matter was referred to Ministry in July 2002, their reply was awaited (September 2002).

17.6.4    Unproductive expenditure due to non-reduction of surplus manpower at Delhi bottling plant

Delhi LPG (Liquified Petroleum gas) Bottling Plant of the Company having installed capacity of 132 TMT (Thousand Metric Tonnes) per annum was commissioned at Tikrikalan in 1988. As per the existing deployment pattern, the plant showed the requirement of 215 Blue Collar Workers (workers) against which 206 workers were positioned in May 2001 with a shortfall of 9 workers which was being covered by engaging workers on overtime basis. The LPG plants at Karnal and Madanpur Khadar with an installed capacity of 88 TMT per annum each had staff requirement of 89 and 82 workers respectively. Keeping in view the requirements and staff deployment at other plants, the Plant Manager, Delhi Bottling Plant, in a study conducted in May 2001, recommended the deployment of 109 workers only against the 206 in position. He further recommended gainful deployment of the surplus 97 workers at other locations. However, the surplus manpower had not been reduced so far (July 2002). Consequently, the salaries and allowances paid to the surplus workers amounting to Rs. 2.91 crore per annum became unproductive. This amounted to Rs.14.55 crore in last five years.

Further, despite surplus manpower at the Delhi Bottling Plant, the Company paid overtime allowance of Rs. 16.25 crore (including arrears of Rs. 5.64 crore paid in 2000-01) during last 5 years ending March 2002. There had been continuous increase in the payment of overtime allowance to workers at the plant, which could be seen from the chart given below. It increased from Rs.1.55 crore in 1997-98 to Rs.2.87 crore in 2001-02.

Significantly, the actual overtime payment was far in excess of budgeted overtime and ranged between 109.5 per cent and 276.81 per cent during the above period. It was also noticed in Audit that despite surplus manpower of 97 workers against the total requirement of 109 workers, average overtime payment was as high as Rs.1.40 lakh per worker per annum.

Management in its reply stated (June 2002) that reduction of surplus manpower at bottling plants had always been its concern and therefore, efforts were on to optimise the deployment pattern through discussion with the collectives. Further, increase in the payment of overtime allowance was due to increase in overtime allowance rate. Ministry endorsed (Septmber 2002) the view of Management.

The reply is devoid of any merit because the payment of overtime is in itself questionable. Management has clearly failed to rationalise the staff structure in line with its other bottling plants. Further, instead of reducing surplus manpower available and redeploying them, it continued to pay overtime allowance for activities that could have been performed by fewer personnel. As a result of foregoing deficiencies in Management, the Company was loaded with an unproductive expenditure of Rs.2.91 crore per annum on salary and allowances to surplus manpower.

17.6.5    Avoidable payment of irrecoverable excise duty

State surcharge is part of assessable value for payment of excise duty on petroleum products with effect from 3 July 1996. The State Surcharge rate, however, varies from State to State.

The Company was supplying High Speed Diesel Oil (HSD) to its customers located at Madurai, Tirunelveli, and Coimbatore in Tamil Nadu from their storage points at Trivandrum and Palakkad in Kerala. As the product was moved from Kerala, excise duty was paid by the Company on the assessable value, which included Kerala State Surcharge rate which was higher than Tamil Nadu. However, the recovery was made from customers in Tamil Nadu based on the rate applicable for Tamil Nadu. Thus, during the period between July 1996 and December 1998, the Company suffered a loss of Rs.1.65 crore on the sale of 265128 KL of HSD. Only in January 1999, the Company took corrective action of earmarking of stocks meant for Tamil Nadu customers in the depots in Kerala by which excise duty paid was recovered from the customers. The inordinate delay of over 2 years in taking corrective action resulted in loss of Rs.1.65 crore.

Management stated (January 2002) that after analysing other alternatives like provisional assessment and increase in price which were not found feasible, the new system of declaring different assessable values for Tamil Nadu and Kerala customers was introduced from January 1999 to avoid under-recovery. However, the delay of over two years in arriving at the above decision resulted in loss of Rs.1.65 crore and Management approved (March 2000) absorption of loss on this account.

The matter was referred to Ministry in April 2001; their reply was awaited (September 2002).

17.6.6    Failure to nominate the vessel for upliftment of material at agreed schedule

Failure of the Company to nominate vessels for upliftment of High Speed Diesel from Kuwait when nominated vessel was held up due to a cyclone at Kandla port resulted in extra expenditure of Rs.1.45 crore

According to contract between the Company and Kuwait Petroleum Corporation (seller), the former was to lift 2 cargoes of High Speed Diesel (HSD) of 40-45 TMT (thousand metric tonnes) each with loading days as 15-16 June 1998 and 22-23 June 1998 on FOB Kuwait basis. The vessel nominated by the Company for lifting HSD was held up at Kandla due to a cyclone that hit the Kandla port on 9 June 1998. At the request (15 June 1998) of the Company, alternate vessel (MT CD Singapore) nominated by Transchart (A wing of the Ministry of Surface Transport (now Ministry of Shipping), with lay days 15-17 June 1998 also failed to reach the load port on time. Arrangement with the other vessels (Olympic Venture and Olga) could not be finalised due to technical problems. In the meantime, the seller, to offload their heavy stock, chartered a floating storage vessel at the Company’s cost. Finally, the original nominated vessel was again nominated (25 June 1998) and it lifted HSD on 3 and 9 July 1998 from the storage vessel. An amount of US$ 0.524 million (Rs.2.29 crore) claimed (May 2000) by the seller towards storage and other associated costs for delay in lifting HSD was settled for US$ 0.310 million (Rs.1.45 crore) in May 2001 with the approval of the Empowered Standing Committee.

Legal opinion sought (August 2000) by the Company envisaged that the Company might be in a position to take action against the alternate nominated vessel (CD Singapore), if it fixed lay days on guarantee from the vessel owner and vessel failed to meet the lay days. It was observed in Audit that the Company had not taken any guarantee from the vessel owner and thus, no action could be taken against the vessel owner.

Management in their reply admitted (December 2001) the facts and stated that against 34 parcels handled in June 1998 there was problem in only two cases (Other case being on cost, insurance and freight basis, the loss was borne by the seller). Considering the major calamity at Kandla, the performance of the Company was an achievement. The overall good performance does not justify not obtaining the guarantee from the vessel owner to secure the Company’s financial interest and the Company has not fixed any responsibility in the matter.

Thus, failure to arrange alternate vessel on time and to secure adequate financial safeguards to protect the interest of the Company against vessel’s delay in reaching the load port, the Company had to incur extra expenditure of Rs.1.45 crore on storage.

The matter was referred to Ministry in July 2002; their reply was awaited (September 2002).

Oil and Natural Gas Corporation Limited

17.7.1    Avoidable loss due to flaring of gas

With a view to minimise avoidable flaring of Natural Gas and putting it to effective use by compression of Low pressure Natural Gas of Gandhar GGS (Group gathering station)-1 and GGS-IV at Ankleshwar project. Oil and Natural Gas Corporation Limited (ONGC) decided (February 1997) to arrange compression of Natural Gas in these fields to generate revenue by sale of gas. Accordingly, in August 1997 it decided to hire for an initial period of two years, low-pressure natural gas compression services at GGS I and IV for a total of 3 LCMD (Lakh cubic metres per day) capacity. Tenders were invited (September 1997) under two-bid local competitive bidding system for GGS IV only as the technical details for GGS I could not be firmed up.

The terms and conditions of the tender envisaged advance payment of mobilisation charges amounting to 10 per cent of the contract value to the contractor. After opening the bids (November 1997) the Tender Committee (TC) recommended the deletion of mobilisation advance clause and call for adjusted prices from the shortlisted parties as the policy in vogue did not allow any advance payment. It was, however, observed that the same circular did allow payment of advance as a special case with the concurrance of Member (Finance) and approval of Chairman. The L1 party John Equipment revised its price from Rs.590 to Rs.1045 per thousand cubic metres. The Region recommended acceptance of the original price with advance payment. The file was also forwarded to the Chairman for approval on 9 July 1998 which was instead approved by the Director (Operations) only on 29 July 1998 stating that the approval of Chairman was not required at this stage. The order was required to be placed immediately on L1 party as the bids were valid only up to 31 July 1998. ONGC, however, decided (1 August 1998) to re-invite tenders on global tender basis as it found the adjusted prices to be on higher side and validity had expired. Tenders were, accordingly, invited in January 1999 for both GGS I and IV. The contracts for hiring of two compressors were finally awarded to Shiv Vani Universal Limited and Deep Industries Limited in November 1999 and March 2000 for Rs.820 per thousand cubic metres (GGS I) and Rs.986 per thousand cubic metres (GGS IV) respectively. As against the schedule dates of May 2000 (GGS I) and September 2000 (GGS IV) the compressors were actually installed/commissioned in February 2001 (GGS I) and May 2001 (GGS IV). During the period between October 1998 to February/ May 2001 a total of 369138 thousand cubic meters gas worth Rs.45.08 crore was flared.

Ministry stated (June 2002) that the delay in arranging the compressors was on account of the following unavoidable circumstances:

1. Re-invitation of tenders as the parties had not extended the validity of original prices and the valid adjustment price was almost double the original price;
2. Identifying the possibility of utilising the existing compressors within ONGC for compressing the gas from GGS I; and
3. Delay by the contractors for which liquidated damage is being recovered.

The case has several disquieting features, which the reply of neither Ministry nor ONGC convincingly answers.

When the tender conditions in NIT had clearly stated about the advance payment, it was wrong on the part of tender committee to advice retendering after deleting the clause. In a way that committee exceeded its brief. The Region’s recommendation to honour the original NIT conditions was approved by the Director (Operations) who was not competent to do without going to the Chairman - the competent authority. The facts also were not clearly analysed by Management in this case, since, ONGC circular of April 1993 did allow, as a special case, payment of advance with the concurrence of Member (Finance) and approval of Chairman.

In effect therefore, both ethically and operationally, the decision to go in for fresh tenders when the existing tenders were responsive to NIT was flawed and uncalled for. To make matters worse, the tender for GGS-I could not be invited in September 1997 due to delay in firming up the technical details. ONGC took 42 and 45 months for arranging compression facilities for GGS-I and IV respectively as against the original schedule of 12 months.

Resultantly the purpose of hiring gas compression services was defeated due to the delay and consequently ONGC suffered a loss of Rs.45.08 crore because of avoidable gas flaring from October 1998 to May 2001.

17.7.2    Infructuous expenditure due to abandonment of projects

ONGC entered into Coal Bed Methane (CBM) exploration wells by drilling two CBM wells i.e. ‘DUAA’ and ‘DUAB’ in the Durgapur area, West Bengal in 1995-96. The wells were abandoned due to poor cementation. Cementation forms an integral part of successful well completion and the quality of primary cementation job is vital for both development and exploratory well. A good cement bond is one of the most critical aspects of a successful CBM well that must be hydro- fractured.

ONGC drilled a CBM well ‘DUAA’ in 1995-96 up to 1833 metres. However, due to poor cementing, hydrofracturing and stimulation job could not be taken up. The cement used had a compressive strength of only 500 to 600 psi, whereas for hydro-fracturing 1500 to 1600 psi compressive strength was required. The integrity was extremely poor making it impossible to test the objects. Zonal isolation was also doubtful. The strength of the cement had to be much higher. Therefore, the well was abandoned on 5 October 1996 after testing only a few objects. The total expenditure incurred on the well was Rs.17.53 crore.

ONGC drilled another CBM well ‘DUAB’ on 16 December 1996. As per the well programme production testing of six objects and hydrofracturing job was to be taken up in May 1997. However, the Cement Bond Log (CBL) and Variable Density Log (VDL) recorded on 21 May 1997 and 8 June 1997 showed poor cement bonding. Even after carrying out cement repair job and block cementation job the CBL-VDL did not show much improvement. Conventional cement was used for cementation but the cementation was too patchy. Any further cement repair job was unlikely to improve the cement bond and, therefore, none of the objects of DUAB were taken for hydrofracturing and production testing. The other accessories used in ensuring good cement bonding like the stage collar equipment also failed.

SA Holditch and Associates a foreign consultant recommended (July1997) that if the CBL-VDL does not show good bonding the well be abandoned. It may be possible to test object VI but only for research and data collection purpose. It would not be economically feasible to hydrofracture or produce the well with only one seam completed. The Well Stimulation Services of ONGC also recommended (July 1997) that the well was not suitable for stimulation job. However, ONGC continued to incur out unfruitful expenditure of Rs.1.71 crore on the well beyond July 1997 to September 1997. The well was finally abandoned on 9 September 1997. The total expenditure incurred on the well was Rs.8.83 crore.

Ministry stated (May 2002) that:

1. Poor compressive strength of cement was not the reason for not taking up hydraulic fracturing at well DUAA. Cause of poor cementation at DUAB was mainly attributed to mechanical failure of stage collar.
2. Two wells were drilled with the objective to generate CBM specific data to evaluate the prospectivity of coal seams and to optimise the technology. By drilling the wells first two objects were fully achieved.

The reply is not tenable due to the following:

1. ONGC’s internal report clearly indicated that the strength of the cement used in well DUAA was not sufficient to carry out hydrofracturing. As regards well DUAB, the enquiry committee reported inter alia that the cementation job was carried in the night under insufficient lighting arrangement and stage collar used was old.
2. The purpose of drilling CBM wells was to explore an alternate source of energy. Hydrofarcturing, which is essential for successful completion of the CBM wells, could not be carried out due to poor cementation. Also no production testing was undertaken and the production potential of the coal seams remained unknown.

Thus, the Company incurred infructuous expenditure of Rs.26.36 crore due to abandonment of wells.

17.7.3    Infructuous mobilisation of logging equipment

ONGC while inviting fresh tenders for Electro-logging contracts for the period 1996-98, decided (November 1995) to opt for a new technology, “logging while drilling” (LWD) as it was capable of providing real-time data. These tools were specifically intended for deployment in two wild cat exploratory wells of Kerala Konkan Project viz. ‘KKDW 17-A’ and ‘KKDW-A’. The Executive Purchase Committee approved (November 1997) the hiring of 2 sets (one for 12¼” hole and other for 8½” inch hole) of LWD equipment for six months period. ONGC issued letter of award (LOA) on the lowest bidder M/s. Schlumberger Asia Services Limited (SASL) in December 1997 for mobilising the LWD tools within 90 days.

The drilling of well KKDW 17-A was almost completed by the time the LOA was issued. As regards the second well, KKDW-A, the drilling was to be carried out by rig Sagar Vijay which was under repairs (December 1997) and was subsequently assigned (February 1998) an alternate location in East Coast. Thus, there were no wells for deployment of LWD at the time of issue of LOA and also at the time of mobilisation of tools on 17 June 1998, as such the tools remained idle.

ONGC decided to deploy the equipment in some other wells and carry out techno-economic analysis. Accordingly, it identified after 35 days (23 July 1998) two highly inclined wells (HX4 and HX9) in Heera Region, which were earlier planned to be drilled by rotary drilling. However, redeployment plan of LWD in these wells failed for want of position stabilizers and by the time the contractor could import the stabilizer, drilling in both wells had been completed by using wire line equipment.

Finally, one set of 8” tool was deployed in well HX-5H (12¼” hole) in September 1998 (for only 8 days). The same set was further deployed in well HX-8H. However, the drill string got stuck in the well at 1885 metres. It was finally abandoned resulting in a loss of US$ 1.03 million (equivalent to Rs.4.80 crore). The other set of 6¾” LWD tool was deployed in well HX-5H (8½” hole) but tools could not be lowered into the well in view of short landing of the casing. The tools were finally demobilised (26 October 1998) at this stage and a committee was constituted on 27 October 1998 to conduct techno-economic analysis of LWD operations and feasibility for further use.

The Committee analysed the LWD operations and feasibility for future use and concluded (8 November 1998) that in Mumbai Regional Business Centre environment the dispensation of conventional logging unit was not possible. Also, proportional dispensation of conventional logging against LWD was negligible as it provided only minor technical advantages. The committee in its report recommended that to avoid expenditure on non-operation period and stand-by/back up equipment in future first meticulous planning should be made about requirement of equipment and for the period same was required. Also re-export of all LWD equipment was recommended. The General Manager (Logging), however, suggested (12 November 1998) the tools be deployed in one or two wells before final decision on doing away with LWD technology.

ONGC, therefore, deployed (between 28 May 1999 and 8 June 1999) the LWD tools in B-55 A4 and B-55 A1 involving an expenditure of Rs.2.03 crore. The resultant resistivity log data was also found not useful. Finally, the tools were re-exported in September 1999. The decision of the General Manager (Logging), thus, entailed another fruitless expenditure of Rs.2.03 crore.

It is clear from the sequence of events that LWD tools were mobilised without ascertaining the status of drilling the wild cat wells. Well KKDW 17-A was in completion stage and drilling of well KKDW-A had been deferred at the time of mobilisation of the tools. The tools were mobilised without deciding on the wells to be used. All the decisions were taken only after the tools arrived and were used more as fait accompli.

Management stated (April 2002) that synchronisation of all the activities i.e. drilling and arrival and deployment of tools could not be made possible due to large amount of uncertainties which are part of the oil industry. Ministry endorsed (June 2002) the views of Management.

The reply is not tenable. The well KKDW 17A was spudded in October 1997 whereas the LOI was placed in December 1997. ONGC had ample time to ascertain the status of drilling before placing the order. Further, on 6 February 1998 the rig Sagar Vijay (earlier earmarked for well KKDW-A) was assigned an alternate location, still ONGC gave the green signal for mobilsation of the tools which resulted in the idling of tools for 35 days from 17 June 1998 to 23 July 1998. The infructuous mobilisation of the LWD equipment by the ONGC was also substantiated by the recommendations (November 1998) of the committee which conducted the Techno-Economic analysis of LWD operations and feasibility for further use to re export the equipment besides requirement be meticulously planned to avoid unnecessary expenditure on non-operation period and stand-by/back up equipment in future.

Lack of planning in mobilisation of the LWD tools and consequently, its ineffective utilisation resulted in an infructuous expenditure to the extent of Rs.26.03 crore. (Rs.15.96 crore had been paid to the contractor (August 2002) and the balance amount is yet to be settled).

17.7.4    Wasteful expenditure due to lack of planning

The drillship ‘Sagar Vijay’ of ONGC was undergoing repair and upgradation at the Cochin Shipyard Limited from November 1996. The scheduled date of completion was December 1997. In August 1997 ONGC entered into an Operation and Maintenance (O&M) Contract with M/s. SEDCO Forex International Drilling Inc. (SEDCO) for undertaking drilling operations in the deep sea after completion of the upgradation/repair job. On 19 December 1997 ONGC decided that as the rig was under final stages for commencement of drilling operations the drillship be handed over to SEDCO for making it ready for drilling operations. Accordingly a letter was issued to SEDCO for mobilisation of crew on the drillship from 29 December 1997. SEDCO agreed to commence the contract at 50 per cent of the operating day rate of US$ 28000 from the date of deployment of the crew till the time the ship sailed from the shipyard for commencing drilling operations. SEDCO mobilised the crew on 29 December 1997. However, the crew was not deployed for any work from 29 December 1997 to 9 February 1998.

The drillship sailed from the Cochin shipyard on 21 February 1998. It was seen from the daily progress reports of the drillship that SEDCO was involved in readying operations only from 10 February 1998 to 20 February 1998 i.e. for 11 days only. As on 23 December 1997 many of the items of repair were still continuing and in fact some items had not been taken up at all. ONGC paid an extra expenditure of Rs.2.25 crore to SEDCO for the period 29 December 1997 to 9 February 1998 due to incorrect assessment of available facts.

Management stated (July 2000/December 2001) that the personnel of SEDCO were associated with commissioning and testing of equipment required for deep water drilling operations, third party inspection, classification survey and taking over of complete inventory of stores and spares as per the contractual requirement till 21 February 1998. Considering that the rig was under repairs for a prolonged duration it was necessary that the crew of management and contractor moves in the rig well before the sailing of the rig so that sufficient time is available to the crew of O&M contractor to acclimatise with the equipment. As per the contract rig was to be inspected by third party before actual handing over of the rig and it was also considered prudent that the contractor’s crew was also present during inspection and testing of rig equipment.

The reply of Management is not tenable due to the following reasons:

1. The crew of SEDCO was involved in readying operations only from 10 February 1998 to 20 February 1998 i.e. for 11 days only.
2. The handing over of stores job was being carried on even prior to deployment of the O&M crew.
3. ONGC had specifically asked the contractor to mobilise the crew in anticipation of sailing of the ship on 29 December 1997. The ship, however, sailed on 21 February 1998.

Thus, unnecessarily early deployment of operation and maintenance personnel which occurred due to improper assessment of the availability of drill ship, resulted in extra expenditure of Rs.2.25 crore.

The matter was referred to Ministry in April 2002; their reply was awaited (September 2002).

17.7.5    Avoidable payment of customs duty

ONGC placed (November 1998 and December 1998) two purchase orders for import of Air winches and Diesel engine spares for its drill ships ‘Sagar Samrat’ and ‘Sagar Bhushan’ respectively.

The spares were received during May 1999 to June 1999. These were cleared after payment of customs duty amounting to Rs.1.25 crore. As per Customs Act, 1962 spares for foreign going vessels were eligible for nil customs duty if imported as under:

1. Through customs bonded warehouse under Section 85 of Customs Act and transferred on board the vessel by filing export shipping bill under section 69 or imported through transhipments permit under section 86 (2).
2. The goods were to be consigned to the master of the vessel and the import General Manifest was required to specify that the goods are ship stores/spares and for transhipment.

ONGC, however, did not avail the benefit thereby incurring an additional expenditure of Rs.1.25 crore.

Management admitting (March 2002) that no detailed study of customs duty rules and procedures was carried out and stated that the spares were not rig specific and mixing up could have resulted in not following the rule clearly.

However, the supply order clearly mentioned the name of the vessels for which the spares were being procured. During 2000-01, ONGC imported another set of spares for the same drill ships at nil customs duty under section 85 of the Customs Act.

Thus, the failure of ONGC to avail nil customs benefit despite the presence of a full-fledged team of finance professionals resulted in an avoidable expenditure of Rs.1.25 crore.

The matter was referred to Ministry in May 2002; their reply was awaited (September 2002).

17.7.6    Loss due to import of unproven technology

In October 1995, ONGC observed that a Hydro Impact Stimulation System technology invented by a foreign firm for increasing oil production from oil fields and wells was reportedly being applied in some oil fields in Russia. The technology was stated to be virtually cost-free but for the payment of licensing fee. ONGC decided to explore the possibility of implementation of the technology on nomination basis.

In February 1996, an ONGC team visited the Russian oil fields where the system was in operation. The team observed that in Russian oilfields, the application of the technology was examined neither by the operator nor by the USA based inventor. The team further reported that the operation of the technology was not demonstrated to their satisfaction. Despite this uncertainty, the team recommended (March 1996) application of this technology in two oil fields of ONGC viz. at Navagam in WRBC (Western Regional Business Centre), and Lakwa in ERBC (Eastern Regional Business Centre). The feasibility report (FR) for ONGC was prepared by the contractor M/s. Wave Technologies Limited, USA (WAVE) who claimed the success of the technology in 13 wells. This success was, however, not demonstrated to ONGC. ONGC awarded the contract to WAVE at US$ 0.23 million for its Navagam oil field for which letter of intent was placed in December 1997 and the contract was signed in May 1998. The oil gain on implementation of the technology was estimated at 0.664 MMT (0.16 MMT in the first year) over a period of 10 years with 6 months as pay back period at the then prevailing oil price of Rs.1991 per MT. The terms of the contract did not provide any performance guarantee either for the envisaged oil gain of 0.16 MMT in the first year of operation in the FR or the overall 10 percent oil gain specified in the contract. The supplier was, thus, completely absolved of the liability of proving the successful operation of the technology. The oil recovery from the 10 observatory wells actually dropped down to 10941 MT during the first year of operation of technology i.e. from January 1999 to December 1999 as compared to the production of 11894 MTs during the corresponding earlier year. The technology was after this declared unsuccessful. The entire payment of US$ 0.23 million (equivalent to Rs.1.21 crore) made to Wave from March 1999 to August 2000 was thus, rendered infructuous.

Ministry in its reply stated (June 2002) that:

1. The supplier did not reveal the process in greater details for the understanding of the ONGC as it was patented. It was anticipated that the technology could be understood in greater detail once the technology is applied in the field;
2. The price paid was towards the import of the technology and therefore insistence of performance guarantee would have padded up the price; and
3. the technology was tried for the first time and appropriately termed as research and development.

The reply is totally untenable on following grounds:

1. Before venturing into this unproven and unfamiliar technology as pointed out by the ONGC field team who visited the Russian fields with the consent of the technology holder, the ONGC should have ensured about oil recovery gains of the technology before implementation;
2. As the technology holder did not demonstrate the success of its technology, adequate performance guarantee should have been insisted by ONGC to safeguard its interests.
3. Further, it could not be termed as research and development item as the technology was imported in a compact and final shape from the inventor. The FR prepared by the supplier had also envisaged an oil recovery of 0.664 MMT on implementation.

It was surprising that the system purchase was recommended by the team and accepted by the Company despite their adverse factual description of the same. The decision, therefore, to buy the system was totally flawed and not based on any sound basis which eventually led to a loss of Rs.1.21 crore in this deal. The case calls for a fuller investigation to fix responsibility.

17.7.7    Avoidable payment of customs duty

Failure to award job of procurement and fitting of the propeller blades to registered ship repair unit by ONGC led to avoidable payment of customs duty amounting to Rs.1.10 crore.

The Indian Register of Shipping (IRS) had imposed ‘Condition of Class’ on four Offshore Supply Vessels (OSVs) of ONGC in 1996 and 1997 as the propeller blades were damaged. ONGC was required to replace/repair the propeller blades immediately. ONGC placed order for importing four ship sets of propeller blades directly in two consignments during 1997-98 and 1998-99 from the original equipment manufacturers M/s. Ulstein Private Limited. The first shipment arrived in Mumbai port in May 1998 and was cleared by payment of customs duty amounting to Rs.37.04 lakh. Though the blades were received in ONGC stores in June 1998, they were fitted on the OSVs Samudrika-18 and Sindhu-5 in September 1998 and March 1999 respectively during dry docking. The second consignment arrived at Mumbai Port in August 1999 and was cleared on payment of customs duty amounting to Rs.72.70 lakh. The blades were fitted on Samudrika-17 and Sindhu-8 in June-July 2000.

It was observed that capital goods and spares for ocean going-vessels imported and fitted by a ship repair unit registered with the Directorate General of Shipping of India were exempted from payment of custom duty (under customs notification 11/97 and 20/99 respectively). ONGC could have satisfied the above condition by awarding the repair and procurment job to a registered ship repair unit so that the repairs could be carried out during dry-docking. ONGC was also aware of the dry docking schedule of the OSVs. Therefore, the repair job could have been scheduled accordingly. However, slippage by Management on this account resulted in avoidable burden of customs duty of Rs.1.10 crore.

Ministry while endorsing (June 2002) the reply of Management (January 2002) stated that the replacement of blades could be decided only after survey by the IRS during dry docking, therefore the job for procurement of blades could not be included as a part of repairs. Ministry further added that the procurement of propeller blades against specific vessels could have increased the inventory as it was not certain for which vessel IRS will ask for immediate renewal/replacement. Therefore, the propeller blades were procured as insurance items.

The reply is not tenable in view of the following:

1. IRS imposed the ‘condition of class’ in 1996-97. As such, ONGC was aware of the condition of the propeller blades at the time of placement of order;
2. ONGC was also aware of dry-docking schedule of the vessels. Therefore, it could have placed the procurement order on a registered ship repair unit in such a way that after receipt of the equipment the same could have been fitted on the vessels during the dry docking period and also within three month of receipt of the equipment.
3. The Company took a year’s time to fit the propeller blades on the vessels after receipt in stores. As it had no intention of putting the material to immediate use ONGC could have very well given the job of procurement and repair to a registered ship repair unit.
4. In 1996 ONGC had availed benefit of custom exemptions by importing the blades through Mazagaon Dock Limited.
5. The procurement of propeller blades was made in accordance with the requirement worked by ONGC for the OSVs under ‘condition of class’.

Thus, the decision to import the propeller blades directly rather than awarding the job to a registered ship repair unit led to avoidable payment of customs duty amounting to Rs.1.10 crore.

17.7.8    Extra expenditure due to delay in finalisation of tender

The Eastern Regional Business Centre (ERBC) of ONGC was operating its six workover rigs in the Upper Assam Project during 1996-98 through four contractors at the daily rates of Rs.23095 for operations and Rs.17401 for inter-location movement. The contracts were to expire between 17 to 19 June 1998. ONGC had the option to extend them at the same rates, terms and conditions by one year in two instalments of six months each.

As per Company’s approved time-frame for processing of tenders for two-bid system, 30 days were required for invitation and receipt of tenders and 120 days for further processing.

In order to finalise fresh contract within the approved time frame, ERBC was supposed to start the process for invitation of tenders before 18 January 1998. ERBC, however, invited tenders only on 17 August 1998 despite the fact that the recommendations of two committees constituted to assess the rig requirement for next two years had already been received during January and April 1998 respectively. The Executive Purchase Committee had also approved bid evaluation criteria (BEC) to be incorporated in the new tender on 16 June 1998. Yet the tenders were invited only on 17 August 1998 and opened on 29 September 1998. It took ONGC further 206 days (29 September 1998 to 22 April 1999) to verify the details before opening the price bids on 23 April 1999. The lowest rates quoted in the tender were Rs.19000 for operations and Rs.2000 for inter-location movement which were substantially lower by more than 32 per cent than those received in the previous tender.

In the meanwhile, the Region extended the existing contracts twice for six months each during June 1998 and December 1998 at the existing rates. The Region approached (April 1999) the contractors, (three of whom were also being considered for award of the contract against new tender) to accept the extension from 18/19 June 1998 at the rates received in new tender. The contractors agreed (May 1999) to accept new rates only from 23 April 1999 i.e. the date on which the price bids were opened, on the ground that they had already incurred expenditure as per the terms of the old contracts. The extension of contracts on the old rates from July 1998 to April 1999 resulted in extra expenditure of Rs.1.06 crore.

Ministry admitted (October 2001) that the new agreement was finalised at a lower cost than the existing one, but such incidence was very rare, considering the inflation in the market rate for materials, labour etc. It was also stated that necessary precautions were being taken to avoid such eventuality in future.

The reply is silent on the question as to what caused the administrative delays. The reply also does not explain the delay during the period 17 June 1998 to 17 August 1998 i.e. delay of 62 days in inviting tenders after approval of BEC. Similarly the gap between the technical bids (29 September 1998) and price bids (23 April 1999) was abnormally excessive. As a result of the delay, ONGC came to know the decreasing price trend only on 23 April 1999, which was the date from which the bidders agreed to charge for the existing contracts at the lower rates

By not following its own prescribed schedule for inviting tenders ONGC incurred extra expenditure of Rs.1.06 crore which could have been avoided by finalisation of tenders well before the expiry of the existing contracts in June 1998.