After Bailout, Gujarat State Petroleum Corporation Asks SBI For Fresh Loans to Refinance Debt

GSPC, whose current total debt stands at over Rs 13,000 crore, has asked the bank for a term loan of Rs 2,100 crore to refinance existing debt.

New Delhi: A year after it received a bailout from state-owned ONGC, Gujarat State Petroleum Corporation (GSPC) has approached State Bank of India for fresh loans and credit facilities for refinancing its existing debt.

According to SBI sources, GSPC has requested the public sector lender for a term loan of Rs 2,100 crore for refinancing existing debt from Gujarat State Financial Services (GSFS).

It has also pleaded with the public sector lender to sanction a Rs 750 crore fund-based credit facility. It has also asked SBI to take over loan of other banks in the consortium that lent to it.

GSPC’s total debt currently stand at over Rs 13,000 crore, far higher than the Rs 2,000 crore threshold that the Reserve Bank of India (RBI) has chosen for referring loan defaulters to the bankruptcy courts.

On Monday, Congress leader Jairam Ramesh held a press conference calling for GSPC to admitted into the bankruptcy process. Ramesh cited the RBI’s February 12 circular on stricter debt resolution norms.

“GSPC’s highest debt is from SBI. According to RBI’s notification, SBI should declare GSPC as bankrupt by 5 pm today (Monday),” said Ramesh.

Last year, ONGC acquired 80% stake in GSPC’s Deen Dayal West block in the K-G basin for Rs 7,783 crore, in a deal that left many analysts puzzled, fueling speculation that it was arranged and pushed through by the Centre. 

Significantly, in 2016, the national auditor had slammed GSPC for its mismanagement of investment in that block. When the discovery was initially made, over a decade ago, GSPC had claimed that block had gas reserves of 20 trillion cubic feet (tcf). But the CAG drastically downgraded GSPC’s reserves estimates.

The national auditor in its audit report observed that the Gujarat PSU did not properly address the risks associated with cost, technology and price in development of the K-G Block.

“GSPC did not act upon a proposal for inducting strategic/financial partner at a appropriate time in spite of high costs and technological challenges,” the Comptroller and Auditor General (CAG) said in its report.

During 2011-12 and 2014-15, GSPC’s total borrowings increased 177% to Rs 19,716 crore, mainly because of development work in the K-G block, which led to doubling of its interest burden to slightly over Rs 1,800 crore.

In this four-year period, the revenue from production fell to Rs 152 crore from Rs 230 crore due to a drop in prices of oil and production of gas from 119.24 million cubic metres to 50.21 million cubic metres.

SBI presentation

According to a presentation made by SBI Capital Markets Ltd before senior bank officials recently, GSPC has total loans of Rs 12,551 crore as at the end of March this year. Besides this, it has compulsorily convertible debentures of Rs 550 crore that are due for conversion into equity this fiscal.

Of the Rs 12,551 crore debt that GSPC has on its books, Rs 6,000 crore is in the form of non-convertible debentures and  Rs 2,248 crore as rupee-term loan.

Another Rs 1,500 crore is owed to GSFS. It has also taken letter of credit (LOC) loan of Rs 1,136 crore and another Rs 1,035 crore in foreign currency. It also has short-term loan of Rs 600 crore on its balance sheets, according to the presentation.

ONGC’s Cash Reserves Down by 90% In Last Year

After the Modi government used the oil PSU as a milch cow to finance the Centre’s fiscal deficit and to bail out the beleaguered Gujarat State Petroleum Corporation, ONGC will likely have a hard time mobilising resources to fund its expenditure plans.

New Delhi: State-owned explorer Oil and Natural Gas Corporation’s cash reserves have been depleted by more than 90% over the past year, with the Narendra Modi government using it as a milch cow to finance the Centre’s fiscal deficit and to bail out the beleaguered Gujarat State Petroleum Corporation (GSPC).

The public sector explorer’s cash reserves have dropped to Rs 1,000 crore from Rs 13,000 crore a year ago, leaving the PSU hard-pressed to finance its capital expenditure plans of over Rs 32,000 crore and repay debts of nearly Rs 25,000 crore. Much of this debt, incidentally, was raised last year to buy out the government’s stake in state-owned refiner Hindustan Petroleum Corporation Ltd (HPCL).

Exploration of oil and gas is a risky business. The company has to spend a huge amount of money hunting for hydrocarbon reserves and investment yield returns only when it finds commercially exploitable reserves. Otherwise, it has to write off the expenditure.

Not surprisingly, the shrinking cash reserves have left ONGC veterans worried. “ONGC is heavily leveraged now. It’s important for exploration companies to have a sizeable cash balance as a buffer. It’s a high-risk business,” Aloke Kumar Banerjee, ONGC’s former finance director, told Bloomberg in an interview.

In August last year, ONGC picked up 80% stake in GSPC’s KG basin gas block for Rs 7,738 crore. Later, it also bought out the government’s 51.11% stake in HPCL for Rs 36,915 crore.

Questions have been raised over ONGC’s decision to pick stake in GSPC’s KG basin block given the widespread doubts over the field’s extractable reserves.

In 2005, Modi, the-then Gujarat chief minister, had announced that the GSPC’s KG basin block had 20 trillion cubic feet (tcf) gas. But it later turned out that the proven reserves were much less than what Modi had claimed.

Even the national auditor questioned GSPC’s claims on extractable reserves of the block. Eventually, it fell to ONGC to bail out GSPC. 

Soon after, ONGC was asked to acquire the government’s stakes in HPCL. While there are doubts over the benefits that would accrue to ONGC from the HPCL takeover, the proceeds that flowed to the government from the stake sale helped it easily hit its disinvestment target in 2017-18.

But one thing is clear: ONGC is now in a financially tight spot. With cash reserves depleted, the PSU is likely to have hard time mobilising resources to fund its expenditure plans.

One Big Jumla: ‘GSPC Is a Case of How Not to Do Business’

Researcher and journalist Subir Ghosh talks to Anuj Srivas from The Wire on the financial mess that the Gujarat State Petroleum Corporation finds itself in and how it is emblematic of the larger Gujarat model.

Researcher and journalist Subir Ghosh talks to Anuj Srivas from The Wire on the financial mess that the Gujarat State Petroleum Corporation finds itself in and how it is emblematic of the larger Gujarat model.

On Bended Knee: This Is No Way to Interview a Prime Minister

arnab modi guffawWhen India’s most aggressive anchor meets India’s most aggressive politician, one expects sparks to fly. Instead, Arnab Goswami looked like a favourite nephew lobbing the ball gently to a benign elderly uncle. More “noora-kushti” and less a sharp interview, there were many questions that ought to have been asked. And many answers that sounded more fixed than spontaneous.

After flattering the prime minister by saying, “thank you very much”, then again, “thank you very much”, the interviewer thanks Modi a third time, and adds that he is “very grateful”, repeats he is “very grateful”, and goes on that his viewers are also “very grateful” before he even begins asking his questions. All this within his first one hundred words! Such abject grovelling and obsequiousness become the hallmark of the next hour and a half. Hard questions are assiduously avoided. Follow-up questions are put mildly and deferentially. In a word, professionalism is thrown to the winds. The underlying adulation smacks of a job application by an undeserving supplicant.

Soft lobs

The first substantive question seeks to know, “How much have you achieved of your own targets?” Modi goes on at great, uninterrupted length about his having pledged that his government “would be committed to the poor”, but totally avoids answering how much he has achieved of his own targets. Instead of saying anything at all about the gap between his electoral promises and his actual achievements, Modi shifts the ground to seeking a “comparison with the immediate past” in order to discover “a bright future”. Back to his old game of flaying the UPA (without adducing any reasons for his assertion) he completely evades the question that sought his assessment of his own performance vis-à-vis his own pledges. Extraordinarily, the interviewer, who rarely lets anyone he disagrees with complete a minute of his argument, lets the prime minister go.

He then turns to foreign policy. Again, he introduces his question with an abject   compliment that tips off the interviewee on how he should answer: “You have balanced different powers and different interests”. Why not, “Have you balanced different powers and different interests?” Modi resorts to his old game with a manifest untruth: “For 30 years, in our country, the government was unstable.” He is not immediately asked to substantiate this claim. Incidentally, his “30 years” include the Rajiv government that ruled with the largest majority ever, much larger than the BJP’s wafer-thin majority; the Rao government that completed its term; the Vajpayee government that also completed its term; and the UPA governments that completed not one full term but all of two.

NSG flubbed

To the specific question, “How close are we to getting the NSG seat?” Modi simply does not answer. He flies off in the direction of saying that the world needs to know him – as if anyone asked – and takes at a swipe at the Gandhis (his favourite obsession) by claiming that “as I am not from a political family” he had “never had the opportunity to meet world leaders earlier”. But did anyone ask him that? The question was about how close we were to getting NSG membership and Modi answers by not mentioning NSG at all despite being told: “on the NSG you staked a lot of personal interest, personal push, you lobbied actively” – why then was the Seoul meeting of just a day earlier such a spectacular flop? Intriguingly, the interviewer just lets him off the hook.

Instead, the interviewer helpfully adds, “You were an unknown entity in foreign policy.”  This is not even a question but Modi takes off about how his government “works as a team”. The obvious interjection should have been, “Oh, yeah, ask Sushma Swaraj”, who, despite her obvious ability, is clearly the most neglected foreign minister in the history of independent India. He goes on to blow his own trumpet and a meek Goswami just lets him get on with it. No repeating the unanswered question about the failed NSG bid, or why his “personality” left the leaders of Switzerland and Ireland so unmoved that despite the Modi team having claimed both countries had switched sides to us, at Seoul they helped blunt the Indian request for NSG membership.

True, the interviewer gently asks much later whether Modi is “disappointed that we did not make it to the end because of Chinese opposition”. Modi gives the answer that should have come before he went to Tashkent only to be brushed off by President Xi. Explains Modi, “Everything has rules” – which is exactly what the Chinese and a dozen others have been consistently telling us for years. Instead of such belated wisdom, the Modi team spread the hype that the courteous hearing the Chinese foreign office had earlier given our foreign secretary was about to be transformed by Modi’s persuasive powers into a firm Chinese vote in our favour. The Chinese were not taken in. Instead of gracefully accepting this, Modi typically attributed his failure in Tashkent to his Washington speech (Goswami, at his courtierly best, exclaiming, “By the way, Prime Minister, it was a fantastic speech”) claiming that his “Government is being criticized not for any mishandling of the NSG issue but because we were so successful over there (in the USA).” Haha, as they say on WhatsApp these days!

Moreover, there was no attempt made by the interviewer to underline the obvious contradiction between Modi’s assertion with respect to China that “even when the views are contradictory, talks are the only way forward and problems should be resolved through dialogue” and his repeated blocking of the dialogue with Pakistan. Another glaring lacuna in the interview was the failure to raise our relations with Nepal, that have hit rock bottom ever since the Modi government began bullying that country over its near-unanimous constitution.

Nor was any attempt made by the interviewer to pin down the prime minister on the military dimensions of our growing relations with the US, especially in the context of the dangerous beginnings of a Cold War between the US and China.

What he didn’t ask

It was on the economy that the questioning was at is weakest and most vapid. Nothing on the dodgy statistics of growth rates we have been regaled with. Not a single question asked on the non-performing assets crisis enveloping our banking industry, with over one lakh crore owed with no signs of forthcoming payment by a handful of our wealthiest. Nothing on Vijay Mallya’s Great Escape. Nothing on Lalit Modi. No retort to Modi deflecting a relevant question on the promise of Rs. 15 lakhs of black money for every Indian pocket by saying “that is something the opposition raises during elections”. Should not Goswami have promptly interrupted, “Sorry, Sir, that is something you raised during elections”.

And would not that have been the right juncture to have grilled Modi on the deceptions with which he has wrapped up the humongous Rs.20,000 crore scam at Gujarat State Petroleum Corporation when he was CM? Instead, Goswami let him get away with unsubstantiated insinuations about Augusta and “the amount of dirt that exists”.

On the worst agrarian crisis in decades, Goswami swallows every cliché that Modi feeds him. Not one question on why his government tried pull the wool over the nation’s eyes by transferring thousands of crore from the finance to the agriculture ministry’s budget and then claiming they had massively increased public investment in agriculture! No searching questions on whether the promise of “doubling” farmer incomes was of real income or nominal income. Nothing on the failure to implement the electoral promise of jacking up procurement prices, especially in this period of precipitately falling farm incomes. Allowing Modi to get away with crocodile tears on food inflation when he should have been shown the contrast between the doubling of oilseeds output in the eighties and the surge in pulses then as critical government policy to combat the last comparable drought. When Modi weakly pointed to dal imports, he not asked why the previous year’s import figure of a little over 5 million tonnes was not being substantially surpassed this year when prices have topped Rs.200 a kilo?

Nothing on industrial stagnation or investment famine or stultifying infrastructure. Nothing on exports collapsing every month in succession for the last 18 months (that is, two-thirds of Modi’s term thus far). Meaningless questions and meaningless answers on jobless growth. Platitudes for the suffering of our people. And praise for the RBI governor he is just kicking out! Subramaniam Swamy is not mentioned but some general remarks are made about “no one being above the party”. Yet, Swamy himself has boasted that he talks only to the PM. Then what has Modi been saying to him? Why nominate a renegade to the Rajya Sabha? On none of these key matters does the interviewer challenge the interviewee.

And the same Modi who does nothing to reprimand and rein in his colleagues in parliament and the council of ministers, not to mention sundry other Sangh parivar types who spread communal poison, actually asks the media not to report on them as if it is media publicity that is encouraging them on, not the fundamentals of the Hindutva philosophy that the prime minister shares with his ilk.

Gujarat 2002 is off bounds. The outrages of intolerance are off bounds. Gulberg Society is not mentioned. Encounter killings are bypassed.

Then why this interview?

Mani Shankar Aiyar is a member of the Congress party. He served as a member of the cabinet in the Manmohan Singh government.

What Went Wrong with Gujarat’s KG ‘Deen-Dayal’ Gas Reserve Discovery?

From ballooning costs to technological challenges, the GSPC has spent nearly Rs. 20,000 crore on the Deen Dayal gas fields with little to show for it.

From ballooning costs to technological challenges, the Gujarat State Petroleum Corporation has spent nearly Rs. 20,000 crore on the Deen Dayal gas fields with little to show for it.

Out of its depth: The Gujarat State Petroleum Company has spent nearly Rs. 20,000 crore on the Deen Dayal field with little to show for it. Credit: Skmaircon

Out of its depth: The Gujarat State Petroleum Corporation has spent nearly Rs. 20,000 crore on the Deen Dayal field with little to show for it. Credit: Skmaircon

New Delhi: It was a discovery that dwarfed all other discoveries. On June 26, 2005, Narendra Modi, the then-Chief Minister of Gujarat, announced that the Gujarat State Petroleum Corporation (GSPC) had discovered “the country’s largest reserve of natural gas in the Krishna-Godavari Basin.”

The announcement was surprising for two reasons: Firstly, the discovery of an estimated 20 trillion cubic feet (TCF) of gas was even bigger than the 14 TCF discovery by Reliance in 2002.

Modi referred to the finding as a “historic moment for India’s hydrocarbon sector”. Christened the Deen Dayal West (DDW) area, it was widely thought that the discovery would bring down India’s import bill.

The second reason why many were taken aback by the announcement was because of the low-profile nature of GSPC. What made matters more interesting is that the state-run corporation had just barely avoided disqualification for the bidding of the KG basin block that had now given it such a dramatic finding. Modi was forced to engage in some twelfth hour financial wrangling — through which the net worth of GSPC was increased by Rs. 300 crore — in order to win over competitors such as ONGC and Reliance. An India Today article lauded this decision, dubbing GSPC as “a company with the golden touch”.

All downhill from there

Fast-forward to the present, a little over decade after Modi announced the discovery, and to say that GSPC’s discovery hasn’t lived up to its potential would be putting it mildly. A Comptroller and Auditor General report, released last week, reaches a scathing conclusion: Even after an investment of Rs. 19,576 crore, commercial production is yet to start (as of November, 2015), resulting in “uncertainty regarding the future prospects from the block”.

What then, went so wrong? The CAG report –which talks of underestimation of costs, technical difficulties and poor contractors — breaks it down into three major categories:

1) Viability of the Field Development Plan (FDP): Every company that engages in deep water gas exploration has to factor in the government’s gas pricing policy. According to the report, when starting out, GSPC assumed a gas price of $5.7 per million british thermal unit (MMBTU) even though the prevailing government-approved formula was $4.20 per MMBTU.

This means that at the time the field development plan was written and proposed, it wasn’t economically viable.

However, amongst oil and gas companies this is normal practice. GSPC assumed, rightly, that the government would kick off gas price deregulation and that there would be an increase in global crude and gas prices. In fact, during a price discovery process carried out by the state-run company, it received offers above the floor price of $8.50 per MMBTU, subject of course to the approval of the government.

The problem, however, as the report notes, is that the price of $8.50 per MMBTU was not approved by the government. Furthermore, even under the 2014 natural gas pricing guidelines, which linked domestic prices to a weighted average of global prices, the price of gas was revised from $5.05 per MMBTU (effective November 2014) to $3.81 per MMBTU (October, 2015).

“The fact remained that prices were below the FDP estimate of $5.70 per MMBTU, based on which the project was considered financially viable. Thus the viability of the project even after commercial production of gas is doubtful,” the report says.

2) Technological Risks & Poor Planning: Out of all the concerns and risks that the CAG has flagged, the technological challenges of extracting gas out of DDW are the largest hurdles that GSPC still has to surmount.

The DDW field falls under what the oil and gas industry refers to as “high pressure, high temperature (HPHT) conditions”. A HPHT gas field has low permeability, which means that reservoir fluid cannot move out or flow within the rock into the well very easily. This essentially means that the production rate of a HPHT zone can be severely impacted if you don’t have the right technology strategy.

To its credit, as the CAG notes, GSPC believed that it could achieve a production target of 200 mmscfd by using “well bore designs and completion techniques” — proven operational and technological means that had been used elsewhere to develop other HPHT reservoirs. However, the efforts of GSPC in using technological techniques such as multilateral wells and hydraulic fracturing met with very little success from 2011 to 2014.

“The successive changes in approach for resolving the issue of low permeability and their outcome indicate that the Company [GSPC] is still not clear on how to obtain the proposed production rate from the wells. [The] audit noticed that the [GSPC] Board was apprised that it had not developed suitable drilling technology during the exploration phase..,” the CAG report says.

The report soberly notes that the technological issues are still unresolved: during trial production, which happened in August, 2014, average production reached only 19.45 mmscfd — the total targeted commercial production from the DDW field was around 200 mmscfd, which is indicative of these continuing problems.

3) Unqualified Contractors: In order to implement the FDP that had been laid out, after a tender process, GSPC awarded the contract in 2010 to Tuff Drilling (A consortium of Tuff Drilling Private Limited and Spartan Offshore Drilling).

The audit conducted by the CAG brought up the fact that Tuff Drilling “had not designed, engineered or constructed a modular platform rig on its own.” During the tender process, when a clarification was sought by GSPC, Tuff Drilling replied that its subcontractor had relevant experience; which was accepted by GSPC.

The CAG report notes that the “technical qualification of Tuff Drilling was not according to tender conditions.” One particular mistake by Tuff Drilling, which it failed to mobilize a platform rig by a stipulated time, proved to be costly, resulting in an additional expenditure of Rs. 34 crore.

       §

The longest running thread throughout the CAG’s assessment of GSPC’s performance is one of avoidable expenditure and overshooting of costs. The cost of constructing one subsea pipeline, for instance, increased from $160 million to $420 million because the state-run company had not obtained the required forest and wildlife clearances.

In another instance, the actual cost of creating an offshore facility was $1,057 million — 93% higher than what the company’s FDP estimated.

At times, the difference between what GSPC projected in its FDP and what something actually costed affected the overall economics of the project as well as resulting in production delays. For example, because the cost of the offshore facilities were underestimated, its capacities had to be realigned in order to reduce costs. This realignment pushed back commercial gas production from March, 2012 to May, 2013.

Much of these issues could have been avoided if GSPC decided to rope in a strategic, third-party partner. Indeed, it was even discussed during a company board meeting in 2010. However, as the CAG report notes, “no action was taken on this at an appropriate time”.

From 2010 onwards, GSPC got a little more frantic. Letters released by Arvind Kejriwal in 2014 showed that GSPC officials wrote to the government in 2013, proposing a new formula for the pricing of gas that would vary from $8.5 per MMBTU to $14.2 per MMBTU. This proposal, however, went against a 2010 Supreme Court decision that strongly reaffirmed the government’s right to set gas prices.

        §

The oil and gas industry is no stranger to issues of underestimation, overestimation and government interventions gone wrong. A classic example is the case of Reliance and its issues with the KG basin, which was either an instance of technical incompetence or malicious corporate intent.

The Gujarat story, if one goes by the CAG report,  is of company that appears to be simply out of its depth. Should the company have rushed in bidding for the opportunity back in 2003? And after realizing that it needed more experience, should it have called in a strategic partner? These are questions that remain to be answered. In the meantime, the opposition has been quick to jump on the CAG report, with former Commerce and Industry Minister Anand Sharma demanding an inquiry into what he called “a waste of public money and Rs. 20,000 crore.”

When GSPC first announced its discovery, a number of officials, including the then-Hydrocarbons Director-General V.K. Sibal, were very skeptical of the company’s claim. In an India Today story, Sibal was quoted as saying “it appears to be a tall claim based on the result of just one well.”

The Minister of State for Energy and Petrochemicals at the time, Saurabh Patel, didn’t take these comments lightly. Hitting back at Sibal, he said “we have done things professionally. We acquired advise [sic] at a price and took a decision. We have hit the jackpot.”

As any lottery winner will tell you though, the future isn’t automatically rosy.