Petroleum Minister Dharmendra Pradhan has been on a media blitzkrieg over a proposed acquisition by the Oil and Natural Gas Corporation (ONGC) of the Krishna Godavari (KG) basin “asset” of Gujarat State Petroleum Corporation (GSPC). The petroleum minister not only thinks he should be playing the role of an investment banker in this proposed merger but also uses geopolitics to justify this. He asks: “Are ONGC and GSPC equivalent to India and Pakistan that they cannot merge?” (Indian Express, May 29). The BJP’s natural disposition to resort to India-Pakistan rhetoric for everything from elections, college campuses to now PSU mergers aside, it is more than a matter of curiosity that our petroleum minister is so eager to palm off an “asset” to the ONGC.
The sordid saga of the GSPC’s misadventures over the last decade is now well known. Bombastic claims of gas discovery by the then Gujarat chief minister, Narendra Modi; huge borrowings of Rs 20,000 crore from 15 public sector banks; suspicious overseas acquisitions in Yemen, Egypt and Indonesia; handing important contracts to bogus and dubious entities; and now staring down the barrel with no gas produced and the inability to meet loan obligations. The GSPC’s annual interest dues alone are around Rs 2,000 crore. Its income before interest is Rs 82 crore. Credit rating agencies have downgraded it recently.
Modiphiles tend to brush off the GSPC’s shenanigans at public expense as sins of omission rather than commission. However, anyone who has cared to lift the hood and analyse the GSPC’s operations or read the scathing report of the Comptroller and Auditor General (CAG) and talked to industry experts will concur that there was a deliberate exploitation of the GSPC by its then political masters under the alibi of a risky venture. Now, in a brazen attempt to wash away the past sins of his prime minister, the petroleum minister paints a rosy future of a proposed merger between the ONGC and GSPC.
Minister’s claim: The UPA government is responsible for the GSPC’s woes. It did not allow free market pricing for gas and the dictated price was unviable.
Fact: The GSPC needs to first produce gas. Only then can it sell it at a certain price. The government-determined selling price was not a secret and was well known. The GSPC decided to bid for this KG block in 2003. Between 2005 and 2015, it borrowed Rs 20,000 crore, ostensibly to explore gas in the KG basin. If the GSPC knew all along that the selling price was unviable, why did it continue to borrow and splurge that money instead of stopping exploration? This is precisely the question the CAG has raised in its damning report.
Minister’s claim: There is now a new market-based gas pricing formula, which will make the GSPC KG basin asset attractive for the ONGC. Hence the ONGC should consider acquiring it.
Fact: This is not for the minister to decide. It has to be decided by the board of the ONGC in an independent manner. The new gas pricing formula is dependent, among other factors, on the global crude price, spot LNG prices etc. It is no secret that these prices have fallen precipitously recently and hence future gas pricing is very likely to be much lower. So, this sales pitch that the new pricing formula bodes well for the GSPC’s KG basin gas is plain bunkum.
Minister’s claim: The GSPC’s gas reserves are 14 trillion cubic feet (tcf), certified by international experts. Hence, this will be a profitable purchase for the ONGC.
Fact: Like investment bankers eager to close a merger transaction, the minister too resorts to false and misleading claims. These reserve numbers are called 3P or gas-in-place reserves which have less than a 10 per cent chance of recovery. Everyone, including the ONGC, has disputed these claims and said that the actual proven reserves are a mere fraction of this number.
The ONGC is a navaratna public sector company with thousands of small shareholders. In the interest of overall transparency that Modi keeps talking about, he and his minister should answer the following questions.
British Petroleum (BP) is a technical advisor to the GSPC. Why is BP not keen on buying this GSPC KG block that is being thrust upon the ONGC? Why is there no open competitive bidding?
The former managing director of the GSPC has been appointed as director-general of hydrocarbons, which is the regulator for this industry. Isn’t this conflict of interest? Most industry experts value the GSPC’s KG block at no more than Rs 15,000 crore, which is less than the value of the GSPC’s loans. If the ONGC were to buy this KG block entirely, it will also take over the loans of the GSPC. How is this good for ONGC shareholders?
How will the interests of the ONGC’s minority shareholders be protected from future liabilities arising out of the CAG report and other potential lawsuits from the GSPC’s past?
Oil and gas exploration is inherently uncertain and risky. But the GSPC story is not merely one of a genuine business bet going awry, as some claim. For starters, they should explain the curious pattern of the GSPC’s rising borrowing during election years and its money trail. When PM Modi admitted to the Wall Street Journal that he does not believe in privatisation of PSUs, his bhakts need not look beyond the GSPC saga to understand why.
(This article first appeared in the print edition under the headline ‘Staring down the barrel’)