ONGC to bear heavy repayment burden if it buys over 50%

ONGC will have to bear a heavy loan repayment burden if it buys more than 50% equity stake in the Krishna Godavari (KG) basin deep-water block — KG-OSN-2001/3 — held by Gujarat government-owned GSPC. The debt burden, coupled with ONGC’s estimate that the high-pressure-high-temperature block off the east coast has far less than the presumed 7.6 trillion cubic feet (tcf) of natural gas, could mean that size of a potential deal between the two firms would be much lower than the reported $2-2.5 billion.

GSPC has raised R12,000 crore mortgaging KG basin receivables. Of this, R10,000 crore has been spent. Currently, servicing the loan for KG basin development alone costs close to R1,000 crore annually — including R800 crore interest and R178 crore as principal amount.

Sources told FE that the block yet to start commercial production indicating inadequate revenue generation and re-payment of loans has already began are “major dampener” to buy equity in the asset.

GSPC has spent whopping R14,641.92 crore till March 2015, which exceeds the field development plan target of R13,122.46 crore, to develop single field of the block — Deen Dayal West (DDW). For the entire block, which has other prolific areas such as the DDW Extension and Six Discoveries, an expense of R19,576 crore has been incurred till March 2015.

“This has resulted in uncertainty regarding the future prospects from the KG block where an investment of around R19,576 crore was made as of March 2015. The development costs incurred in the block also resulted in increased borrowings and stressed finances for the company,” the CAG said in its latest report.

GSPC told FE that interest liability “until the date of commercial operations” of the project was factored in to the techno-economic viability of the project as interest during construction (IDC). This is an industry practice while evaluating infrastructure projects especially such large oil and gas exploration and production projects.

However, the asset has missed the deadline for commercial production. According to the field development plan submitted in November 2009, the block, which is tough to exploit, was expected to commence commercial production from December 2011.

The Gujarat-based company claims that it has serviced all the loans with interest and principal ever since the repayment of its KG loans commenced in 2011. “The company has successfully financed and syndicated debt funding instruments, including refinancing and conversion of short term loans to long term loans, to synchronise the revenue from KG block with the repayment cycle of loans. The company has been servicing interest and repayment of the entire debt funding arrangement in a timely manner,” GSPC said in response to FE query whether the firm is always to pay back loans.

GPSC said it has totally repaid an external commercial borrowing of $325 million as per its schedule and its charge was released in June 2015.