On the face of it, the news about the Oil and Natural Gas Corporation (ONGC) signing a pact to buy a stake in the Gujarat State Petroleum Corporation (GSPC) may seem to be that of a routine merger-buyout deal. Only, that it’s not business as usual. In fact, it is a classic case of a cash-rich Maharatna enterprise being made to subsidise the financial misadventures of a company that is steeped in debt.
Suspicion that ONGC would have to bail out GSPC surfaced during the Budget session of Parliament, shortly after a Comptroller and Auditor-General (CAG) report pulled up GSPC for grossly mismanaging its exploration and development-related activities in the Krishna-Godavari (KG) basin and also its overseas assets, that had led to higher costs and financial losses. The CAG report, which was tabled in the Gujarat Assembly on March 31, noted that the total borrowings of the company which were Rs 7,126.67 crore as on March 31, 2011 had jumped by 177 per cent to Rs 19,716.27 crore as on March 31, 2015.
Rumours, suspicions and allegations
GSPC’s financial disaster did feature in Parliament, which was in session at the time—it was raised by the Congress which alleged that ONGC would soon be bullied into bailing out the Gujarat company. The BJP countered this, saying that the Congress was raking up the issue only to deflect attention from the Agusta Westland controversy that was raging at the same time. The Congress allegations possibly took root from a news item that had curiously appeared the same day that the CAG report was tabled.
That news item said that ONGC was being offered at least 50 per cent stake to make it the operator of the Deen Dayal West field (an 1,850 sq km area in the KG basin area off coast of Andhra Pradesh), which had been awarded in February 2003 to a consortium led by GSPC for exploration. Soon, the ONGC-GSPC negotiation was quantified: the deal could be worth anything between $2 billion and $2.5 billion. Incidentally, this was close to the Rs 14,500 cash reserves that ONGC reportedly had in March this year.
The suspicion of the government’s detractors turned into sureshot confirmation once minister of state for petroleum and natural gas Dharmendra Pradhan admitted that the two companies were talking to each other, and that the outcome of the parleys between the companies would be a “commercial decision.” Pradhan was rhetorical, “Are ONGC and GSPC equivalent to India and Pakistan that they cannot merge?”
The murky side of things
Well, on the face of it, they certainly can; but only if those do not run contrary to ONGC’s or the public’s interests. Or, if there are no indications of surreptitious negotiations.
This apprehension was raised by former economic affairs secretary EAS Sarma in a letter to KD Tripathi, secretary to the ministry of petroleum and natural gas (MoPNG), in July. Sarma wrote: “I understand that your ministry is trying to persuade the ONGC to go to the rescue of GSPC, which will have the effect of transferring the risks to the ONGC and dent ONGC's finances. Since the public has a substantial stake in the ONGC, such a step is unacceptable. Decisions taken in that respect should be on the basis of a transparent and a wider discussion and debate.” No such debate took place, and negotiations turned murkier.
The fears of Sarma, who has long been tracking developments related to natural gas exploration and production in the KG basin and had even filed a public interest litigation (PIL) in 2011 involving the MoPNG minister Veerappa Moily and Reliance Industries Limited (RIL), were not unfounded.
When the ONGC board approved the signing of the preliminary agreement for buying a stake in GSPC’s KG basin gas block, what came to light was a virtually unheard-of dispute resolution mechanism that was being penned into the memorandum of understanding (MoU). According to this clause, differences over issues like valuation or natural gas reserves would be referred to a three-member committee of outside experts.
A world of consultants
This becomes significant since once of the prime reasons that GSPC is in the dock is that it had overestimated gas reserves in the first place. And now, when a dispute resolution mechanism is being put in place over valuation and estimates, it should raise eye-brows. It only means that GSPC is not that sure of the in-place reserves of 14 trillion cubic feet (tcf)—with around 7.6 tcf recoverable—that petroleum consultancy firm Gaffiney, Cline and Associates has estimated. In fact, Pradhan has been tomtomming about the viability of the ONGC-GSPC deal based on the same estimates. Unless, of course, the estimate is all gas.
But, that’s not all; here is a cash-rich ONGC buying majority stake in a company that is in acute distress, and yet does not even have the freedom either to make its own moderate estimates of the natural gas reserves, or to carry out a valuation of the estimates. For the record, the rate of gas production of GSPC from its KG basin block has not only been unstable over the years, it has been way below what had been estimated initially. And now, ONGC cannot have the last word on the estimates (read, uncertainties).
Worse, ONGC has appointed an "independent" US-based consultant, Ryder Scott, to assess the reserves of the block. Yes, it the same company that had been engaged earlier by GSPC for precisely the same block to conduct “a review of the data pertaining to the exploratory potential for petroleum resources, provide a qualitative opinion of the technical data and interpretations supporting the validity of various identified prospects.” As Sarma wrote in a subsequent letter to Tripathi last week, “Ryder Scott cannot be considered an ‘independent’ consultant to assess the reserves of GSPC's block at all.”
Saving GSPC by all means
GSPC has been in the red for a while, but moves to pull it out went afoot once the BJP-led government headed by Narendra Modi came to power in May 2014. Modi has an interest in GSPC’s fortunes—it was he, as chief minister of Gujarat in June 2005, who had bragged to the world about GSPC making “the biggest ever discovery of its kind in the country” of estimated reserves of 20 tcf of natural gas worth $50 billion. Three years later, he made a bigger claim: that reserves were more in quantity, and worth $100 billion.
The first person to prick this balloon was Jean-Paul Roy of GeoGlobal Resources, one of GSPC’s partners in the consortium. Roy had not only contradicted Modi’s claims, but even filed a complaint with the New York Stock Exchange saying the Gujarat claim was premature.
GSPC’s over-estimates of reserves and under-estimates of costs are well-documented, and now ONGC will pay the price for someone else’s cavalier, extravagant and come-what-may attitude.
