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Internal Audit Report – Business Development-Acquisition & Monitoring

.Confidential & Restricted Access1OIL | FY 2014-15 | BD – Acquisition & Monitoring

Internal Audit Report – Business Development-Acquisition & MonitoringCorporate Office

Report No: OIL/IA/AU-38.1/CO/2014-15/12Period covered: October 1, 2013 to September, 2014

Audit period: November 11, 2014 to November 22, 2014

Report date: February 25, 2015

OIL INDIA LIMITEDInternal Audit Department(For Internal Use Only)

Ref : OIL/IA/AU-38.1/CO/2014-15/12 Date : 25.02.2015

GM (BD)

Sub: Internal Audit Report of Business Development-Acquisition & Monitoring for Corporate Office for the period

October 1, 2013 to September 30, 2014

1. Please find attached herewith the Internal Audit report of Business Development-Acquisition & Monitoring forCorporate Office, Noida for the period October 1, 2013 to September 30, 2014. The report has been issued afterincorporating the management comments wherever received and further audit comments for necessary action at yourend.


2. The audit has been conducted on test check basis and based on the records / documents produced and theexplanations given to the audit. Consequently, the matters raised in this report are primarily those which have beenobserved during the course of our audit and are not necessarily a comprehensive statement of all the weaknesses orirregularities that may exist or all the compliances or improvements that could be made.

3. We take this opportunity of thanking you and your representatives for the assistance, co-operation and courtesyshown to us during our audit.

B. Hari ShankarChief Manager (Internal Audit)

CC : GGM (F&A) /Head (F&A)-BD/ GM (RM &Audit)

Page No.

Audit Scope and Audit Team 04

Summary of audit observations 05

Executive Summary 07

Detailed Observations 12

Annexure 40

Table of Contents


S. No. Audit Areas

1 Asset acquisitions

2 New opportunities

3 Monitoring

4 PR tracking

5 Creation of Service Entry Sheet (SES)

6 Manpower planning

Scope: Business Development – Asset acquisition / New Opportunities /


Audit team

Name Designation Role

Jyotirmoy Bhattacharya Senior Manager(Internal Audit) Team Lead

Ashish Kumar Pathak Sr. Internal Audit Officer Auditor

D.C Goswami Advisor Auditor

Summary of Audit Observations

S. No. ObservationRisk

Rating

Root Cause Category Status as perAuditee CommentsD O S F OP SNC

A. Common Observation

A1 Periodic updating of Checklist for new opportunities Moderate � � Compliance Pending

A2Delegation of Power(DOP) for Business Development(BD)activities

Moderate � � �

Settled

B. Project Carom, Russia

B1Mitigation of Key Risks associated with the project Tomsk61, Russia

Critical� �

Compliance Pending

B2 Non receipt of interest on loan to Joint Venture Critical � � Compliance Pending

B3 Penalty imposed due to violation of gas flaring rules Critical � � � Settled

B4 MOU not signed by requisite authorized personnel Major� �

Compliance Pending

B5 Non-availability of insurance coverage Major


B5 Non-availability of insurance coverage Major� �

Compliance Pending

B6No loan agreement entered between OIL and itssubsidiary formed for operating block

Moderate� �

Compliance Pending

B7 Issues on Valuation of License 61, Tomsk, Russia Moderate� � �

Settled

C. Block SS-04 and SS-09, Bangladesh

C1 Signing of Confidential Agreement with OVL Major� �

Compliance Pending

C2 Approval taken from CBC instead of BDC as per DOP Moderate� �

Settled

C3 Non compliance to the commitments made to CBC Moderate� �

Compliance Pending

Summary of Audit Observations

S. No. ObservationRisk

Rating

Root Cause Category Status as perAuditee CommentsD O S F OP SNC

D. Yemen Block – Block 82 & 83

D1 Need to reconcile differences JV expenditure Major � � Compliance Pending

D2Need to ensure compliance of timelines specified for payment of cash calls

Moderate � � �

Settled

D3Need to conduct operating committee meeting as per the defined timelines

Moderate � �

Settled

D4 Need to strengthen supervisory control over JV progress Moderate � �

Settled

D5Budget uploaded in SAP by finance instead of user department

Moderate �

Compliance Pending

D6 Delay in write off of expenses on relinquished block Moderate � �

Compliance Pending


Risk Rating CriteriaCritical Financial Irregularities with direct financial loss; Statutory Non-

compliances with imprisonment risk; Repetitive issues with negligence ofpolicies

Major Potential opportunity loss; Statutory Non-compliances with implication offines; Absence of policy or non-compliance to defined policies;Inefficiencies in operations

Moderate Improvement opportunities with no financial loss; Policy defined anddocumented but with minor procedural / control gaps

Root cause legend

Design deficiency D

Operating ineffectiveness

O

IT System deficiency S

Category

Financial F

Operating OP

Statutory Non Compliance

SNC

D7 Need to review pending amounts Moderate � �

Compliance Pending

D8 Need to check currency fluctuation difference Moderate � � Compliance Pending

D9 Need to check variance in trial balance Moderate � � Compliance Pending

Executive Summary


Key Observations

S. No. Observations Impact Management Action Plan

B1 Mitigation of Key Risksassociated with the projectTomsk 61, Russia :• Subsequent to the farm-out ,

the ability of Petroneft to fundits 50% share of capex wasnot clear in the note.

• The estimates given by M/sBayphase towards the fielddevelopment investment forUS$750 m was on veryhigher side which may resultto funding constraint infuture.

• No information / document

This may resultinadequateevaluationwith higherfinancial outgo.

• Considering the ability of Petroneft for funding its share, OIL hasagreed for fund Development Capex up to a level of US$ 45 Mn.Existing production and agreed development capex funding by OIL,the project to become self sufficient has been agreed.

• Total capex required for developing all fields. It has not taken care ofthe revenue being generated or to be generated from the project.

• A detail risk study is done by the advisors and their mitigationstrategy has been provided. Key risks have been discussed withPetroneft and common strategy has been made.

• Worldace is now being owned 50% by OIILBV. The charges arebeing time written and already agreed between the parties. Variousagreements shared in this regard may be referred.

• Noted and due requests will be generated.

Further Audit Comments:


• No information / documentavailable towards mitigatingother risks;

• As Stimul-T and World-Aceare 100% owned byPetroneft group, commoncosts were not recharged tothe respective companies ;

• Tax Audit were carried outonly upto 2011. HoweverTax audit for 2012 & 2013were not completed

Further Audit Comments: 1. Point by point action taken report of risk mitigation strategy should be

provided to audit for review.

2. Action should be initiated for the completion of Tax audit at theearliest and compliance for the same should be provided to auditfor record .

Key Observations


B2 Non receipt of interest on loan to Joint Venture :

Please furnish the details of loan outstanding as on30.09.2014 along with interest charged and recoveredas per loan agreement. Any delay will pile up interestliability and financial risk exposure to OII –BV(subsidiary of OIL).

Financial loss • There has not been any recovery of loandone so far. This is because of thefollowings reasons

• Cash requirement at the M/sStimul T level.

• Exchange rate volatility.

Further Audit Comments: The reasons fornot recovering the interest as stated in thedepartment reply is not tenable for honoringthis commitment. Please confirm interestdue to Petroneft against their loan liability ason that date.

B3 Penalty imposed due to violation of gas flaringrules :

Additional outgodue to payment of

• Flaring is the only option currentlyconsidering total production and


rules :

• Reason for not advising the penalty since inceptionof this agreement be furnished along with amountpaid on this account

• If this is continuing phenomena as per law , isthere any statutory action prescribed.

• Action taken report after review of due diligencereport for other risks stated be furnished to audit forreview.

due to payment ofpenalty

considering total production andtechnological challenges. Total penaltypaid is RUB 1,450,786.03 for gas flaring.It is expected that for the year 2014 to bearound RUB 2 million.

• The options are being explored. As perthe information available, there is nostatutory action prescribed.

• The response from PR may be found inthe attached risk mitigation list.

Further Audit Comments: As mentionedabove, the Response from PR may befurnished for review

Key Observations


B4 MOU not signed by requisiteauthorized personnel :

As per the approval the agreementhas to be signed by GM(BD) & GM(CS) , whereas it is signed only byGM(BD).

Non compliancesof the approval ofcompetentauthority.

Signature of CS or an authorization from CS will be taken, ifrequired.

Further Audit Comments: A photocopy of the signature takenfrom the CS may be provided for record for settlement of theissue.

B5 Non-availability of insurancecoverage :

A copy of the above insurances asper article 8.2 be provided withcomments on sufficient coverage asrequired under JVA

Heavy financialloss in case of anymisfortune /calamity

• Noted. The insurance paper would be sought from PR andprovided to IA.

Further Audit Comments: Already one month has lapsed andcopy has not been provided to audit. Please provide the sameat the earliest.


required under JVA

Key Observations


C1 Signing of Confidential Agreement with OVL :As required by SoU (Summary of Understanding)dated.27.02.2013, Oil will sign a separate confidentialagreement with OVL (ONGC Videsh Limited) fortechnical data obtained from Petrobangla by OVL

However , it was informed during audit that suchagreement has not been signed till date

Possibility of dispute OVL has confirmed that it did nothave a Confidentiality Agreementwith Petrobangla for data purchase.Consequently, while sharing thedata with OIL , OVL did not enterinto a CA .

Further Audit Comments:Compliance in this regard befurnished to audit at the earliest.


D1. Need to reconcile differences JV expenditure :

OIL’s share of cumulative expenses (US$ 37.02 lakhs)of the Yemen joint venture block 82 as on 30.09.2014,recorded in the books of account do not tally with theexpenditure statement (US$ 48.65 lakhs) provided bythe operator.Reconciliation statement was not available for review

Risk of wrong amounts being reflected in vendor ledgers.

The difference are being identifiedand shall be reconciled with thehelp of core team at the earliest.

Further Audit Comments:Compliance in this regard befurnished to audit at the earliest.

Detailed Observations


A. Common Observations


A. Defined process of periodic review of checklist, used for business developmentBackground: As per process, business development department maintains following checklists:• for Producing & Developed assets (P&D) , defining various parameters of evaluation, prepared in 2009• for exploration asset, prepared in 2011Observation1. As informed, checklist for Producing and developed asset (P&D) was put up for information to Board in 2009,

however minutes for the same couldn’t be produced to audit. Further, checklists for Exploration assets has notbeen put up to the Board till the date of our review i.e. November 20th, 2014.

2. The checklist for Producing asset had not been reviewed since 2009 to incorporate the latest developments inthe evaluation criteria

B. Appraisal of Blocks are not done on the basis of evaluation checklist.Background: As per process, new opportunity are first evaluated as per internal BD checklist. Only thoseproducing/developed opportunity which fulfills the evaluation criteria are being processed further.Observation: We reviewed 2 blocks (Russia and Bangladesh) on sample basis and noted that supportingdocuments certifying the fulfillment criteria of evaluation checklist is not available in both cases.

A1. Periodic updation of Checklist for new opportunities

Category

Financial

Operational a


Root Cause

Non compliance of the definedprocedure

Implication

Outdated checklist may cause lossof opportunity and selection ofineligible block

Risk rating

Critical

Major

Moderate a


1. To update the checklist, a brain storming session is being planned. 2. The checklist for Russian acquisition will be provided.3. The checklist is to provide the initial evaluation. In case of exploration assets, a number of information are already not available. Usually decision to

go for exploration assets is taken based on the expertise of the near by geology and expected prospectively of the blocks. Checklist for explorationasset would not be a right tool. It should always be a strategic decision.

Person responsible: Business Development Target date: As per timeline given belowFurther Audit Comments: 1. The department reply is general in nature. As pointed out by audit an updated checklist defining the steps to be taken foracquisition of new asset/opportunity be finalized in a time bound manner, preferably within 3 months i.e. before May 31, 2015. A copy of the same may befurnished to audit for review.2. However as per audit observation, there was no checklist followed for acquisition of Russian block. It is requested that same may be provided at theearliest as stated in reply.3. Audit is of the view that an evaluation checklist based on experience, the major criteria be decided to bring base uniformity. However, other evaluationcriteria can be looked into by the department in consultation with finance on case to case basis. After review, if feasible the same may be prepared and acopy to be provided to audit for record.

ineligible block

Recommendation

Auditee Remarks

Checklist needs to be reviewed andupdatedFollow standard procedures forblock evaluation

It is learnt from the presentation of ;the Business Development(BD) Department about their functioning that Newopportunities are internally evaluated by the BD department and if the asset/project appears to be viable as perInternal BD checklist then only, a note is put up to the management for approval of further processing ofasset/project• It is also observed that delegation of power (DOP) had not been defined for approval of day to day relatedoperation of assets/projects being handled by the department. Moreover there was no defined DOP at variouslevel for execution of the project activities.Delegation related to ongoing activities viz.,

• approval /authorizing the cash call payment• call/ approval of contract related to the assets

are obtained individually for each project, from the competent authority from to time.

• Documentation of the papers in the files are not proper and up to date (Papers are partly maintained in softcopies and partly are documented in file). Important documents are not filed especially in the Russia Projectlike copy of the Minutes of the Meeting etc.

Audit Comments :

1. To avoid such type of observation, it is suggested thata. For day to day common acquisition activities in BD group, the DOP should be either linked to General DOP

A2. Delegation of Power(DOP) for Business Development(BD) activities

Category

Financial a

Operational a


Root Cause

Standard DOP not defined foroperation of assets

Risk rating

Critical

Major

Moderate a


a. For day to day common acquisition activities in BD group, the DOP should be either linked to General DOPor if requires a separate DOP be got approved. A clarification may be furnished in this regard for reference.b. No comments on taking separate DOP for each asset/project as per requirement.

2. It is suggested that filling should be kept up to date for all important document to avoid gaps.3. In case of Russia acquisition, approval was obtained from CBC to authorize GM (BD) to approve payment for

cash call. However no such approval was obtained from CBC in case of Bangladesh block.

1. A general DOP for various acquired assets is necessary. Due proposal should be sent in this regard.2. Noted. Due care will be taken for filling of papers in future.3. Noted. This should be solved with the general DOP. However, this gap would be addressed through a separate

proposal to the Management.

Person responsible: BDTarget date: Closed

Further Audit Comments: In view of the auditee comments, observation is recommended to be settled

Implication

Possibility of same job bedelegated and executed bydifferent level personnel leadingto non standardizationDelay due to obtaining approvalfor each project.

Recommendation

Evaluate the need to define DOPand take corrective actions

Auditee Remarks

Department was asked to provide List of documents related to acquisition of New assets , however followingdocuments/information are yet to be received –

List of New assets acquired during the period from 01.10.2013 to 30.09.2014 with the Date of Investment, Amountof Investment, - Not Received

List of Opportunities identified but rejected at Preliminary process – soft copies with details. Not Received

List of assets accepted by management but couldn’t materialise /succeed later due to other reasons. Not Received

Checklist for Monitoring of existing asset, if any –soft copies ; Not Received

A3. List of Information yet to be received

Category

Financial

Operational a


Root Cause

Risk rating

Critical

Major a

Moderate


Person responsible: BDTarget date: Immediate

Implication

Possibility of dispute

Recommendation

SoU should be signed at theearliest

Auditee Remarks

B. Observations –Project Carom, Russia


Project Carom, Russia

While putting up the proposal to the 24th Business Development Committee(BDC), it is noted that there are anumber of risks related to the project: Project Tomsk License 61, Russia. These were mainly divided intoTechnical, Financial and Other Key Risks.

While Mitigation of all the Technical issues have been clarified in the above mentioned BDC, clarification on theFinancial risk and Other Key Risks have been addressed differently.

Audit comments :1. Subsequent to the farm-out , the ability of Petroneft to fund its 50% share of capex was not clear in the note;2. The estimates given by M/s Bayphase towards the field development investment for US$750 m was on very

higher side which may result to funding constraint in future.3. No information / document available towards mitigating other risks;4. As Stimul-T and World-Ace are 100% owned by Petroneft group, common costs were not recharged to the

respective companies;5. Tax Audit were carried out only upto 2011. However Tax audit for 2012 & 2013 were not completed.

B1. Mitigation of Key Risks associated with the project Tomsk 61, Russia

Category

Financial a

Operational


Root Cause

Key financial risks and otherrisks are not clarified in anydocument

Risk rating

Critical a

Major

Moderate

Auditee Remarks


1. Considering the ability of Petroneft for funding its share, OIL has agreed for fund Development Capex up to alevel of US$ 45 Mn. It is expected that with the existing production and the agreed development capex fundingby OIL, the project to become self sufficient.

2. That is the total capex required for the developing all fields. It has not taken care of the revenue beinggenerated or to be generated from the project.

3. A detail risk study has been done by all the advisors and their mitigation strategy has also been provided. Fewkey risks have also been discussed with Petroneft and a common strategy has been made.

4. World ace is now being owned 50% by OILBV. The charges are being time written and already agreedbetween the parties. Various agreements shared in this regard may be referred.

5. Noted and due requests will be generated.

Person responsible: BD Target date: 28th Feb’15Further Audit Comments:

1. Point by point action taken report of risk mitigation strategy should be provided to audit for review.

2. Action should be initiated for the completion of Tax audit at the earliest and compliance for the same shouldbe provided to audit for record .

Implication

This may result inadequateevaluation with higher financialoutgo.

Recommendation

BackgroundA shareholder loan agreement has been entered between M/s OII BV & M/s World Ace for capex funding of $45 million wherein OII BV will provide the loan to Joint Venture- M/s World Ace, for capex development of theproject to be carried out in 2014 & 2015.

As per the loan agreement, interest will be levied at the rate of 6% + LIBOR on 5th business day of succeedingmonth of each quarter (i.e. 5th Oct ’14 for quarter 2).

ObservationStatus of interest received has not been appraised to audit

Audit Comments:

Please furnish the details of loan outstanding as on 30.09.2014 along with interest charged and recovered as perloan agreement. Any delay will pile up interest liability and financial risk exposure to OII –BV (subsidiary of OIL).

B2. Non receipt of interest on loan to Joint Venture

Category

Financial a

Operational


Root Cause

No process to monitorcompliance of JVA terms

Risk rating

Critical a

Major

Moderate


The loan outstanding as on 30.09.2014 is US $ 8.5 mn. There has not been any recovery of loan done so far. Thisis because of the followings reasons

• Cash requirement at the M/s Stimul T level.• Exchange rate volatility.

Person responsible: BD Target date: 28th Feb’15

Further Audit Comments: The reasons for not recovering the interest as stated in the department reply is nottenable for honoring this commitment. Please confirm interest due to Petroneft against their loan liability as on thatdate.

Implication

Financial loss

Recommendation

Evaluate need to implementprocess of monitoringcompliance of all terms of JointVenture Agreement

Auditee Remarks

BackgroundOn review of the due diligence report and related documents of the project few of the following risk observedrelated to the project:

A . Financial risk of the Russian project .As per the rules of Russian Government :• flaring of associated gas more than 5% is prohibited. Penalty will be imposed in case gas is flared in excess of5 % and

• associated gas not utilized for power generation must be re-injected .Currently associated gas is used to generate electricity in gas based power plant at project site.As per licence terms, gas can be sold however at present, infrastructure to transport / sell gas does not exist.

ObservationCurrently flaring of gas is more than 5% and associated gas are not re-injected. Due to this penalty had beenimposed by the authorities as stated by department.As confirmed by the department , penalty amount had not been confirmed yet by process owner , however It mayrange from RUB 800,000 (approximately USD 22,700) to RUB One Million (approximately USD 28,400)Audit Comments :

B3. Penalty imposed due to violation of gas flaring rules (1/2)

Category

Financial a

Operational

Statutory Non Compliance a

Root Cause

Re-injecting the Gas are notdone

Risk rating

Critical a

Major

Moderate


Audit Comments :1. Reason for not advising the penalty since inception of this agreement be furnished along with amount paid on

this account2. If this is continuing phenomena as per law , is there any statutory action prescribed.3. Action taken report after review of due diligence report for other risks stated be furnished to audit for review.

1. After a number of discussions, it has been concluded that flaring is the only option currently considering totalproduction and other technological challenges. For the period 1 Jan 2014 to 30 Sept 2014 the total penalty paidis RUB 1,450,786.03 for gas flaring. It is expected that the total for the year 2014 to be about RUB 2 million.

2. The options are being explored. As per the information available, there is no statutory action prescribed.3. Please find the same attached.

Person responsible: BD Target date: Closed

Further Audit Comments: In view of the auditee comments, observation is recommended to be settled.

Implication

Additional outgo due to paymentof penalty

Recommendation

Efforts should be made to limitthe flaring of gas within theacceptable limit

Auditee Remarks

B. Operational RiskBackgroundStimul-T does not have a direct tie-in of its facilities into the Transneft Pipeline System and highly dependable onthe pipeline facilities which belong to Nord Imperial LLC.The relevant services on oil pipeline transportation and storage are currently provided by Nord Imperial LLC toStimul-T on the basis of agreement No. 360-2009 dated 26 August 2009 (the "Nord Imperial Agreement"). TheNord Imperial Agreement is valid for 25 years, however, it provides for its termination in case of termination orrevocation of any permits or licenses of Nord Imperial LLC required for the performance of the Nord ImperialAgreement by Nord Imperial LLC, without any penalty for Nord Imperial LLC.

Observation:Risk of inability to get access to the Transneft Pipeline System in case of early termination of the Nord ImperialAgreement by Nord Imperial LLC in case of termination or revocation of any of its licenses/permits.

Audit Comments-

C. SUBSOIL USE

B3. Penalty imposed due to violation of gas flaring rules (2/2)

Category

Financial a

Operational

Statutory Non Compliance a

Root Cause

Inaccessibility of Transneftpipeline system in case oftermination of agreement

Risk rating

Critical

Major a

Moderate


The technical discrepancies in Subsoil License in 2011.ObservationThis may create difficulties with obtaining various documents based on or related to the Subsoil License.

1. The response from PR may be found in the attached risk mitigation list.


Further Audit Comments: As mentioned above, the Response from PR may be furnished for review.

Implication

The project may faceOperational difficulty

Recommendation

Earnest effort should be mademitigate the risk.

Auditee Remarks

BackgroundAs per approval of functional Directors, GM (BD) & GM (CS) were authorised to sign the MOU for Russian blockbetween OIL & JV partner Petro Neft (PR). MOU contains terms and conditions of joint venture viz., acquisition ofInterest , funding , condition for acquisition etc.

ObservationWe noted that the agreement was signed by GM (BD) only.

Audit Comments :As per the approval the agreement has to be signed by GM(BD) & GM (CS) , whereas it is signed only by GM(BD). Please furnish comments.

B4. MOU not signed by requisite authorized personnel

Category

Financial

Operational a


Root Cause

Approval has not be followed.

Risk rating

Critical

Major a

Moderate


Signature of CS or an authorization from CS will be taken, if required.


Further Audit Comments: A photocopy of the signature taken from the CS may be provided for record forsettlement of the issue.

Implication

Non compliances of the approvalof competent authority.

Recommendation

Approval taken should befollowed

Auditee Remarks

BackgroundAs per Article 8.2 of the JVA of Russian block , M/S World Ace (holding company of licence Holder) , shall procureand maintain all insurance as determined by the Board i.e. Insurance shall cover the physical assets of LicenceHolder (i.e. M/s Stimul-T, 100% subsidiary of Holding Company),Third Party liability , Pollution Insurance , Oil &Gas operation costs etc.

ObservationNo insurance policy was provided to us for verification till November 28,2014.

Audit Comments :

A copy of the above insurances as per article 8.2 be provided with comments on sufficient coverage as requiredunder JVA .

B5. Non-availability of insurance coverage

Category

Financial a

Operational


Root Cause

Non compliance of terms of JointVenture Agreement

Risk rating

Critical

Major a

Moderate


1. Noted. The insurance paper would be sought from PR and provided to IA.

Person responsible: BD Target date: 28th Feb’15.

Further Audit Comments: Already one month has lapsed and copy has not been provided to audit. Pleaseprovide the same at the earliest.

Implication

Heavy financial loss in case ofany misfortune / calamity

Recommendation

Evaluate need to implementprocess of monitoringcompliance of all terms of JointVenture Agreement

Auditee Remarks

BackgroundFor the purpose of funding of joint venture of Russia block, a subsidiary company named OII-B.V. was formed.Funding for Russian block through its subsidiary OII-B.V are shown as loan to OII-B.V by Oil India LimitedUS$. 8.5 million have been given to the subsidiary till September 30, 2014.

ObservationWe noted that no loan agreement have not been entered between OIL India Limited and OII-B.V.As the subsidiary is separate legal entity, formal loan agreements should have been in place.

Audit Comments :

Since no agreement has been entered between OIL and OIIBV, an amount of Rs.51.06 Crore( US$8.5 Million) hasbeen shown as Advance to Subsidiary (OIIBV) as at 30th September, 2014.

Further As per point no. 4 of the Written Resolution of the Board of Directors of OIIBV for Funding Stimul T and theCash call letters of Shareholders, OIIBV is required to get a facility agreement with its Shareholders (OIL) on theline of existing Facility agreement within 2 months from 3rd July, 2014 i.e. by 3rd September, 2014. The loanagreement between OIL & OII-BV, therefore be executed immediately and furnished to audit for review.

B6. No loan agreement entered between OIL and its subsidiary formed for operating block

Category

Financial

Operational a


Root Cause

The other party is 100%subsidiary hence agreement wasnot formalized.

Risk rating

Critical

Major

Moderate a


agreement between OIL & OII-BV, therefore be executed immediately and furnished to audit for review.

Moreover the date of the Written Resolution mentioned above is not clearly mentioned neither the signatories(Directors) have put any date while signing the resolution which ultimately vitiates the very purpose of anAgreement.

1. Noted.

2. Dates are not put up by the signing Directors considering most of the resolutions being signed on circulation.Once it is signed by all the Directors, it is dated and recorded.


Further Audit Comments:1. As per reply a copy of date recorded be furnished to audit. If the delay has been more than 2 months, ajustification of same should be submitted to competent authority and approval be provided to audit.

Implication

As the legal entity is different thetransaction may be questionedby authorities (Indian andforeign).Terms and conditions in relationto loan are not defined viz.,interest on loan

Recommendation

Formal agreement needs to beentered between OIL IndiaLimited and OIL B.V.

Auditee Remarks

BackgroundIt is observed from the IRR analysis done by M/S Rothschild who has done the financial due diligence of theproject under certain assumptions :

1. Oil Price- US $ 80/bbl (2014 real) long term all price with 2% inflation has been considered. Further, 4 yearforward curve is also considered for the valuation purpose resulting $ 22/bbl as net back as on 31.03.2014.

2. VAT applicable in domestic sale of crude was also not assumed in the Financial model considering aconservative approach.

Observation1. Since the valuation of the project was done considering the OIL price at $80/bbl scenario, the impact onreduction of crude prices are not mentioned in the BDC note.

2. Further nothing was mentioned regarding applicability of VAT.

3. Moreover, the project was also most sensitive in price and crude production, the valuation was done atproduction of ~2600 bopd level with an increase over a period of time. However we observed from the TuesdayMeeting Minutes of OIL that the production for week ending November15, 2014 have come down to 1754 bopd.Therefore views are required regarding decrease in production and measures taken by the project to uplift the

B7. Issues on Valuation of License 61, Tomsk, Russia

Category

Financial a

Operational a


Root Cause

Implication

Both shortfall in production andcontinuous decrease in crude oil

Risk rating

Critical

Major

Moderate a


Therefore views are required regarding decrease in production and measures taken by the project to uplift theproduction as per desired and targeted level.

1. At the time of BDC Meeting, the expectation of crude oil price was not downward rather upward. However, studies are being conducted to calculatedthe expected reduction in revenue.

2. As the model is at Cyprus level, Russian VAT applicability does not matter. The cost sheet used for modeling has taken care of the same.3. The assumption is model for production is based on the study till 31st Dec 2013. Two fields were expected to come online. However, because of the

delay in completion of farm out process, PetroNeft Resources could not complete the work. There is an agreed management financial model whichprovides better IRR then OIL’s model even with higher production assumption. Efforts are on to stick to the Management production level forecast.

Person responsible: BD Target date: ClosedFurther Audit Comments: In view of the auditee comments, observation is recommended to be settled

continuous decrease in crude oilprice will have very severe negativeimpact on the cash flow of theproject.

Recommendation

Same may be taken care in futureprojects.

Auditee Remarks

C. Observations –Block SS-04 and


Block SS-04 and SS-09, Bangladesh

As required by SoU (Summary of Understanding) dated.27.02.2013, Oil will sign a separate confidential agreementwith OVL (ONGC Videsh Limited) for technical data obtained from Petrobangla by OVL

However , it was informed during audit that such agreement has not been signed till date .

Audit Comments :-

Please inform whether there is any time plan to get the confidential agreement signed by OVL and OIL as per MOUto avoid any future obligations.

C1. Signing of Confidential Agreement with OVL

Category

Financial

Operational a


Root Cause

Oversight

Risk rating

Critical

Major a

Moderate


OVL has confirmed that it did not have a Confidentiality Agreement with Petrobangla for data purchase.

Consequently, while sharing the data with OIL , OVL did not enter into a CA


Further Audit Comment : As per SOU dt. 27.02.2013 ,OIL is required to sign a separate Confidentialityagreement with OVL irrespective of the fact whether OVL has signed a separate agreement with Petrobangla ornot. Compliance in this regard be furnished to audit at the earliest.

Implication

Possibility of dispute

Recommendation

SoU should be signed at theearliest

Auditee Remarks

As per 425th Board resolution dt.20.01.2012, any BD proposal valued in excess of $75 million should be put up tothe Business Development Committee (BDC) to approve submission of NBO .

We noted that for Bangladesh project, proposal was moved on March 26, 2013 for blocks SS-04 and SS-09 forbudget amount of $ 197.5 million. With 50% PI, proposal should have been moved for $ 98.75 million for BDCApproval. However proposal was moved for $ 72.4 million to CBC, considering bank guarantee amount to begiven to Petrobangla for 70% drilling cost and 80% seismic cost.

Further post-facto approval was taken from Board on April 10, 2013 for $ 72.4 million bank guarantee amount and $98.75 million budgeted cost.

Audit comments-

Please furnish comments on the above deviation for not routing the proposal through BDC .

C2. Approval taken from CBC instead of BDC as per DOP

Category

Financial

Operational a


Root Cause

Standard DOP not followed

Risk rating

Critical

Major

Moderate a


Due to strict timeline for submission of bid , the proposal was submitted to the CBC. There was no Board / BDCmeeting scheduled just prior to the submission of bid. However, Post facto approval was taken from the OIL Board.

Person responsible: BD Target date: Settled

Further Audit Comment : In view of the above, the point is settled.

Implication

Non-compliance to DOP.

Recommendation

-

Auditee Remarks

Case no-1A note was put up to the CBC on 16.06.2014 vide letter ref no.BD(G)/03/12/2014/230 for approval of Work Programme andBudget (WP&B) for Joint Review Committee meeting (JRC).

As per note point no.7, it was stated that ‘’Once WP&B are signed by all the partners, the same along with the minutes of thesame will be submitted to CBC for information.’’However, as on November 28, 2014, the WP&B and minutes have not been put up to the CBC for their appraisal although theywere signed on June 19, 2014.

Case no-2A note was put up for approval to the CBC on 03rd Oct’13 vide letter ref. no BD(G)/02/02/2013/422 for initialing and signingof PSC & JOA .

As per note point no.10 , it was stated that ‘’ Considering the above may please approve for initialing and signing the PSC andJOA. The Board will kept apprise in the subsequent Board Meeting. ‘’

While according the approval , D(HR&BD) put a remark that ‘’Once signed , GM (BD) may make a presentation on salientfeatures of PSC & JOA ‘’

Audit comments :-

C3. Non compliance to the commitments made to CBC

Category

Financial

Operational a


Root Cause

Non compliance of the approval

Risk rating

Critical

Major

Moderate a


Audit comments :-1. Please furnish comments on non-compliance of the above, if furnished copy of the same may be provided.2. Since this is only a test check, department to relook all the notes approved by CBC /Board and ensure the compliances

under intimation to audit since 1st April ‘2013.3. Normally, Contract cell co-ordinates such activities for other departments with CBC. To avoid such type of lapses, itsuggested that note should be routed through the Contract cell to ensure compliances desired as per note or CBC directives.

Response to Audit comment no. 1: Case no. 1 WP&B submitted to CBC for information.Response to Audit comment no. 1 Case no. 2 The JOA for the blocks is in advance stage of finalisation (The draftJOA is currently with the Bangladesh NOC – M/s BAPEX) . The Presentation will be made subsequently.Response to Audit comment no. 2: Noted. Compliance to be furnished to the auditResponse to Audit comment no. 3: The Contract cell is not involved in BD Blocks Operations. The same point maykindly be taken up with Management.


Further Audit Comment : Audit comment no : 1 ,2 & 3 Compliance may be furnished to audit

Implication

Recommendation

WP& B needs to be put to CBCfor their appraisal.

Auditee Remarks

D. Yemen Block –Block 82 & 83


Block 82 & 83

OIL’s share of cumulative expenses (US$ 37.02 lakhs) of the Yemen joint venture block 82 as on 30.09.2014,recorded in the books of account do not tally with the expenditure statement (US$ 48.65 lakhs) provided by theoperator.Reconciliation statement was not available for review.

D1. Need to reconcile differences JV expenditure

Category

Financial

Operational a


Root Cause

Weak review mechanism forvendor accounts

Risk rating

Critical

Major a

Moderate


The difference are being identified and shall be reconciled with the help of core team at the earliest.

Person responsible: F&A Target date: Immediate

Further Audit Comment : Compliance may please be provided to audit.

Implication

Risk of wrong amounts beingreflected in vendor ledgers.

Recommendation

Reconciliation statement may beprepared for the variances.

Auditee Remarks

As per production sharing contract (PSC) cash calls are to be paid within 15 days of the call. Delay of up to 167 days was noted in payment of cash calls made by the operator (Yemen block 82 and 83) during October 1, 2013 to September 30, 2014.

Cash calls are not being paid in accordance with the relevant clauses of the PSC/JOA, which may result in charging of interest. Refer annexure 1 for a list of cash calls made during the period October 1, 2013 to September 30, 2014

F & ASo far as finance is concerned, normally the payments are made within a reasonable period after receipt of certified cash calls subject to checking of budgets, internal approvals, etc. Further,, it has been observed that no interest

D2: Need to ensure compliance of timelines specified for payment of cash calls

Category

Financial a

Operational a


Root Cause

Delay in payment of cash calls.

Risk rating

Critical

Major

Moderate a

Auditee Remarks


cash calls subject to checking of budgets, internal approvals, etc. Further,, it has been observed that no interest has been charged by the operator for delayed payment of cash calls.

BD DeptBlock 82 and 83 faced a lot of challenges in terms adverse geo-political conditions in Yemen and law and orderproblems created by the local tribes at the sites. This led to frequent disruptions in block activities and led tosuspension of activities on many occasions. Due the delay caused by above factors, the operator had to seekextensions ( 2 incase of Block 83 and 3 in case of Block 82) after the expiry of 1st phase of exploration of threeyears which expired in March 2012.

Due to uncertainties in both the blocks, a cautious approach was adopted while releasing cash calls for both theblocks not only by OIL but by other partners too. The operator has realized this concern and hence has neverimposed any penalty/interest against any partners. This can be verified when Operator’s audit is carried out by OIL.

Person responsible: F&A Dept. / BD Target date: Settled

Further Audit Comment : In view of the above, the point is settled.

Implication

Risk of imposition of penalty bythe operator @ LIBOR + 2%

Recommendation

Compliance to PSC may beensured

The operating committee has a role of overall direction and supervision of all matters pertaining to joint ventureoperations. It consists of one representative of each of the partners. In order to operate effectively, the productionsharing contract (PSC) requires that operating committee meeting has to be conducted at least once in every sixmonths.However, no such meeting was conducted in year 2014. Last operating committee meeting was held on November24, 2013.

D3: Need to conduct operating committee meeting as per the defined timelines

Category

Financial

Operational a


Root Cause

Delays in conducting ofoperating committee meeting

Risk rating

Critical

Major

Moderate a

Auditee Remarks


BD DeptAs has already been mentioned, Block 82 and 83 faced regular operational hurdles due to adverse geo-politicalconditions in Yemen and law and order problems created by the local tribes at the sites. Post November 2013 tillend of September 2014, the operator could not carry out any activities at the site due to law and order problemscreated by the local tribal groups at the site.During the OCM in held at Sanaa in November 2013, Partners had planned to meet again in March /April 2014 toreview the work progress. Since there was no activity post Nov 2013, the need for having a TCM/OCM was notconsidered appropriate. The violent disruptions created by AL Houthie rebels in Sanaa during September andOctober 2014 further delayed the OCM/TCM.Recently on 11th and 12th November 2014, Partners attended OCM/TCM at Jakarta to discuss the way forward forBlock 82, Yemen.Person responsible: BD Target date: Settled

Further Audit Comment : In view of the above, the point is settled. However a copy of the recent OCM/TCM may please be provided to audit .

Implication

All the partners to joint venturemay remain unaware of theprogress and they may not beable to take timely decisions.

Recommendation

It may be ensured thatrequirement s of PSC arecomplied with.

PSC for Yemen block was signed in year 2008. Periodic reports are received from operator (MEDCO Energy) andreviewed by team from OIL India.Any clarifications if required are taken via telephone or mails, however process for supervision through periodicfield visits is not in place.

D4: Need to strengthen supervisory control over JV progress

Category

Financial

Operational a


Root Cause

Absence of process ofconducting supervision throughperiodic field visits.

Risk rating

Critical

Major

Moderate a


BD DeptSecurity situation in Yemen ( particularly at the Block site ) remained very volatile most often. A number of attempts have been made in the past to depute OIL’s Geoscientists during the seismic acquisition process. However, based on operator’s feedback and considering the law and order and security problems the same was not pursued further.

Person responsible: BD Target date: Settled

Further Audit Comment : Considering the present Geo political situation in Yemen and the reply received abovethe point is settled.

Implication

Risk of over reliance over reportsprovided by the operator.

Recommendation

Periodic field visits by technicalteam may be scheduled.

Auditee Remarks

As per the process followed at Corporate office, the budget for any joint venture is not being uploaded immediatelyafter approval in operating committee meeting.Instead, the budget is uploaded in SAP by finance team, at the time of receipt of invoice / cash call from theoperator. Further, as the payment is also made through finance segregation of duty conflict may exist.

As budget figures are uploaded in SAP by the person making payment, the purpose of budgetary control isdefeated.

D5. Budget uploaded in SAP by finance instead of user department

Category

Financial

Operational a


Root Cause

Budget in SAP is not beinguploaded by user.

Risk rating

Critical

Major

Moderate a


BD DeptThe payment and budget uploading processes are being followed in the existing mode since the beginning and forall the BD managed projects. Any change in processes/practices as suggested by Audit can be considered withproper coordination between BD and F & A Departments. A suitable solution can be worked out by involving allconcerned.


Further Audit Comment : Matter may be taken with Finance for suitable solution and compliance in this regardmay furnished to audit.

Implication

Risk of segregation of dutyconflict.

Recommendation

Possibility may be exploredwherein user may upload thebudget in SAP as soon asoperating committee approvesthe same

Auditee Remarks

The CBC has approved relinquishment of Block 83 on December 30, 2013 but an asset of amount Rs.7.62 crorespaid towards signature bonus (GL a/c. 370500) was not written off till September 30, 2014. A delay of 6 monthsfrom the closure of financial year.

D6. Delay in write off of expenses on relinquished block

Category

Financial

Operational a


Root Cause

Delay in writing off expenses onrelinquished asset.

Risk rating

Critical

Major

Moderate a


The provision in respect of the Signature bonus was taken in the books as of 31.03.2014. Provisions are generally evaluated on annual basis. However, call will be taken for write off.


Further Audit Comment : Compliance in this regard may please be furnished to audit.

Implication

Risk of overvaluing assets inbalance sheet.

Recommendation

Expenditure incurred onrelinquished asset may bewritten off in accordance withaccounting policies and dueapprovals.

Auditee Remarks

Final cash call for block 83 (US$ 11,74,369) was raised by operator on May 11, 2014 which was paid on June 5,2014. Despite settlement, as on September 30, 2014 vendor account is showing outstanding payable of US$27,530.62. Explanation for same was not available.

D7. Need to review pending amounts

Category

Financial

Operational a


Root Cause


Risk rating

Critical

Major

Moderate a


The difference are being identified and shall be reconciled with the help of core team at the earliest.



Implication

Risk of excess payments tovendor

Recommendation

Review of vendor ledgers maybe done to ensure correctbalances.

Auditee Remarks

1. Amounts of US$ 10,50,000 and US$ 15,00,000 were paid towards signature bonus for block 82 & 83 respectively , on March 25, 2009. However, as per the ledger 370500 for the signature bonus, the amount is reflecting as US$ 855292.16 and US$ 12,21,845.94.

2. An amount of $ 1034978.18 being signature bonus has been credited to GL 809901 but the corresponding debit amount posted to GL 370500 is $ 855292.16 creating a difference in trial balance to the tune of $179686.02.

D8. Need to check currency fluctuation difference

Category

Financial

Operational a


Root Cause


Risk rating

Critical

Major

Moderate a


With the change in reporting requirements over the period, The amount of signature bonus was transferred to aseparate GL in January,2014 by core team. So rectification entries, if any, shall be passed in consultation withcore team .



Implication


Recommendation

Advice of ERP core may betaken to rectify the system error.

Auditee Remarks

In the trial balance(GD 20) of Block 82 as on 30.09.2014, the absolute values depicted against GL account203500 & 203502 in INR are inconsistent with those in USD. In INR , GL account 203500 is greater whereas inUSD GL account 203502 is greater as shown below:

D9. Need to check variance in trial balance

Category

Financial

Operational a


Root Cause


Risk rating

Critical

Major

Moderate a

GL Account INR USD

203500 -2088,94,955.11 -3702379.80

203502 2069,92,601.63 3734383.00


A part of INR balance relating to the operator arising as a result of exchange fluctuations is reflected in GL 200510.After considering the impact of the INR amount in GL 200510, there is no inconsistency between INR & USD.

Person responsible: F&A Target date:

Further Audit Comment : The reply to the observation is not properly addressed. There is an inconsistencybetween INR & USD values in the above mentioned GLs which needs to be checked and reconciled.

Implication


Recommendation

Advice of ERP core may betaken to rectify the system error.

Auditee Remarks

Annexures


Annexure1:

BlockNo.

Call details Payment detailsDue date

Date ofpayment

Delay(days)Month Date Amount (USD) Date Amount

82 Oct-13 03-10-2013 3,23,578 25-10-2013 3,22,970 18-10-2013 25-10-2013 7

82 Dec-13 05-12-2013 1,30,412 20-12-2013 17-04-2014 118

82 Jan-14 09-01-2014 4,35,495 24-01-2014 17-04-2014 83

82 Feb-14 11-02-2014 5,59,494 26-02-2014 17-04-2014 50

82 Mar-14 05-03-2014 7,38,155 20-03-2014 17-04-2014 28

82 Apr-14 07-04-2014 7,69,714 17-04-2014 7,38,154 22-04-2014 01-08-2014 101

82 May-14 11-05-2014 4,35,147 26-05-2014 01-08-2014 67

82 Jun-14 05-06-2014 4,26,149 20-06-2014 01-08-2014 42

82 Jul-14 07-07-2014 4,35,213 01-08-2014 4,35,212 22-07-2014 01-08-2014 10

82 Aug-14 06-08-2014 4,45,631 21-08-2014 Not paid


82 Aug-14 06-08-2014 4,45,631 21-08-2014 Not paid

82 Sep-14 10-09-2014 86,157 25-09-2014 Not paid

83 Oct-13 03-10-2013 1,10,858 25-10-2013 1,10,712 18-10-2013 25-10-2013 7

83 Dec-13 05-12-2013 11,62,232 20-12-2013 05-06-2014 167

83 Jan-14 09-01-2014 11,43,277 24-01-2014 05-06-2014 132

83 May-14 11-05-2014 11,74,369 05-06-2014 11,74,369 26-05-2014 05-06-2014 10

Thank You


Thank You

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