ONGC signs pact to buy stake in GSPC's KG basin block

To have dispute resolution mechanism over valuation or natural gas reserves

State-owned Oil and Natural Gas Corporation (ONGC) has signed a preliminary agreement to buy an operating stake in the Gujarat State Petroleum Corporation (GSPC)’s KG basin gas block.

The memorandum of understanding (MoU), signed last week, has a dispute resolution mechanism wherein any differences over issues such as valuation or natural gas reserves would be referred to a three-member committee comprising outside experts.

Sources said GPSC is keen to get ONGC on board to help tide over its difficulties in producing gas from the Deendayal fields, which a decade ago were touted as the biggest discovery in India.

GSPC began trial production of a very small volume of gas from August 4, 2014, but has not reached commercial production yet.

“Daily plateau production gas rate envisaged from Deen Dayal Upadhaya West field is around 5.7 million standard cubic meters per day as per approved Field Development Plan (FDP) for a period of 14 years.

There is a problem of high pressure and high temperature in completion/drilling of wells in the field. No final date of commercial production has yet been given by operator (GSPC),” according to a Right to Information reply by the oil ministry’s technical arm, Directorate General of Hydrocarbons.

Sources said this is perhaps for the first time that an MoU sets out a dispute resolution committee and it perhaps is an indication of the pitfalls that ONGC anticipates in buying a stake in the block.

It has already differed with GSPC on the gas reserves the block holds and has appointed US-based consultant Ryder Scott to do an independent assessment.

The three-member committee will include economist and former oil secretary Vijay Kelkar and former chief vigilance commissioner P Shankar.

Since the Bharatiya Janata Party-led government came to power at the Centre, GSPC has been seeking to sell a majority stake in its KG-OSN-2001/3 (Deendayal) block in Bay of Bengal to ONGC to avoid defaulting on loans.

ONGC initially was not keen to buy stake in the block, as it felt the block had reserves far less than what GSPC was claiming and the asking price for the stake was not commensurate with the returns. But, it has relented lately.

GSPC was to begin gas production from the block in 2013 but after sinking in $3.6 billion, it found that gas reserves are one-tenth of 20 trillion cubic feet claimed in 2005 and that too is technically difficult to produce.

In the process, it has amassed Rs 19,576 crore of debt, on which interest cost was Rs 1,804.06 crore in 2014-15, according to the Comptroller and Auditor General. And against this, its revenue was Rs 152.5 crore in 2014-15.