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OVL in the dock over Russian oilfield deal

The Comptroller and Auditor General of India report reveals that OVL rushed ahead to strike the deal despite the Russian resources ministry's warning that the London-listed IEC's estimates of oil reserves were highly inflated.

S.P.S. Pannu | March 25, 2011 | Updated 08:52 IST

ONGC Videsh Ltd 's (OVL) Rs 10,320-crore purchase of Imperial Energy Corp's (IEC) oilfield in Russia has turned out to be a major blunder with the public sector company piling up a huge loss of Rs 1,182 crore in the first two years of its operations as most of the wells drilled to produce more oil are turning out to be dry.

The latest report of the Comptroller and Auditor General of India (CAG) reveals that OVL rushed ahead to strike the deal despite the Russian resources ministry's warning that the London-listed IEC's estimates of oil reserves were highly inflated.

The OVL investment in the oilfield was cleared by the Cabinet Committee on Economic Affairs (CCEA) in August 2008, subject to the stipulation that the internal rate of return (IRR) on the investment should be more than 10 per cent but the company has run up a huge loss of Rs1,182 crore instead due to the "unrealistic estimation of reserves", the report points out.

Slipping on oil

  • ONGC Videsh had bought Imperial Energy Corp's (IEC) oilfield in Russia for Rs 10,320 cr
  • Most of the wells drilled to produce more oil are turning out to be dry
  • OVL rushed ahead with the deal despite the Russian resources ministry's warning that IEC's estimates of oil reserves were inflated
  • OVL had estimated a daily production of 35,000 barrels of oil for 2009, which was expected to rise to 80,000 barrels by 2011
  • Actual average production turned out to be only 9,067 barrels a day in 2009 and 14,724 barrels in 2010
  • Technical consultants say it is well known that a tight reservoir has poor productivity and poorer recovery in comparison to a normal one
  • OVL has itself reduced the proven reserve size during 2009-10 by 1.527 mn tonnes
The IEC oilfield located in the Tomskh region of Russia was acquired in January 2009 when Murli Deora was the petroleum minister and R.S. Butola was the managing director (MD) of OVL. Butola has now moved on to become the chairman and managing director (CMD) of Fortune 500 Indian Oil Corp (IOC).

Before the acquisition, OVL had estimated the "proven and probable" reserves of the IEC oilfield at 826 MMBOE while the consultants hired by the company had put the figure at 790 MMBE. With these estimates of reserves and a long-term crude price of $85 per barrel, OVL had assessed the project as viable with an average daily production of 35,000 barrels of oil a day for 2009, after which production would be stepped up to 80,000 barrels a day by 2011.

However, the actual average production of oil from the field turned out to be only 9,067 barrels a day in 2009 and 14,724 barrels in 2010 "due to the tight reserve position", the report says. The CAG report further reveals that the actual daily rate of production of the field during 2008 was only about 5,634 barrels as against the projected production of 11,000 barrels.

According to oil industry experts all these were clear pointers that OVL should have taken into account before it struck the final deal in January, 2009. The CAG also took the expert views of former ONGC board member Y.B. Sinha and former vice chairman and adviser ONGC P.K. Chandra in preparing the report.

These technical consultants while confirming the audit observation opined that it is a known fact that a tight reservoir has poor productivity and also poorer recovery in comparison to a normal one.

According to them, OVL's prediction for production levels was highly optimistic. The company should have been more cautious when the seller had indicated a very rosy picture, especially when the Russian ministry had expressed doubts about the reserves quoted by the seller.

The report also points out that OVL has itself reduced the proven reserve size of the oilfield during 2009-10 by 1.527 million tonnes, which indicates the inflated size of the reserves as estimated by OVL at the time of the acquisition.

The report also points out that OVL did not farm out a 10 per cent share in the field to a Russian company as had been envisaged earlier and this could have helped reduce part of the loss.

Courtesy: Mail Today 

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