ONGC stops investment in Imperial pending study

ONGC stops investment in Imperial pending study

New Delhi: State-owned Oil and Natural Gas Corp. (ONGC) won’t invest further in Imperial Energy Corp. Plc until it has a “suitable strategy in place", with data showing that peak production from the company’s key Siberian oil fields will fall drastically short of the estimates made at the time of the $2.1 billion (around 10,690 crore today) acquisition.

ONGC’s board also decided that ONGC Videsh Ltd (OVL), its subsidiary that acquired Imperial, will conduct a “detailed study to make the operations sustainable".

Imperial’s main asset is its Siberian fields with an acreage of around 16,800 sq. km. Peak oil output from the Siberian fields was estimated at 80,000 barrels per day (bpd) by 2011 at the time of the purchase and was subsequently lowered to 45,000 bpd, Mint reported on 17 June 2010.

“Around six months back, we decided to stop making any future investment in the Imperial fields,"said a senior ONGC executive, speaking on condition of anonymity. “Over and above the acquisition costs, we have invested around $500-600 million. We will have to do a detailed study and we are trying to make the operations sustainable. The decision was taken by our board."

Mint couldn’t ascertain the current output from the Imperial fields in the Tomsk region of Siberia. The fields have 946 million barrels of oil equivalent of proven and probable reserves, according to an audit by DeGolyer and MacNaughton.

“What we have decided is that we will make a study and not spend indiscriminately," said a top OVL executive, who also didn’t want to be named, in reply to a question whether this means all further investment in the fields will stop. “How can we take such a decision? It is such a big and significant investment for us. We want to form a firm strategy and take actions in all directions. We don’t want to go ahead in an unplanned way, and want to identify the required technology for our fields. This was the board’s decision."

The Comptroller and Auditor General (CAG) of India had earlier found fault with the acquisition of Imperial Energy. Mint reported on 25 March 2011 that the government’s auditor said OVL incurred a loss of 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 OVL’s “prediction for production levels was highly optimistic rather than realistic".

According to the CAG 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". OVL achieved a production of 15,803 bpd in the 15 months to March 2010.

India has had a mixed record when it comes to acquiring overseas assets to boost energy security, said Gokul Chaudhri, partner at audit and consulting firm BMR Advisors Pvt. Ltd. “Whilst investment in producing assets such as Sudan and Sakhalin worked well, the share transaction involving Imperial has been of growing concern," he said.

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 low production.

CCEA signs off on key decisions related to economic ministries and state-owned firms. IRR is a measure to determine project viability, with investors looking for IRR to be higher than the cost of funding.

“The government, and possibly CCEA, will need to review this investment and articulate the way forward to make sure that the investment value can be protected or optimized in the given circumstances," Chaudhri said.

utpal.b@livemint.com

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