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  1. ONGC likely to cut value of GSPC deal by half, here’s why

ONGC likely to cut value of GSPC deal by half, here’s why

ONGC has sought to almost halve the size of the gas assets deal it is negotiating with Gujarat government-owned GSPC, by arguing that the recoverable reserves at the latter’s deep-water block in the KG basin are far less than the presumed 7.6 trillion cubic feet (tcf)

By: | New Delhi | Updated: June 2, 2016 9:15 AM
ONGC chairman and managing director Dinesh K Sarraf said the firm’s board has given the go-ahead on the investment plan to take out hydrocarbon from cluster-II area of the KG-DWN-98/2 block in the east coast. While gas-in-place in the block is estimated at 14.4 tcf, sources privy to the negotiations told FE that ONGC is “not agreeable” to the recoverable reserves quoted by GSPC.

ONGC has sought to almost halve the size of the gas assets deal it is negotiating with Gujarat government-owned GSPC, by arguing that the recoverable reserves at the latter’s deep-water block in the KG basin are far less than the presumed 7.6 trillion cubic feet (tcf) — probably not even half that. If ONGC’s contention holds sway, it would need to expend just $1-1.5 billion to pick up a majority stake in the 1,850 sq km block (KG-OSN-2001/3 block). The deal size was earlier touted to be between $2 billion and $2.5 billion.

While a GSPC-led consortium has already spent close to R20,000 crore on the project including borrowing costs of nearly R6,000 crore, it does not have the funds needed to develop the block fully — estimates are it will need another $1.5 billion to develop the block’s Deen Dayal West (DDW) field, perhaps another $1 billion for DDW Extension and anywhere between $4 billion and $6 billion to develop other areas such as the Six Discoveries.

While gas-in-place in the block is estimated at 14.4 tcf, sources privy to the negotiations told FE that ONGC is “not agreeable” to the recoverable reserves quoted by GSPC.

“This is the toughest field currently being exploited in the country. Recovering more than 50% of the gas-in-place is indeed far-fetched,” said an official, requesting anonymity.

GSPC has, however, stuck to the original estimates of recoverable reserves, which would mean that at the current gas price for difficult fields, the asset is worth some $50 billion, which could be monetised over 15-20 years.

Petroleum minister Dharmendra Pradhan had said that if ONGC finds the proposed deal viable, it would proceed. “If two exploration companies competing against each other can work together in the Gulf of Mexico and cut down their cost of production, why can’t it happen in India? At least, the cost of product will come down. Are they India and Pakistan?” the minister asked.

ONGC chairman and managing director D K Sarraf said that as a matter of principle, he does not comment on mergers and acquisitions of the company before a deal is finalised.

GSPC has reported a net loss of Rs 804.42 crore in FY16, mainly due to the write-off of exploration expenditures.

The unnamed official quoted above said that the negotiations are “purely commercial.”

“No one can force ONGC to buy an asset. It is an independent company and the board takes the decisions. There are independent directors too, who play a major role in clearing such important proposals.”

GSPC said in a statement that the explorer is sparing no effort for bringing DDW field on commercial production mode. “The DDW field is technologically challenging with characteristics such as high pressure, high temperature and low permeability. After having completed the first three wells on conventional perforation methods, the company has carried out successful hydro-fracturing in its fourth well,” the company said.

Hydro-fracturing is a well stimulation technique in which the well-rock is fractured by a pressurised liquid. It involves high pressure injection of ‘fracking fluid’ into a well bore to create cracks in the deep-rock formations, through which natural gas will flow more freely.

GSPC has spent Rs 6,915 crore for exploration and Rs 10,110 crore for development in the KG block. The DDW field requires another $1.5-2 billion for development, Six Discoveries $4-8 billion and DDW extension 1-1.5 billion.

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