ONGC has signed a preliminary pact to acquire a stake and operate the KG Basin block of Gujarat State Petroleum Corp. (GSPC), which had announced a major natural gas discovery and spent $3 billion to develop it but hasn’t been able to start commercial production in the technically challenging field.
“Yes, we have signed an MoU (memorandum of understanding) on October 4. This is a preliminary thing and we are looking into various possibilities. We have shared report (about gas reserves) of our consultant Gaffney Cline & associates with ONGC,” GSPC managing director JN Singh told ET. ONGC declined comment.
GSPC had announced the gas discovery in the Deen Dayal block with much fanfare when Narendra Modi was Gujarat’s chief minister. Subsequently, the company faced unexpected hurdles such as extremely high temperature and pressure, which can damage equipment. This contributed to the rise in development expenditure, debt and delay in execution.
Official sources said the pact provides for a panel of three experts to oversee the transaction. This includes Vijay Kelkar, former oil secretary, and P Shankar, former chief vigilance commissioner. The third slot is yet to be filled but sources said MA Pathan, a former chairman of Indian Oil Corp., may get the job.
ONGC and GSPC currently have differences over the quantity of reserves in the KG block, the amount of capital and operating expenditure needed, the prices gas and condensate from the KG block can obtain, and the discount rate that should be used to calculate the net asset value, sources said.
Singh said the commercial matters could easily be resolved between the two state-run firms. “As the minister had earlier pointed out, ONGC and GSPC are not India and Pakistan. We are both government bodies, and various possibilities are being looked into,” he told ET.
The expert panel will take a final call on all the differences. In the MoU, the two companies have agreed to accept the expert panel’s recommendation on valuation and seek their respective boards’ approval, sources said.
ONGC has appointed Ryder Scott, a consultancy, to independently assess the reserves in the GSPC’s block. The consultant’s assessment of the Deen Dayal West (DDW) field has to be presented to the expert panel by November 15and for other discoveries latest by December 31, sources said.
The MoU is non-binding and valid for six months. It doesn’t mention the extent of stake ONGC may acquire but sources said it could be a majority holding. If a definitive agreement is signed, GSPC will offer ONGC suitable indemnity, sources said.
GSPC’s stake in the KG block and future income from the block is hypothecated to lenders, sources said. The Comptroller and Auditor General (CAG) had criticized GSPC this year for the way it handled the block. The investments in the block drove up GSPC’s debt 180% in four years to Rs 19,700 crore by March 2015, the auditor said. The CAG had cited deficient implementation, cost overruns and inability to induct a strategic partner in time.
GSPC owns an 80% participating interest in the KG block while Jubilant and Geo Global Resources have 10% each.
One official said that in late August, the Prime Minister’s Office called a meeting with top executives of the two firms including ONGC chairman DK Sarraf to review progress in the matter and to make sure the MoU’s terms would be acceptable to both companies.
GSPC joint managing director T Natrajan had earlier confirmed to ET about the meeting held on August 24 and the sharing of data with ONGC. “ONGC has the capability and resources to develop DDW field. They have also done their internal study,” he had said. “This is a high pressure and high temperature field. Further, DGH has made its assessment about it, which is in the public domain. Our technical consultant Xodus is also working on this.”
A senior PMO official told ET that ONGC’s board would decide on buying a majority stake in GSPC.
“Our role is only to facilitate talks and ONGC’s board is free and fully independent to decide on this deal,” said this official.
Petroleum minister Dharmendra Pradhan had earlier told ET that the two companies were commercially discussing the matter for mutual benefit and that his advice to the firms was to use common facilities and make a joint strategy, just like global firms such as BP, BG, Chevron and Exxon do. Curtis McElhinney Authentic JerseyShare This