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CAG criticizes OVL for expensive acquisition of Imperial Energy

CAG criticizes OVL for expensive acquisition of Imperial Energy
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First Published: Fri, Mar 25 2011. 12 00 AM IST
Updated: Fri, Mar 25 2011. 12 00 AM IST
New Delhi: The Comptroller and Auditor General (CAG) of India has found faults with ONGC Videsh Ltd’s (OVL) most expensive acquisition of Imperial Energy Corp. Plc.
The government’s auditor said the company incurred a loss of Rs1,182.14 crore between January 2009 and March 2010 due to its inability to achieve the estimated production of 35,000 barrels of oil per day (bpd).
The public auditor pulled up the overseas arm of state-run Oil and Natural Gas Corp. Ltd (ONGC) on its internal control system, saying OVL’s “prediction for production levels was highly optimistic rather than realistic”. OVL achieved a production of 15,803 bpd in the 15 months to March 2010.
CAG released its report on OVL’s joint venture on Thursday.
Mint reported on 17 June that OVL’s miscalculation was likely to raise doubts about the processes followed in the $2.1 billion (Rs9,408 crore) acquisition that was completed in 2009.
The Imperial acquisition was touted as India’s effort to reduce the country’s dependence on imports of oil and gas. Imperial’s main asset is its Siberian fields with an acreage of around 16,800 sq. km.
According to CAG’s report, production was 9,067 bpd in 2009 and 14,724 bpd till August in 2010, against the projected 35,000 bpd, “due to tight reserve position and delay in drilling the wells”. Current output from the Imperial fields in the Tomsk region of Siberia is about 17,000 bpd.
“The company (OVL) did not address the reservations expressed in 2007 by Russian resources ministry regarding inflated reserve position declared by IEC (Imperial Energy)...,” CAG said in its report.
“The fact that the company even now is not in a position to generate a realistic production profile and bring out an economic analysis confirms that all the problems associated with these fields were not properly assessed at the time of evaluation of opportunity which led to poor production performance and consequent losses,” the auditor added.
The acquisition was made by OVL with approval from the cabinet committee on economic affairs (CCEA) “subject to stipulation that the IRR (internal rate of return) should be more than 10% and an option to farm out a part of its stake to a Russian firm”. This IRR could not be achieved because of the low production.
CCEA signs off on key decisions related to economic ministries and state-owned firms. IRR is a measure to determine project viability—a higher IRR is preferred and usually investors prefer IRR to be higher than their cost of funding.
“To say that we have failed is not fair as a project should be judged on a long-term basis rather than short-term,” said an OVL executive who did not want to identified.
CAG also criticized OVL’s approach in Sudan, Myanmar, Libya, Turkmenistan, Qatar, Congo, Colombia and Nigeria.
The Imperial project was assessed as viable with average production forecast at 35,000 bpd for 2009, and to be enhanced up to 80,000 bpd by 2011. Mint had reported that Imperial was expected to see a peak output of 45,000 bpd in its Siberian fields, almost half the 80,000 bpd estimate that was the basis for the valuation and approval of the purchase.
Failure to meet the target resulted in a production loss of 10.8 million barrels and the proven reserve size of the asset was reduced by 1.527 million tonnes, CAG said in its report.
Petroleum secretary S. Sundareshan had defended the deal in July. “We can’t come to conclusion from what is envisaged as the peak production because we are nowhere near reaching the peak production. We are convinced that in the long run, the project is extremely worthwhile and will be viable,” he had said.
The latest increase in oil prices has re-emphasized the urgency for India to secure its future energy needs. The existing energy plan envisages India’s dependency on imports to increase to 90% by 2030—a period in which the country will strive to achieve double-digit economic growth.
India’s consumption of petroleum products has grown at an annual compounded growth rate of around 4% in the previous seven years and, according to the International Energy Agency, consumption is expected to rise to 135 million tonnes per annum (mtpa) by 2012 from 112 mtpa now.
On SAIL, RINL
In another report, CAG said it has found lapses in the manner in which Steel Authority of India Ltd (SAIL) and Rashtriya Ispat Nigam Ltd (RINL) used funds earmarked for corporate social responsibility (CSR) and environment management systems (EMS).
While the companies were providing 2% for their CSR activities, the money wasn’t transferred to a separate fund. As a result, the unspent money lapsed at the end of the year, CAG said. “In fact, RINL was able to utilize only 45% of the budget provided by it during 2006-07 to 2009-10,” it said.
SAIL and RINL scored poorly on EMS norms, CAG added.
“SAIL and RINL have not fixed any target for reduction of carbon dioxide, whereas Tata Steel Ltd set a target of reduction in carbon dioxide emission to less than 1.7 tonnes per tonne (of production) by 2012,” it said. “SAIL and RINL were found not to have even analysed the reasons for their higher carbon dioxide emissions.”
CAG also found issue with the safety records of SAIL and RINL, noting that the number of fatal accidents began to rise in 2008-09 and 2009-10. “The companies did not achieve the target of ‘zero accidents’ fixed by them due to inadequate house keeping and safety equipment,” it said.
utpal.b@livemint.com
Aman Malik contributed to this story.
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First Published: Fri, Mar 25 2011. 12 00 AM IST
More Topics: CAG | India | OVL | ONGC Videsh | Audit Report |