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INVESTIGATION: ONGC VIDESH'S
SAKHALIN PROJECT
Slippery Deal
The ONGC subsidiary's whopping $1.73 billion (Rs
8,136 crore) investment in a Russian oilfield was signed in indecent haste
and procedures were bypassed despite doubts about its commercial soundness
By V. Shankar Aiyar
By all accounts
it is history in the making but largely of the dubious kind. At $1.73
billion (Rs 8,136 crore), it is the largest investment ever made by an
Indian company abroad. Cleared in just six months it is perhaps one of
the fastest economic decisions taken by the Union Government. Investment
norms were inexplicably altered, allowing India's richest PSU, the ONGC,
to commit the huge amount in an obscure oilfield in the Russian far-east
after two global oil majors declined to do so.
 Consider
the deal: ONGC Videsh Ltd (OVL), the overseas investment arm of ONGC,
is to buy a 20 per cent stake in the oilfield-Sakhalin I-from Russian
public-sector oil giant Rosneft Sakhalin and its subsidiary Sakhalinmorneftega-Shelf.
The other stakeholders are US giant Exxon Mobil and a Japanese consortium
Sakhalin Oil Development Corporation both owning 30 per cent each. Of
the Rs 8,136 crore ONGC plans to pump in, Rs 447 crore is towards past
costs, Rs 1,057 crore towards premium for the equity, Rs 3,290 crore is
cash on call through the project and, believe it or not, Rs 3,342 crore
is a project loan. The first tranche of Rs 1,588 crore was paid on May
31 this year.
In terms of economic rationale, the deal is simply
scandalous. To appreciate the size of the transaction, place it in context.
At Rs 8,136 crore, the deal is Rs 636 crore more than what the ONGC is
struggling to find to upgrade Bombay High. And the Rs 3,342 crore ($711.2
million) loan extended to Rosneft is three times the Rs 1,112 crore the
Government of India will be giving as loan to over 20 countries.
What's equally baffling is that the deal was
passed in just about six months-between June 1, 2000 when investment bankers
JP Morgan made the first presentation to OVL and January 6, 2001 when
the country's highest decision-making body, the Cabinet Committee on Economic
Affairs (CCEA), gave its approval. The rush raises suspicions, given the
track record of investments in Russia and its troubled politics which
have driven investors away in the past.
How was the commitment managed? A cabinet decision
of July 8, 1997 specifies that OVL has to take the approval of the all-important
Empowered Committee of Secretaries (ECS) for all investments over Rs 200
crore. It also mentions that "there shall not be any support from
the Government or ONGC to ONGC-VL's overseas ventures" or from its
own resources. At Rs 8,136 crore the investment was 464 times the revenue
earned by OVL in 1999-2000 and way out of its reach. So the Petroleum
Ministry and the ECS advised the CCEA on January 6, 2001 to delete the
clause "or ONGC".
This when OVL's track records in Egypt and Tunisia
have been dubbed "dismal" by the Ministry of Finance (MoF).
Significantly, ONGC has had to pump capital into OVL and its equity base
has tripled from Rs 100 crore in 1998-99 to Rs 300 crore now.
In return for the investment, OVL will get 5-8
million cu m of natural gas which can be swapped for cash or crude and
2-4 million tonnes of oil every year from 2005. Plus, of course, it will
get crude-kept aside from Rosneft's share-as repayment of the Rs 3,342
crore loan. The truth is that even assuming peak production of two lakh
barrels per day (which will be achieved only in 2012) through the project's
life of 50 years, its 20 per cent share comes to 1.9 million tonnes a
year.
According to data presented to the CCEA, India's
share of Sakhalin I produce from 2005 to 2045 works out to 44.5 MT or
just 1.11 MT per year. On the face of it, the equity crude of 1.11 MTPA
costing around $200 million may seem attractive but if discounted on net
present value basis, the worth of the crude will translate into 0.69 MT
or 62 per cent of today's value when delivered in 2005. Most investment
bankers factor only 15 years of production because by then a dollar would
be worth 6 cents at current value.
Union Petroleum Minister Ram Naik is not ruffled
by the conflict between pricing or costs and the rationale. His contention:
"The CCEA considered all these issues while taking the decision."
On his part, OVL Managing Director Atul Chandra says, "The overall
economics of the project are attractive." Naik also cites the India
Hydrocarbon Vision 2025 report which suggests domestic exploration and
overseas investments to meet the country's growing energy demand. "I
want to ensure supply of crude for the country's growing need and oil
security."
Juxtapose this doctrine of oil security with
the country's needs. This year India's consumption of petroleum products
is estimated to be around 110 MT. India is expected to import around 80
MT of crude. What kind of security will 1.11 MT or even the claimed 2-4
MT provide and at what cost? Even if oil security were to be an issue,
is this ad-hoc investment the only way out? Obviously not. Today, oil
can be booked for delivery 20 years in advance in the futures market.
India Today spoke to Sunil Deshmukh, a New York-based expert in forward
oil pricing and structured transactions. Deshmukh says, "There is
a derivative market in long-term forward oil wherein you can buy physical
or paper oil. It offers more flexibility."
Perhaps there is a geopolitical interest given
the fact that the deal was being pushed through when Russian President
Vladimir Putin visited India last year. Brajesh Mishra, national security
adviser and principal secretary to the prime minister, however denies
any link. "There are no geopolitical or security issues involved.
It was approved by the Cabinet on the basis of a good commercial deal."
This perception of the Cabinet though is not borne out if one looks at
the decisions of other oil majors. Rosneft had offered a stake in the
same field to Texaco in 1999 and, according to The Russia Journal, was
turned down. Ditto with the $232-billion Exxon Mobil, which declined to
exercise its right to acquire the 20 per cent stake.
Chandra's argument is that Exxon declined because
it "already had a 30 per cent participating interest and also substantial
stakes in Sakhalin III A and III B projects". He says the company's
decision could have been based on the country-risk exposure limits. Interestingly,
Texaco's refusal or the rationale for Exxon's waiver has not been discussed
either by ECS or the CCEA.
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