ONGC, GSPC to tie up for KG block exploration

The deal size was expected to be $2-2.5 bn but ONGC was successful in bringing it down to $995 mn

Oil and Natural Gas Corporation (ONGC), the largest hydrocarbon producer in the country, is likely to sign a farm-in agreement with Gujarat State Petroleum Corporation (GSPC) for the acquisition of its Deen Dayal Upadhyaya discovery in the Krishna-Godavari (KG) basin for $1.2 billion (Rs 8,160 crore) by February end. 

According to multiple sources, the two companies would sign the agreement prior to the closure of the deal by March 31. “A farm-in agreement has to be signed by both the parties. At the moment, we have approved process agreements and the deal is likely to be notified by the end of this financial year,” said an official close to the development. 

Though there were controversies surrounding the deal, with Congress leader Jayaram Ramesh claiming it to be a Rs 8,000-crore scam, ONGC said it would help the company develop nearby discoveries in the Yanam and Godavari petroleum mining lease (PML) areas, the KG-DWN-98/2 block and the adjacent nomination blocks. “GSPC has already invested about $2 billion (Rs 13,600 crore) to develop infrastructure, which we can use for adjacent fields,” said an ONGC official.   

The deal size was initially expected to be $2-2.5 billion (Rs 14,000-17,000 crore). ONGC was successful in bringing it down to $995 million (Rs 6,766 crore), with another $200 million (Rs 1,360 crore) towards future consideration for six discoveries other than the Deen Dayal West Field.  

GSPC executives said the company was trying to wind up the entire process and close the deal by March 31. According to the agreement, GSPC will buy the entire output at a predetermined price from the KG Basin gas field after the sale. 

While ONGC demanded a higher gas price, GSPC offered price support, with the state government acting as the guarantor. It was in December that ONGC board agreed to acquire the entire 80% participating interest of GSPC along with the operatorship in the Deen Dayal West Field.  

Both the companies came to a final price after much deliberations since there doubts over the recoverable reserves in the area. While the estimate by Ryder Scott was much less, ONGC estimated a reserves of above 27 billion cubic meter (bcm) and GSPC claimed it to be above 40 bcm, following which both the companies agreed at 29 bcm. According to opposition parties, GSPC’s discovery in 2005 is yet to get into full flow of commercial production, despite the company investing a whopping Rs 19,576 crore.

GSPC, which has working interest in 23 blocks, out of which 16 blocks are producing, is looking for a financial restructuring next financial year. Reports suggest the company which is laden with Rs 20,000-crore debt is already in talks with state-run Indian Oil Corporation to sell its 50% stake in Rs 4,500-crore upcoming LNG import terminal at Mundra in Gujarat. GSPC has tied up with the Adani Group for the project.