On the face of it, news that the Oil and Natural Gas Corporation had signed a pact to buy a stake in the Gujarat State Petroleum Corporation earlier this month seemed to be that of a routine merger-buyout deal. However, this agreement is not business as usual. It is a case of a cash-rich public sector enterprise being made to subsidise a state-owned company steeped in debt.
Suggestions that ONGC would have to bail out the Gujarat company surfaced during the Budget session of Parliament earlier this year, shortly after a Comptroller and Auditor-General report pulled up Gujarat State Petroleum Corporation for grossly mismanaging its exploration and development-related activities in the Krishna-Godavari basin, as well as its overseas assets. This 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 7,126.7 crores as on March 31, 2011, had jumped by 177% to Rs 19,716.3 crores as on March 31, 2015.
Rumours and suspicions
The financial state of the Gujarat State Petroleum Corporation subsequently featured in Parliament in May. It was raised by the Congress, which alleged that ONGC would soon be bullied into bailing out the Gujarat company. The Bharatiya Janata Party countered this, saying that the Congress was raking up the issue only to deflect attention from the Agusta Westland helicopter controversy that was raging in Parliament at that time. The Congress allegations possibly took root from a news report that appeared the day after the CAG report was tabled.
That report said that ONGC was being offered at least 50% stake to make it the operator of the Deen Dayal West field (a 1,850 sq km area in the Krishna-Godavari basin area off the coast of Andhra Pradesh), which had been awarded in February 2003 to a consortium led by the Gujarat State Petroleum Corporation for exploration. Soon, the ONGC-GSPC negotiation was quantified: the deal could be worth anything between $2 billion and $2.5 billion. This amount is close to the Rs 14,500-crore cash reserves that ONGC reportedly had in March.
The charges made by the government’s detractors were confirmed when Minister of State for Petroleum and Natural Gas Dharmendra Pradhan admitted in May that the two companies were talking to each other, and that the outcome of the parleys between the companies would be a “commercial decision”.
At that time, Pradhan asked: “Are ONGC and GSPC equivalent to India and Pakistan that they cannot merge?”
The murky side
On the face of it, they certainly can – but only if such a merger is not 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, in July.
“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.
Sarma has long been tracking developments related to natural gas exploration and production in the Krishna-Godavari basin and in 2011, had even filed a Public Interest Litigation involving Veerappa Moily, who was then the Petroleum Minister, and Reliance Industries Limited.
Sarma’s fears were not unfounded.
When the ONGC board approved the preliminary agreement to buy a stake in the Gujarat State Petroleum Corporation’s Krishna-Godavari basin gas block, what came to light was a virtually unheard of dispute resolution mechanism that was being written into the Memorandum of Understanding. According to this clause, differences over issues like valuation of natural gas reserves would be referred to a three-member committee of outside experts.
This is significant since one of the prime reasons the Gujarat State Petroleum Corporation is in a financial mess is that it had overestimated its gas reserves in the first place. Eyebrows should now be raised at the fact that a dispute resolution mechanism is being put in place for valuation and estimates. This means that the Gujarat company is not that sure of the probable reserves of 14 trillion cubic feet – of which around 7.6 trillion cubic feet are recoverable – that petroleum consultancy firm Gaffiney, Cline and Associates has estimated in the Gujarat company’s Krishna-Godavari block. In fact, Pradhan has been boasting about the viability of the ONGC-GSPC deal based on these very same estimates.
But, that is not all. Here is the cash-rich ONGC buying a majority stake in a company that is in acute distress, and yet it does not have the freedom either to make its own moderate estimates of the natural gas reserves it will soon be an operator of, or to carry out a valuation of the estimates.
For the record, the rate of gas production of the Gujarat State Petroleum Corporation from its Krishna-Godavari basin block has not only been unstable over the years, it has been way below what had been estimated initially.
Worse, ONGC has appointed a so-called independent US-based consultant, Ryder Scott, to assess the reserves of the block. This is the same company that the Gujarat company had engaged 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.”
The Gujarat State Petroleum Corporation has been in the red for a while but moves to resuscitate it started when the BJP headed by Narendra Modi came to power at the Centre in 2014. In 2005, when he was chief minister of Gujarat, he announced that the company had made “the biggest-ever discovery of its kind in the country” of estimated reserves of 20 trillion cubic feet of natural gas worth $50 billion. Three years later, he made a bigger claim: that the reserves were even more in quantity, and worth $100 billion.
The first person to prick this balloon was Jean-Paul Roy of GeoGlobal Resources, one of Gujarat State Petroleum Corporation’s partners in the consortium. Roy had not only contradicted Modi’s claims, but had also filed a complaint with the New York Stock Exchange saying that the Gujarat claim was premature.
Gujarat State Petroleum Corporation’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 attitude.
Subir Ghosh is a journalist and researcher in Bengaluru, and co-author of Gas Wars: Crony Capitalism and the Ambanis.