New D elhi: Even as Oil and Natural Gas Corp. Ltd (ONGC) is struggling with its acquisition of the UK’s Imperial Energy Corp. Plc., it now emerges that India’s biggest oil exploration company wanted to terminate the agreement.
The company even sent a government delegation to London to voice its concern over the valuation of the acquired assets to the UK regulators.
ONGC had paid $2.1 billion (around Rs.11,088 crore today) in 2009 in the company’s most expensive overseas acquisition to tap the UK-based explorer’s Siberian deposits as part of an effort to secure overseas energy assets and reduce the country’s dependence on imports.
“After the agreement was entered into by ONGC, the oil price dipped sharply. A question arose before the ONGC board, whether the deal can be dropped. While there was unanimity on exiting the deal, the board also understood that we couldn’t get out of it due to legal implications,” a person aware of the developments said, requesting anonymity.
Peak oil output from the Siberian fields was estimated at 80,000 barrels per day (bpd) by 2011 at the time of the purchase, which was lowered to 45,000 bpd, Mint reported on 17 June 2010.
The field is currently producing only around 15,000 bpd.
“We wanted to retreat on Imperial. So much so that a delegation was sent by the Indian government to London,” an ONGC executive said on condition of anonymity.
“The legal opinion sought by ONGC said that since Imperial was a listed entity, it couldn’t terminate the agreement. The UK regulators told the delegation that ONGC couldn’t get out of it from the legal standpoint. The decision to go ahead with the deal was taken after legal recourse offered no exit,” the person cited earlier said.
ONGC has decided not to invest additional money in Imperial Energy until it has a suitable strategy in place. Imperial’s main asset is its Siberian fields, with acreage of around 16,800 sq. km. Apart from the acquisition cost, ONGC has invested around $500 million in Imperial. It also set aside $408 million to cover the impairment of Imperial’s asset value in the last fiscal. A government official aware of India’s hesitancy to go ahead with the deal said, “While there was opposition within the government, it still went through. A delegation was sent to London to express our concerns.” He too declined to be named.
The Comptroller and Auditor General of India in 2011 criticized the acquisition of Imperial Energy. The government’s auditor said ONGC’s overseas unit had incurred a loss of Rs.1,182.14 crore between January 2009 and March 2010 due to its inability to achieve the estimated oil production of 35,000 bpd. The public auditor said ONGC’s “prediction for production levels was highly optimistic rather than realistic”.
“Some deals have larger geo-political rationale rather than just pure economics,” said an oil ministry functionary, requesting anonymity. The person declined to elaborate further.
India’s investments in the energy sector in Russia include a 20% stake in the Sakhalin-I hydrocarbon block through ONGC.
While a spokesperson for India’s ministry of external affairs didn’t respond to emailed queries, a second ONGC executive who also didn’t want to be identified said, “The deal had little to do with geology.”
Russian conglomerate Sistema JSFC has valued Imperial Energy’s assets at $500 million, a quarter of the sum ONGC paid to buy the explorer, Mint reported on 23 July. The low valuation has effectively stymied the proposed merger of Sistema’s units JSC Bashneft and OAO RussNeft with Imperial Energy. After the merger, ONGC was to acquire a 25% stake in the combined entity by divesting the UK explorer.