GSPC finds a white knight in ONGC

The two are in talks for a probable majority stake sale in the Deen Dayal West gas block

Running out of funds with each passing day, state-owned Gujarat State Petroleum Corporation Ltd (GSPC) is eyeing the Krishna Godavari (KG) basin majority stake sale to Oil and Natural Gas Corporation (ONGC) for its revival and future expansion.

The two are in talks for a probable majority stake sale in the Deen Dayal West (DDW) gas block, which is currently under trial production and has been conducting clean up through the hydro fracturing technology at the ultra-deep high pressure/high temperature (HPHT) block.

"ONGC is currently doing some due diligence to understand the technicalities of the matter, including the quantity and quality of the in-place reserves, the value of the assets and its commercial viability when a final offer is made. However, the matter is yet to go to the oil ministry. Such matters concerning transfer of assets ultimately come to the ministry, which takes a call based on the relevant PSC (product sharing contract) provisions," a senior official close to the development told Business Standard.

According to sources close to the development, if and when sealed, the deal could be a win-win situation for both GSPC and ONGC.

For GSPC, this would not only mean more financial muscle to partly clear its Rs 19,576-crore worth of debts but also create a war chest to fund its future expansion plans worth Rs 20,100 crore in exploration and development.

ONGC, too, would be able to save to roughly Rs 13,400 crore by linking its discoveries in KG basin to the nearby GSPC fields, which have ready infrastructure for development by laying a 15-km pipeline. "Gas production from ONGC's own discoveries can be advanced by two or three years by building a small pipeline for a 15-km distance between their discoveries and GSPC's fields against building a 65-km pipeline to the shore from its fields and then build infrastructure for development and operations. This way, ONGC could save Rs 13,400 crore of government money wherein Government of India would itself gain by not spending on this capex," said sources. An emailed query sent to GSPC and ONGC did not elicit any response.

The stake sale would, however, benefit GSPC in three ways: First, it would help GSPC raise money for expansion worth $3 billion, of which $1 billion would be infused into the existing fields, while the rest would be used to expanding exploration business domestically as well as overseas. Two, with a workforce of around 400 employees and much of the senior management over the age of 60, GSPC is in need of young as well as experienced manpower with expertise in gas exploration, which ONGC could bring in. Three, the firm also looks to share and mitigate future risks through the partnership, sources said.

"Depending on what is the amount they (ONGC) want to invest and what is the valuation of the asset that they ascertain, the stake sale would move ahead. GSPC's preference is that they take above 50 per cent stake so that they can take over the operations. GSPC would look to hand-hold ONGC for two to three years, after which the latter and should be able to take over the operations," a source added.

Under the new gas pricing formula that has set the price of $7 per million British thermal units (mmBtu) for deepsea fields, GSPC's DDW block could generate revenue worth $1.4 billion (Rs 9,400 crore) for the company. Yet, GSPC is keen on taking the stake sale forward given the fact it is running out of funds.

"Whatever money was borrowed has been spent. At the current rate, GSPC would run out of money after September and the stake sale could help continue the flow. There are a few more wells and development activities to be taken up. Hence, although the field is viable, GSPC needs a bigger pocket. It not only looks to build its financial muscle through the stake sale but also cash in on ONGC's large operation base and human resource expertise," a source said, adding that in return, ONGC would not only save on gas transportation and development infrastructure but also acquire GSPC's HPHT hydro fracturing technology, which has been used for the first time in deepsea high pressure gas exploration.

So far, GSPC has spent $3 billion on the project for which it raised debts worth Rs 19,576 crore over and above interest worth Rs 1,804 crore it incurred in 2014-15, according to the recent Comptroller and Auditor General report. Currently, GSPC has been servicing the debt through revenue from other businesses such as gas trading and city gas distribution. In 2014-15, GSPC's revenue stood at Rs 152.5 crore.