ONGC, GSPC deal: Oil ministry raises flag over danger in government nudging PSUs to make sub optimal investments
The petroleum ministry has turned introspective on the practice of asking oil PSUs to acquire energy assets that might not necessarily make business sense to them.
The petroleum ministry has turned introspective on the practice of asking oil PSUs to acquire energy assets that might not necessarily make business sense to them. A note by the ministry reviewed by FE said that although these state-owned firms take over assets in order to ensure energy security, “there is the danger of the government nudging the PSU companies to make sub-optimal investments”. The ministry’s note recalled in this context that, “in December, ONGC acquired the Gujarat government-controlled GSPC’s 80% stake in the not-so-successful Deen Dayal assets in the Krishna-Godavari basin for $1.2 billion”. The analysis by the ministry might not lead to ONGC pulling out of the deal — in February, the national oil company had signed definitive agreements to buy the debt-ridden state PSU’s under-performing deepwater assets. “The board has approved the deal and it will go through. The company does not think any issue will crop up. The blocks may not be very successful today, but it can change overtime,” said an ONGC executive, requesting not to be identified.
However, the ministry’s note, which has been circulated among other departments, proves that despite its public posturing to the contrary, it is doubtful of the prudence of the ONGC-GSPC deal. Earlier, former Union minister and Congress leader Jairam Ramesh had questioned the deal and sought a probe by the Securities and Exchange Board of India for flouting the guidelines for listing obligations and disclosure requirements. The approval of ONGC’s minority shareholders had not been secured before the deal was struck, he noted.
However, petroleum minister Dharmendra Pradhan had countered these allegations, saying that the “boards of the two companies are competent to take such financial decisions” and that integration was the way the oil and gas industry was moving the world over. Besides the ONGC-GSPC deal, the ministry’s self-critical note would remind analysts of many ONGC Videsh (OVL) asset acquisitions in Central Asia and elsewhere. A parliamentary panel had pulled up OVL for buying Russia’s Imperial Energy, which has proved to be highly unproductive.
The Deen Dayal West (DDW) block’s gas-in-place is estimated at 1.9 trillion cubic feet (tcf), of which 1.06 tcf is recoverable. ONGC has been assured by the Gujarat government that the company will get at least $6 per million British thermal units for the gas from DDW in the first year of production. The assured price will see staggered increments every year — it will touch $6.9 per mBtu in the fifth year and remain at that level during the remaining life of the asset. ONGC has maintained that it will not only gain from the GSPC fields but will also be able to use the infrastructure in place to extract gas from its neighbouring field.
GSPC had spent Rs 14,642 crore till March 2015 in the KG Basin blocks, which exceeded the field development plan target of Rs 13,123 crore for just the DDW block. For the entire asset, which includes DDW Extension and Six Discoveries, an expense of Rs 19,576 crore was incurred till March 2015. Currently, the output from the block, which is under ‘test-production’, is hovering at less than 0.5 million metric standard cubic metres per day.
However, a person with the knowledge of the blocks considers them to be gushers. “It is one of the most prolific fields, although a tough one,” he said. The problem is that these are deepwater multi-layered fields and ONGC will need to dig 300 to 600 metres which it is has rarely done earlier, he added, requesting not to be named.
ONGC will be paying $995.26 million for three discoveries in the KG-OSN-2001/3 block which are under trial production since August 2014. In addition, $200 million will be paid for six other discoveries for which GSPC has been finalising an investment plan to bring them to production. Apart from GSPC, GeoGlobal Resources and Jubilant Enpro hold 10% each in the field.