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Slippery Deal
The ONGC subsidiary's whopping Rs 8,136 crore investment was signed in indecent haste.

INVESTIGATION: ONGC VIDESH'S SAKHALIN PROJECT

Mishra Denies Role In The Decision

Worse, in the space of four months the premium sought by Rosneft from OVL was hiked by Rs 846 crore. Chandra's defence is that the original bid reflected a "more conservative view". Subsequently "the economics was found significantly better because of higher production levels". On its part, the Petroleum Ministry, in a note to the CCEA, refers to an October 6, 2000 letter from Rosneft Vice-President S. Oganesyan which mentions "unsolicited offers, initial terms of which are considered by Rosneft as very attractive". Neither the note nor Chandra reveal the bidder or the bid value.

Apparently the unsolicited bid was from British Petroleum Amoco (BPA) but the amount is not known. It strains belief that BPA could have bid substantially higher than OVL's offer of $100 million premium. Significantly, Rosneft's letter revealing the unsolicited bid to OVL came just around the time of Putin's visit. A note by the Petroleum Ministry on the negotiations contains an intriguing reference: "CMD-ONGC requested secretary-Petroleum Ministry to take up the matter with the principal secretary to the prime minister to speak to concerned Russian authority for bringing down their demand of cash premium US $200 million." But Mishra denies he had any role in the investment decision. "I was not involved in the negotiations at all-neither in the investment decision nor in any pricing issues."

But the clearance of the deal seems more than just "commercial". For instance, a senior investment banker dubs the $711.2 million loan to Rosneft at 3 per cent above Libor as "a negotiated novelty". In short, OVL is taking 40 per cent of the project risk for a 20 per cent return. The loan exposes ONGC's balance sheet to the risks of a Russian project where it has little or no control since it is only a minority stakeholder. This point has also been raised by the MoF. It states that the norms governing OVL's investments preclude support from ONGC to insulate it from risks. Naik though pooh-poohs these concerns. "It is a conscious decision, innovative and maybe non-traditional," he says.

In January 2001, the MoF had also raised questions about the project wherein it hoped that its "viability even with increased premium from the original figure of $40-50 million to $225 million has been ensured by the ECS". Commenting on the viability, a note from the Petroleum Ministry, slammed the MoF, saying, "The ECS did not have the benefit of the views of the MoF while considering the proposal because both its meetings on September 7, 2000 and December 29, 2000 had no participation from the MoF." Despite the magnitude of the deal, the absence of MoF mandarins from the ECS meet has been dismissed like it was a birthday party they missed. The ECS had pushed through a Rs 8,136 crore deal, the biggest-ever overseas acquisition-last year the total FDI into India stood at Rs 6,904 crore-without the "expertise of the MoF".

According to the Petroleum Ministry, the MoF had not even specified the "basis on which it is believed that the project is not economically viable". It is not clear if the MoF was stating something between the lines. Neither was Petroleum Ministry overly bothered. Its contention: the project is viable given the rate of return. In a note to the CCEA dated January 5, 2001, the Petroleum Ministry states an internal rate of return (IRR) of 12.35 per cent and a best case return of 14.8 per cent.

An ONGC circular (of December 30, 1999), however, states that since its cost of capital is 16 per cent, investment proposals should yield at least 16 per cent post-tax IRR. Also, the IRR is based on estimates of Exxon Mobil, not the predictions of the consultant, Gaffney, Cline and Associates. The return is far lower than the over 20 per cent dollar yield earned by the government in domestic fields like Ravva and Mukta, Panna, Tapti (MPT). Chandra, however, maintains, "The financial advisers of OVL consider that the available IRR of the project is higher than what oil majors would aim for in such a mega project."

The deal raises some serious concerns. Can ONGC-struggling to fund the Rs 7,500-crore Bombay High modernisation-afford the exposure to Sakhalin's chequered history? Should the Government back overseas ambitions when the Petroleum Ministry is scurrying for investors to fund exploration of new blocks and for Enron's stake in MPT? Oil security is better addressed by investment in domestic blocks where risks are known and by using safer, market-based derivatives. ONGC may learn this the hard way.

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