SELLING A PIPE DREAM
A Gujarat government company once credited with the ‘biggest ever’ natural gas reserve find in the country is now burdened with a Rs 13,000 crore debt and desperately needs a bailout
With debts of Rs 13,000 crore, the Gujarat State Petroleum Corporation is in dire need of a bailout
OOn August 27, Congress leader Jairam Ramesh cited a Reserve Bank of India (RBI) notification to demand that the State Bank of India (SBI) declare the Gujarat State Petroleum Corporation (GSPC) bankrupt by the end of the day. Ramesh referred to the RBI’s circular issued on February 12 which states that lending banks should initiate bankruptcy proceedings against companies that default on loan repayments of Rs 2,000 crore or more if a resolution plan is not worked out within 180 days of the default, beginning March 1.
Ramesh’s argument, however, was erroneous. For GSPC, India’s second-largest gas trading company, in which the Gujarat government owns 86.89 per cent equity capital, owes the outstanding amount to not one but 19 commercial banks. The highest outstanding—Rs 1,459 crore as on July 31, 2018—is against SBI. More importantly, the company has not defaulted on repayments till now.
The misfire by the Congress, though, doesn’t take away the fact that GSPC is in a deep financial mess. Its outstanding debt, as on April 13, stood at Rs 13,200 crore, with losses registered in 2017 at Rs 16,603 crore. The company has been struggling to bring the outstanding to under Rs 7,500 crore, considered a sustainable debt level. Credit rating agency Crisil continues with its rating BBB+ (‘Rating Watch with Negative Implications’) for GSPC. At a time when Indian banks are struggling with non-performing assets (NPAs) to the tune of over Rs 10 lakh crore, GSPC is a big dampener to the Narendra Modi government’s efforts to restore the health of the Indian banking sector.
On June 26, 2005, it was Modi who, as Gujarat chief minister, announced that GSPC had made the ‘biggest discovery’ of its kind in the country’s history—an estimated natural gas reserve of 20 trillion cubic feet (TCF) in the Krishna-Godavari (KG) basin in Andhra Pradesh. One TCF gas can generate 100 billion units of electricity. This gas find and the promise of a ‘gas-based economy’ figured prominently in Modi’s successive political campaigns.
Thirteen years on, GSPC’s bleeding account books have given the opposition ammunition to attack Modi—the Congress has alleged a multi-crore scam in the company and demanded a CBI investigation. Instead of generating revenue of over Rs 20,000 crore for Gujarat, as Modi had promised in 2007, exploration in the KG-OSN-2001/3 block, later renamed Deen Dayal block, landed GSPC with an outstanding loan of Rs 19,270 crore by November 2015. Ironically, RBI governor Urjit Patel, who was chairman of the GSPC audit committee between 2006 and 2013, kept approving the company’s borrowings even though commercial gas production never started and the 2012 deadline was passed by.
In 2003, GSPC, along with the Canada-based GeoGlobal Resources and India’s Jubilant Offshore Drilling, submitted a joint bid for an exploration block in the KG basin. The private
partners each held a 10 per cent stake. After spending over Rs 23,000 crore on gas exploration and related work, GSPC, desperate to shed its liabilities, offloaded its entire 80 per cent stake in the Deen Dayal West (DDW) gas field and other discoveries in the KG block to the Oil and Natural Gas Corporation (ONGC) for $1.19 billion (Rs 7,738 crore) in 2017.
A few days after Modi’s announcement of the ‘biggest ever’ natural gas find, V.K. Sibal, then director general of hydrocarbons, punctured the claim, saying that estimates could not be made after drilling just one well. The oil and gas regulator said the total gas estimate was 2.2 TCF, about one-tenth of what had been claimed. Even GeoGlobal chief Jean Paul Roy, a Canadian geologist, publicly questioned Modi’s announcement.
According to sources, in a 100page report submitted in November 2017 to ONGC, Ryder Scott, a Houston-based oil and gas reservoir evaluation consulting firm, put the gas reserves in the Deen Dayal block at about 1 TCF. The report has not yet been made public.
In a report tabled in the Gujarat assembly in March 2012, the Comptroller and Auditor General of India (CAG) severely criticised GSPC’s operations in the KG block and said that “numerous faulty investment and destructive administrative decisions” had caused the company a loss of Rs 7,000 crore. It observed that GSPC’s exploration cost in the KG basin was almost 13 times the estimate while the outcome was much lower than originally claimed. Four years later, another CAG report rapped GSPC for a 177 per cent rise in its borrowings, from Rs 7,126 crore in March 2011 to Rs 19,716 crore in March 2015. ‘Why was the corporation running up debts and where was the company blowing these all up?’ the report asked.
The CAG concluded that with little expertise in gas exploration, GSPC had tied up with ‘frivolous’ vendors and procured exploration blocks in faraway countries, only to sell them off at a big loss. ‘The company surrendered 10 out of 11 overseas blocks between 2011 and 2015, incurring an
expenditure of Rs 1,757.46 crore, of which Rs 1,734.12 crore was written off,’ the CAG report said.
Before finalising the ONGC deal, J.N. Singh, then managing director of GSPC and now its non-executive chairman, admitted that the company had botched up its foreign acquisitions. “Wrong decisions were made by my predecessors. We should not have acquired blocks in foreign countries, rather we should have focused on developing assets here,” said Singh, who is also Gujarat chief secretary.
In 2016, the Public Enterprise Committee of the Gujarat assembly criticised GSPC for its “overconfidence” in acquiring the KG basin block. ‘It shows the company has taken a huge risk while placing the bids. Without assessing the various financial and technical aspects, GSPC placed a high bid to acquire the KG block. Due to this, the company’s unsecured debt rose to Rs 2,140.53 crore between 2006 and 2011,’ the report said.
The Congress has also demanded an investigation into the allegation of conflict of interest against Gujarat energy minister Saurabh Patel. In April 2008, when Patel was state energy and petrochemicals minister, his brother Mehul Dalal and sister-in-law Nikita Dalal set up Suryaja Infrastructure Private Ltd. Next year, Patel and his son Abhay Dalal got 5,000 shares each in the company. In October-December 2009, Suryaja invested in Gujarat Natural Resources Limited (GNRL), which later entered into a joint venture with GSPC, an entity directly monitored by Patel since he happened to be energy minister.
“GNRL’s annual report for 2016-17 indicates the company had been given a sizeable participation share in as many as eight valuable hydrocarbon blocks. Considering the high value of the hydrocarbon resources in these blocks that belong to the public, the government ought to have cleared the air by subjecting such allegations to an independent investigation,” says former Union finance secretary E.A.S. Sarma, who wrote several times to the Enforcement Directorate, red-flagging GSPC’s transactions. “That no such investigation has yet been ordered creates scope for apprehension.” Patel, however, has dismissed the media reports about his connection with GNRL as “politically motivated”.
On the delay in gas production, GSPC maintains it was a challenging task to extract gas from a high pressure, high temperature (HPHT) zone, and that the production wells had to be drilled to a depth of 5,000 metres or more, making them some of the deepest exploration wells in Indian territorial waters. The Deen Dayal block discovery was achieved after drilling up to 5,061 metres, at a temperature of 400 degrees Fahrenheit.
ONGC to the rescue
ONGC’s decision to buy GSPC’s 80 per cent state in the KG basin had raised eyebrows, with allegations that the bailout was a bid to hide years of mismanagement and wrongdoings at GSPC. Even the CAG questioned the valuation of KG assets, saying GSPC had not provided the documents related to the valuation procedure. The CAG said it had sought the documents since the valuation was done by the two companies based on the value assigned by only one of the two parties. “The company provided some agenda papers related to board meetings, but other documents evidencing the process adopted for arriving at the valuation were not made available,” the CAG said in its comments on GSPC’s financial statements for 2016-17. The GSPC, however, refuted the claim and maintained that all documents sought by the CAG had been provided.
Union minister of petroleum and natural gas Dharmendra Pradhan dismissed the Congress’s charge that the Centre had pressured ONGC into the GSPC buyout, maintaining that it
was a commercial deal. According to Singh, GSPC had originally considered selling the Deen Dayal gas fields to the BG Group in the UK, but later chose state-owned ONGC.
Both ONGC and GSPC had hailed their deal as “beneficial to the nation”. “The acquisition fits well with ONGC’s strategy to enhance natural gas production from domestic fields on a faster pace, more so to reduce import dependency of hydrocarbons by 10 per cent by 2021-22,” then ONGC chairman and managing director Dinesh K. Sarraf had said. According to petroleum ministry sources, however, there is no possibility of commercial production from the Deen Dayal blocks in the next five years.
Is GSPC bankrupt?
Asked about Jairam Ramesh’s allegations on loan default, the GSPC management mailed a response to india today: “The company has always been servicing its loans, including payment of interest and repayment of principal amounts. There has never been a delay or default even by a single day to any bank.” True, GSPC has not defaulted yet, but the company is under severe stress. It is evident from the hiring of SBI Caps to devise a detailed realignment plan to improve GSPC’s financial and operating performance. The plan prepared by SBI Caps suggests that the state government and its other entities take over a part of GSPC’s burden to reduce its outstanding to under Rs 7,500 crore. GSPC officials add that the company is doing good business. “With the daily gas sales volume averaging around 12 million standard cubic metres in 2017-18, GSPC generated a revenue of Rs 10,589 crore,” the GSPC management told india today.
As part of the realignment plan, GSPC has sold its stake in its listed subsidiary, Gujarat Gas, to Gujarat State Petronet for Rs 3,250 crore. The plan also proposes reduction in lending rates by banks and the SBI taking over a share of loans from other banks to reduce the size of the lenders’ consortium. These measures may reduce GSPC’s liabilities, but the story of over-ambition, amplified by tall claims and mismanagement of funds, will remain a blemish on the company’s legacy.
RAISING HOPES Narendra Modi, then chief minister of Gujarat, announces GSPC’s Krishna Godavari basin natural gas find in June 2005