The Comptroller and Auditor General (CAG) has objected to the government's move to narrow the scope of audit of Reliance Industries-operated KG-D6 block, official sources said, keeping alive the controversy over alleged malpractices by the company.

Government sources familiar with the matter said CAGis not inclined to conduct a routine audit while Reliance has argued that its contract with the government allows only financial audit, not a performance audit - a stand that seems acceptable to the ministry of petroleum and natural gas.

Sources close to Reliance IndustriesBSE 0.10 % said the company is willing to abide by all the requirements of its production sharing contract, but is not willing to accept a performance audit, which is not mentioned in the contract.

Before the cabinet reshuffle, the ministry under Jaipal Reddy had sent a note to CAG listing conditions laid out by the company. These include conducting only a financial audit and not sending the audit report to Parliament, which is done in the case of performance audits by the national auditor.

The petroleum ministry made its stand on audit clear after the new minister, Veerappa Moily, took charge this week. It also responded, in a statement, to allegations of malpractices levelled by activist-turned-politician Arvind Kejriwal on Thursday.

"The Production Sharing Contracts (PSC) provide for two audits, one by the Management Committee (MC) and the other by the Government. The Government can get an audit done by its representatives or through Chartered Accountants. Based on the audit by the Government, the cost petroleum will be determined and it will be crucial for finalising Government share of Profit Petroleum," the statement said.

The ministry said in 2007, when Murli Deora was minister, CAG was requested to conduct a "special audit" of certain oil and gas blocks.

The statement went on to say the company's issues would soon be resolved. "Reliance Industries Limited (RIL) has raised certain apprehensions regarding this audit and expressed their desire to discuss the issue further. The issues are likely to be finalised in the next few weeks," the ministry's statement said.

In its audit report last year, CAG had criticised the oil ministry for being lenient in enforcing contracts with exploration companies. It also questioned several practices followed by RILBSE 0.10 % in developing the block.

In response, Reliance had argued that oil and gas is a specialised, technical business, which is run by internationally accepted practices it had adhered to. It also requested the government to appoint any reputed international consultant, which has a deep understanding of the sector, to assess if the company had done anything wrong.

But the government did not agree. Instead, it reduced the amount of development cost the company could recover from gas sales. The ministry said since gas output was much lower than what was planned, Reliance cannot be allowed to recover the cost of surplus infrastructure it had built.

The company said its contract allowed full recovery of its costs, and it has initiated arbitration against the government. (Economic Times)