Oil & Natural Gas Corpn Ltd

To the Members of Oil and Natural Gas Corporation Limited

1. We have audited the attached Balance Sheet of OIL AND NATURAL GAS CORPORATION LIMITED (the Company) as at 31^st March, 2009, the Profit and Loss Account and also the Cash Flow Statement for the year ended on that date, annexed thereto in which are incorporated the Company’s share in the total value of assets, liabilities, expenditure, income and net profit of 110 blocks under New Exploration Licensing Policy (NELPs) / Joint Venture (JVs) accounts for exploration and production out of which 36 NELPs/JVs accounts have been audited by one of the firms of statutory auditors, 55 NELPs /JVs accounts have been certified by other firms of Chartered Accountants and 19 NELPs/JVs as certified by the management (Refer Note 25.3.1 to 25.3.2 of Schedule 27 of the financial statements). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

2. We conducted our audit in accordance with auditing standards generally accepted in India. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amount and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

3. We have placed reliance on technical/ commercial evaluation by the management in respect of categorization of wells as exploratory, development and producing, allocation of cost incurred on them, depletion of producing properties on the basis of the proved developed hydrocarbons reserves, liability for abandonment costs, liabilities under NELP for under performance against agreed Minimum Work Programme and allocation of depreciation on process platforms to transportation and facilities.

4. As required by the Statement on the Companies (Auditor’s Report) Order, 2003 (as amended) issued by the Central Government of India in terms of Section 227(4A) of the Companies Act, 1956, we enclose in the Annexure (read with paragraph 1 above) a statement on the matters specified in paragraph 4 and 5 of the said Order.

5. Further to our comments referred to in paragraph 4 above we report as follows:

5.1. We have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purposes of our audit;

5.2. In our opinion, proper books of account as required by law have been kept by the Company so far as appears from our examination of those books;

5.3. The Balance Sheet, Profit and Loss Account and the Cash Flow Statement dealt with by this report are in agreement with the books of account;

5.4. In our opinion, the Profit and Loss Account, the Balance Sheet and the Cash Flow Statement comply with the accounting standards referred to in sub-section (3C) of Section 211 of the Companies Act, 1956.

5.5. Disclosure in terms of clause (g) of sub-section (1) of section 274 of the Companies Act, 1956 is not required as per notification number GSR 829(E) dated October 21, 2003 issued by the Department of Company Affairs.

5.6. In our opinion and to the best of our information and according to the explanations given to us, the said accounts read with notes to account and in particular Notes 2.1 to 2.3 of Schedule 27 in respect of recognition of Sales Revenue of crude oil and natural gas, give the information required by the Companies Act, 1956 in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India:

a) In the case of the Balance Sheet, of the state of affairs of the Company as at 31^st March, 2009;

b) In the case of the Profit & Loss Account, of the profit of the Company for the year ended on that date; and

c) In the case of the Cash Flow Statement, of the cash flows of the Company for the year ended on that date.

New Delhi

24^th June, 2009

Annexure to the Auditors’ Report

(Referred to in paragraph 4 of our report of even date)

1. a) The Company has generally maintained proper records showing full particulars including quantitative details and situation of fixed assets.

b) The fixed assets, other than those which are underground/ submerged/ under joint venture, having substantial value have been physically verified by the management in phased manner. The reconciliation of physically verified assets with the book records is in progress. Discrepancies noticed on physical verification and consequential adjustments are carried out on completion of reconciliation. According to the information and explanations given by the management, in our opinion, the same is not material.

c) The Company has not disposed off a substantial part of fixed assets during the year.

2. a) The inventory has been physically verified in a phased manner (excluding inventory lying with third parties, at some of the site- locations, inventory with joint ventures and material in transit) during the year by the management. In our opinion, the frequency of verification is reasonable.

b) The procedures of physical verification of inventory followed by the management to the extent verified were generally reasonable and adequate in relation to the size of the Company and nature of its business.

c) The Company has generally maintained proper records of inventory except for recording of consumption at a few of its site-locations. In our opinion the discrepancies noticed on physical verification between the physical stock and book records were not material having regard to the size of the Company and nature of its business. In case where discrepancies noticed on physical verification have been identified with inventory records, necessary adjustments have been carried out in the books. In respect of cases where the reconciliation is not complete, the management has stated that the same would be adjusted in due course.

3. a) The Company has granted secured loans to five parties covered in the register maintained under section 301 of the Companies Act, 1956. The amount outstanding at the year end is Rs. 1.44 million and the maximum amount outstanding at any time during the year was Rs. 1.82 million.

b) The rate of interest and other terms and conditions of the loans granted are not prejudicial to the interest of the Company.

c) The payment of principal amount and interest are regular.

d) There is no overdue amount in respect of loans granted to the parties listed in the register maintained under section 301 of the Companies Act, 1956.

e) The Company has not taken any loans, secured or unsecured, from companies, firms or other parties covered in the register maintained under section 301 of the Companies Act, 1956.

4. In our opinion, and according to the information and explanations given to us, the internal control procedures are generally adequate and commensurate with the size of the Company and the nature of its business with regard to purchases of inventory, fixed assets and sale of goods and services. During the course of our audit we have not observed any continuing failure to correct major weaknesses in internal controls.

5. a) In our opinion and according to the information and explanations given to us, there is no contract or arrangement that need to be entered in the register required to be maintained pursuance of section 301 of the Companies Act, 1956.

b) Accordingly, the provisions of clause 4 (v) (b) of the Companies (Auditor’s Report) Order, 2003 is not applicable to the company.

6. The Company has not accepted any deposits from the public.

7. In our opinion, the Company has an internal audit system commensurate with the size and nature of its business.

8. We have broadly reviewed the books of account relating to materials, labour and other items of costs maintained by the Company pursuant to the Rule made by the Central Government for the maintenance of cost records under section 209 (1)(d) of the Companies Act, 1956 and we are of the opinion that prima facie the prescribed accounts and records have been made and maintained.

9. a) The Company is generally regular in depositing with appropriate authorities undisputed statutory dues including Provident Fund,

Investor Education and Protection Fund, Employees’ State Insurance, Income Tax, Sales Tax, Service Tax, Wealth Tax, Custom Duty, Excise Duty, Cess (except Cess under Section 441A of the Companies Act, 1956 since the aforesaid section has not yet been made effective by the Central Government) and other material statutory dues applicable to it. There are no such material outstanding statutory dues accrued in accounts as of the last date of the financial year concerned for a period of more than six months from the date they became payable.

b) According to the information and explanations given to us, the disputed statutory dues are as under:

10. The Company has no accumulated losses at the end of the current financial year and has not incurred cash losses either during the year or during the immediately preceding financial year.

11. The Company has not issued any debentures and not defaulted in repayment of dues to financial institutions or banks.

12. In our opinion and according to the information and explanation given to us, the Company has not granted loans and advances on the basis of security by way of pledge of shares, debentures and other securities.

13. The Company is not a chit fund or a nidhi mutual benefit fund/ society. Accordingly, the provision of clause (xiii) of the Companies (Auditor’s Report) Order, 2003 are not applicable to the Company.

14. In our opinion and according to the information and explanation given to us, the Company is not dealing or trading in shares, securities, debentures and other investments.

15. In our opinion and according to the information and explanation given to us, the terms and conditions on which the Company has given guarantees for loans taken by others from banks or financial institutions are not prejudicial to the interest of the Company, since these guarantees are given for the subsidiary/ company promoted by the Company.

16. In our opinion, the term loans have been applied for the purpose for which they were raised.

17. On an overall examination of the balance sheet of the Company, we report that no funds raised on short terms basis have been used for long term investment.

18. The Company has not issued any preferential allotment of shares during the year. 19. The Company has not issued any debentures during the year.

20. The Company has not raised any money by way of public issue during the year.

21. According to the information and explanations given to us, no fraud on or by the company has been noticed or reported during the course of our audit.

New Delhi

24^th June, 2009