• ONGC gets price guarantee from GSPC in $1 billion KG basin deal

    Gujarat State Petroleum Corp (GSPC) will buy entire output at a predetermined price from the KG Basin gas field that it has agreed to sell to Oil and Natural Gas Corp (ONGC) for $1billion, a key provision that addressed gas pricing concerns of India’s largest crude producer and helped seal the deal, senior executives at the two firms said.

    “There is an initial understanding that we will support a particular price for five years,” said JN Singh, managing director of GSPC. “We have enough capacity in the system to absorb the gas from that field.”

    Late last month, ONGC agreed to acquire the entire 80% participating interest of GSPC along with the operatorship in the Deen Dayal West field where geological challenges have delayed the commercial production by several years while mounting the Gujarat firm’s development cost and overall debt.

    Senior executives at ONGC, who requested not to be named, said the agreement provides for GSPC buying gas for the field’s lifetime at a price linked to forward prices, which are available for next five years. The forward prices for the fifth year have been taken for the remaining life of the field, they said.

    The government publishes the maximum price producers can charge for gas from difficult fields such as Deen Dayal West twice a year. If government prices were to slide below the forward prices, GSPC will compensate ONGC for the deficit, executives said.

    Price of gas and the reserves GSPC’s field held were the two prickly issues between the two companies. The government ceiling for the gas price today is $5.30/unit. ONGC needed $6/unit to make the acquisition return 14% on investment, the state firm’s expectation of internal rate of return from its projects, sources said.

    This is when GSPC offered price support, sources said, adding that GSPC’s liability has been guaranteed by the Gujarat government.

    Before the two companies started talking prices, they spent more than a year squabbling over the amount of gas that can be recovered from the Deen Dayal West field, an issue that opposition parties also used to criticize the takeover talks, portraying it as an effort by ONGC to bail out GSPC burdened with a debt of about $3 billion.

    ONGC’s technical experts estimated the recoverable reserves at about 27.8 billion cubic meters (BCM) while GSPC’s estimate was 42 bcm, sources said. The two firms finally agreed on 29.9 bcm, a figure the Directorate General of Hydrocarbons (DGH) had estimated years ago.

    The estimate of Ryder Scott, appointed by ONGC for the job, was lower than ONGC’s inhouse estimate, sources said. GSPC’s debt will not come to ONGC following the deal, said D K Sarraf, chairman of ONGC. The Deen Dayal West field and its future income are hypothecated with lenders. “GSPC has to give us an unencumbered asset,” Sarraf said.

    The board of ONGC took almost 11 hours over two days to study the deal before signalling green. “We wanted to explain everything to every member on the board. The deliberation took long and in the end there was a unanimous decision,” said Sarraf.

    When the two companies had signed a preliminary pact in November, they also formed a three-member panel of retired bureaucrats to help resolve differences over valuation. “Since we agreed on a valuation on our own, their intervention wasn’t required,” Sarraf said. Demarcus Walker Jersey

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