State-owned ONGC bought Gujarat State Petroleum Corp's (GSPC) stake in a KG basin gas block for $1.2 billion (about Rs 80 billion) when the replacement value of brand new assets built by the company is at least $1.5 billion and the asking price was Rs 200 billion, its former chairman D K Sarraf said.
With the Opposition attacking the government over what it said was "pressure" exerted on Oil and Natural Gas Corp (ONGC) to first bail out the debt-laden GSPC and then using the company to meet the disinvestment target by selling majority stake in HPCL, Sarraf, who headed the company when the two deals were struck, defended the acquisitions as "strategic and of immense value proposition".
ONGC, he said, has been in the business of acquisition of oil and gas assets for decades, with its overseas investment arm ONGC Videsh Ltd (OVL) amassing 41 projects in 20 countries.
"And so when quality assets are available next door, it is better than going abroad," he said referring to GSPC putting on sale its 80 per cent stake in Deen Dayal West (DDW) gas field in Block KG-OSN-2001/3 in the Bay of Bengal and the government offering 51.11 per cent stake in Hindustan Petroleum Corp Ltd (HPCL).
Sarraf said contrary to perception in some quarters, both the deals have been a win-win for all parties.
While in Deen Dayal field, ONGC got assets it can use to monetise its own gas discoveries in the neighbouring block, HPCL made it an integrated company, helping it hedge price risks that a pure exploration and production (E&P) company faces, he said.
"They (GSPC) began by asking for Rs 200 billion (for stake sale). Negotiations dragged for one-and-half years and we were able to bring them down to Rs 80 billion. This when we consider that the value of offshore platforms and onshore gas receipt facility that GSPC has put in Krishna Godavari basin alone is $1.5 billion. Plus ONGC got gas reserves," he said.
Deen Dayal block had not produced any gas before the December 2016 deal with ONGC.
Sarraf said ONGC, under him, found the GSPC block attractive as it could use the infrastructure in Block KG-OSN-2001/3 to bring to production Cluster-1 discoveries in its neighbouring KG-DWN-98/2 or KG-D5 block.
Also, the KG-OSN-2001/3 block infrastructure gave a back-up option for Cluster-II discoveries in KG-D5 in case of disruptions, he said. "More importantly, it gave ONGC a ready experience in producing for high-pressure, high-temperature (HPHT) field."
Deen Dayal is an HPHT field and ONGC has similar assets which it could bring to production using the experience of GSPC field, he said.
"GSPC was a strategic buy that brought in strategic value in the infrastructure it had, the gas reserves and the HPHT experience," he said.
On HPCL, Sarraf said ONGC always had an ambition to become an integrated oil company by having businesses in downstream refining and fuel marketing.
It acquired Mangalore Refinery and Petrochemicals Ltd (MRPL) one-and-half decades back to fulfil that ambition and had wanted to use it to set up retailing stations.
"ONGC acquired a marketing licence but to set up a critical mass of 10,000 petrol pumps would have taken decades," he said, adding HPCL presented a strategic advantage of leapfrogging to those levels.
Standalone E&P companies are exposed to oil price risks and refining assets help balance such volatilities, he said.
After the Budget announcement of 2017 calling for setting up integrated oil companies, ONGC analysed options available. "IOC was too big a company to be considered for a merger. Bharat Petroleum Corp Ltd (BPCL) in itself was headed towards becoming an integrated player with E&P assets. So HPCL was the best buy, we thought," he said.
ONGC, he said, paid a 10-12 per cent premium in its Rs 369.15 billion deal price which was many times less than a 50 per cent premium that controlling stake in strategic companies like HPCL would normally command.
The refining asset HPCL brought would hedge risks of low oil prices and return of subsidy scheme where the government asks oil producers to subsidise fuel when prices shoot up, he said.
"Both deals went through a rigorous due diligence process with the ONGC board and its sub-committee deliberating on them for hours," he added.