Mittal, ONGC to wind up trading JV

Reason cited: Venture failed to take off due to lack of interest from state-run firm

Steel tycoon Lakshmi N. Mittal and the Oil and Natural Gas Corporation have decided to wind up a firm they had set up four years ago for trading in oil and gas as the joint venture has failed to take off, allegedly due to lack of interest from the state-run firm.

ONGC and Mittal had in July 2005 come together to form two joint ventures - ONGC Mittal Energy (OMEL) and ONGC Mittal Energy Services (OMESL). While OMEL picked up a handful of exploration blocks, OMESL, set up for trading and shipping of hydrocarbons, existed only on paper.

OMESL, which had barely any employee on its role since S K Sharma quit as the CEO in September 2008, will be first converted into a 100 per cent subsidiary of OMEL and then merged with it, sources said.

A top official at the joint venture, who wished not to be identified, confirmed the decision.

Sources said Mittal had never been happy with the progress at OMESL. Apparently, ONGC, after the exit of its flamboyant Chairman and Managing Director Subir Raha, was not keen on trading and shipping of oil and gas (including LNG).

The state-run upstream firm had not even contributed its share of capital and the company survived only on Mittal's contribution.

In both OMEL and OMESL, ONGC held 49.98 per cent stake while the Mittal-owned Mittal Investment Sarl had 48.02 per cent. The remaining two per cent was with financial institutions.

Sources said OMESL was folded up because it could not get business anywhere. OMESL offered to export petroleum products from Mangalore Refinery, a subsidiary of ONGC, directly to customers but was merely registered to receive MRPL tenders.

Other state-run firms like Indian Oil refused to even register OMESL citing lack of experience.

OMESL was to trade in oil and gas produced from overseas properties of ONGC but that business too did not come its way.

Frustrated at the lack of progress, Mittal had in August 2006 even written to the government complaining about ONGC's attitude. But that did not change much as the state-run firm continued to refuse deputation of its employees to even OMEL - the company formed to acquire oil and gas properties abroad.

ONGC, which did not even make the initial $5 million equity contribution in OMESL, now cites RBI guidelines that permit only remittances towards equity investment but not for defraying expenses without a concomitant increase in business activity for not contributing its share, sources said.

Since OMESL did not have any immediate business plans, it was therefore not possible for ONGC to make remittances towards share subscription to defray expenses, ONGC reasoned.

Sources said ONGC management had in private stated that they wanted to exit OMESL as oil-trading did not form the company's core competency. Oil trading would have required parent company guarantees, which the ONGC board was unwilling to extend.

ONGC was willing to continue with OMEL - the firm formed to acquire oil properties, but with a skeletal staff.

After the exit of Raha, ONGC has reversed several decisions of the July 2005 MoU, including the one for opening an office in Delhi.

The Mittal letter of 2006 had pointed to delays by ONGC to register oil companies with OMESL, a pre-requisite to begin trading in crude oil and petro products.

When ONGC and Mittal came together to form OMESL, the company was to initially quote only for naphtha/fuel oil export tenders of ONGC and crude import and petroleum product export tenders of Mangalore Refinery and Petrochemicals Ltd.

Subsequently, it was to register with other refiners like IOC, Bharat Petroleum and Hindustan Petroleum.

OMESL was also to be used as a vehicle for trading of oil and gas produced by OMEL, the other joint venture between ONGC and Mittal for buying oil properties abroad.

Sources said ONGC was willing to continue with OMEL, but with a skeletal staff.

Sources said Sharma, one of the two high profile officers hired by Mittal for his ventures with ONGC, was in 2007 moved to Mittal Investment Sarl, after almost winding up OMESL. He finally quit a year later.

Naresh K Nayyar, the IOC executive who was hired to head OMEL, has previously quit and joined Essar Oil.

In place of Nayyar, V Ravindranath, who retired as executive director from ONGC, was appointed as CEO of OMEL, which now is left with only a handful of employees. Mittal has already moved the CFO of the company to one of his ventures in Kazakhstan.