GSPC may hive off Deen Dayal field to ONGC to avoid loan default

GSPC had approached ONGC to sell a stake in the Deen Dayal field, GSPC’s primary asset, earlier this year

A file photo of an ONGC facility. Photo: Reuters
A file photo of an ONGC facility. Photo: Reuters

Gujarat government-owned company Gujarat State Petroleum Corporation (GSPC) may hive off the Deen Dayal field in the Krishna-Godavari basin (KG basin) into a separate asset if state-run Oil and Natural Gas Corporation (ONGC) decides to buy a stake in it, two people familiar with the development said on condition of anonymity.

The Deen Dayal field is GSPC’s primary asset, located off the coast of Andhra Pradesh.

GSPC approached ONGC to sell a stake in the Deen Dayal field earlier this year. GSPC is the operator of the block with 80% participating interest in it. On 25 September, the ONGC board approved a preliminary agreement to buy this stake.

“If ONGC decides to acquire our block, we will have to undertake a restructuring to keep it separate. We will be taking a decision on the legal and financial viability of this after ONGC’s decision on acquisition,” said one of the two people mentioned above, a senior GSPC official.

In an email, GSPC said that the proposed transaction between GSPC and ONGC is at a nascent stage and it is not possible to comment on either the timeline for completion, deal structure, valuation or use of proceeds.

GSPC is the flagship company of the GSPC Group, involved in exploration and production (E&P) of oil and gas. The government of Gujarat owns 87% of the company’s equity capital.

In August, Mint reported that consulting firm EY has been appointed to value GSPC’s onshore blocks. The exercise is aimed at finding out whether it is possible to induct a strategic and technical partner by farming out a part of GSPC’s participating interest and improve the performance of the producing onshore blocks. GSPC has undertaken a business restructuring exercise to improve its credit profile.

GSPC holds a participating interest in 24 blocks of which 20 are onshore, and four are offshore. Of the 20 blocks, 17 are producing blocks.

“We intend to transfer our major E&P portfolio to GSPC Offshore Ltd and the rest of the business portfolio to GSPC Energy Ltd. However, the finality of this would depend on various statutory and government approvals which are still pending,” J.N. Singh, chairman and managing director, GSPC Group, said in an emailed response on 20 September.

GSPC has invested $3.5 billion (approximately Rs20,000 crore) in the Deen Dayal field and taken on about Rs19,500 crore of debt. Though it started test production from the block in 2014, it is yet to begin commercial output.

A deal with ONGC will reduce its debt burden of nearly Rs20,000 crore as of December 2015.

GSPC has been trying to sell a majority stake in the block to ONGC to avoid defaulting on loans. ONGC initially was not keen, but subseque-ntly said it would evaluate the block.

“GSPC is a government company and would not want to default on the loan payment. The realization from the stake sale to ONGC will be used to retire debt,” said the second person cited above.

In April, the Comptroller and Auditor General said GSPC had mismanaged its exploration and development-related activities in its KG basin and overseas assets, leading to higher costs and financial losses.

In 2015-16, GSPC incurred a net loss of Rs804.42 crore as it wrote off exploration expenditure. It recorded income from operations of Rs10,607.30 crore on a stand-alone basis, compared with Rs10,946,30 crore the previous year.

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