OVL’s Imperial miscalculation

OVL’s Imperial miscalculation

New Delhi: ONGC Videsh Ltd’s (OVL) most expensive acquisition Imperial Energy Corp. Plc is expected to see a peak output of 45,000 barrels per day (bpd) of oil in its Siberian fields, almost half the 80,000 bpd estimate that was the basis for the valuation and approval of the purchase.

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This detail, which emerged during a March review meeting of OVL, is likely to raise doubts about the processes followed in the $2.1 billion (Rs9,744 crore today) acquisition that was completed in 2009. It could also lead to questions about the working of state-owned firms.

“It is an apparent case of weak due diligence. A combination of low prices as compared to when the deal was struck coupled with lower production levels will mean difficult times for OVL," said Anish De, chief executive of Mercados EMI Asia, an energy consulting firm.

OVL is the overseas arm of Oil and Natural Gas Corp. Ltd (ONGC), India’s largest explorer and producer of oil and gas. OVL, formerly known as Hydrocarbons India Pvt. Ltd, was set up in 1965 to buy energy assets abroad, as part of an 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 the minutes of a meeting of OVL’s monitoring committee held on 17 March that have been reviewed by Mint, while the “peak production rate envisaged during CCEA (cabinet committee on economic affairs) approval stage was about 80,000 BOPD (barrels of oil per day) plus. The peak production rate now envisaged was around 45,000 BOPD expected to be achieved by 2015 with a plateau period of 12-15 years". CCEA signs off on key decisions related to economic ministries and state-owned firms.

OVL managing director R.S. Butola had admitted at a 28 May press conference that 40,000-45,000 bpd would be the peak production from Imperial’s Siberian assets once the company started producing from all 17 fields.

The current output from the Imperial fields, in the Tomsk region of Siberia, is in the range of 16,000-16,500 bpd. The fields had 946 million barrels of oil equivalent of proven and probable reserves as of December 2008, according to an audit by DeGolyer and MacNaughton.

A government official, who attended the review, described Imperial as “a difficult proposition". “Concerned with the gaps (between the original estimate and the new one), it was suggested that a lifecycle analysis be carried out for devising an appropriate strategy," added this person, who did not want to be identified.

A senior ONGC official admitted to problems with Imperial. “Our expectations have not been met in Imperial," added this person on condition of anonymity.

India is the world’s fifth largest oil importer, meeting 75% of its needs from overseas. It’s set to become the third largest after the US and China before 2025, according to the International Energy Agency.