GSPC struggles as KG basin gas eludes it

Delayed production and confusion over gas reserves in KG basin have pushed the company into debt, leaving its lenders worried

A few days after Narendra Modi, then Gujarat's chief minister, announced the "biggest ever" natural gas discovery in the Krishna Godavari (KG) basin in June 2005, VK Sibal, the director general of hydrocarbons, punctured the claim when he said estimates cannot be made after drilling just one well.

Political heads do not normally announce discoveries by state-run entities - it is left to the companies. Sometimes, they choose not to do that since initial reserve estimates can go awry and investors can hold that against the company.

Sibal, though, was known to have had open tiffs with Oil and Natural Gas Corporation, so GSPC wasn't his sole target. He wrote to the Securities and Exchange Board of India on the "premature" announcement on GSPC's finds and the possible impact it could have on the company's plan for an initial public offer. Later, GSPC shelved its plans to come out with an IPO and instead its pipeline subsidiary, Gujarat State Petronet, got listed on the stock markets in 2006.

Some 11 years later, GSPC is yet to begin full commercial production from the KG-OSN-2001/3 block christened as Deendayal Upadhyaya block after the Bharatiya Jan Sangh leader. Not just that, its debt on account of exploration and production jumped to Rs 20,038 crore in 2014-15.

The block was awarded to it in the third round of auctions held under the new exploration and licensing policy by the Union government in 2003. With 80 per cent interest, GSPC is the operator of the block and Canada's GeoGlobal Resources and Jubilant Energy, part of the Jubilant Bhartia Group, hold 10 per cent each.

The GSPC block was to go on stream in December 2011 but problems arose despite test production of gas from three wells from August to September 2014. A senior GSPC executive says technical issues have delayed the production from the field which is considered "tough" and for which the company had to drill 5,000 metres below the sea bed. The underperformance of peers Reliance Industries and ONGC in the same sedimentary basin validates his point.

GSPC is now looking to rope in ONGC as a partner in the ultra-deep high-pressure and high-temperature block. "Getting government-owned ONGC into the field will be easier," says the executive who does not want to be quoted. Simultaneously, it is seeking advice from British Petroleum, RIL's 30 per cent partner in KG-D6, and has hired companies like Haliburton, Barry & Associates, E-Frac and Xodus for technical inputs. The company is trying out hydraulic fracturing, also known as Hydrofracturing or Hydrofracking, which is a well-stimulation technique in which the well-rock is fractured by a pressurised liquid. The process involves high-pressure injection of 'fracking fluid' (primarily water, containing sand or other elements carried with the aid of viscous fluid) into a wellbore to create cracks in the deep-rock formations, through which natural gas, petroleum, and brine can flow freely.

GSPC officials say with a reserve of 1.6 trillion cubic feet (tcf), production could go up to 60 million cubic feet a day. This is hardly one-fourth of Reliance's current production from the underperforming KG-D6 block.

Too optimistic?

But how much gas is there? Defending the Gujarat government, Finance Minister Arun Jaitley told Parliament earlier this month that international consultant Gafine Cline Associate had certified that the block holds 14.4 trillion cubic feet of gas reserves, thrice the size of Reliance's KG-D6 block, though Modi in 2005 had put the figure at 21 tcf. The Directorate General of Hydrocarbons has certified Deen Dayal West to hold 1.8 tcf of reserves.

Delayed production and confusion about how much the blocks hold have left the lenders worried. According to a recent report of the Comptroller and Auditor General, the company had spent $2.8 billion at the end of March 2015 for the development of the block as against the estimate of $2.75 billion presented in its field development plan presented to the Union government. CAG said 12 more development wells were yet to be completed under the plan which would further escalate the project cost.

Liabilities, on account of works relating to exploration and production, have almost doubled in three years to Rs 20,038 crore as on March 31, 2015. By Jaitley's own admission, public sector banks gave the company money based on 21 tcf estimates. Though the company is trying to restructure its debt and the senior executive quoted above points out that there has been no default, it is certain that loans to the company are a worry. Crisil had earlier downgraded GSPC on bank facilities and debt instruments. It said GSPC's cash accruals will, over the medium term, be lower than expected.

CAG further said the viability of the field development plan was compromised by the underestimation of costs, non-addressing of technological uncertainties, and deficiencies in project implementation.

Finding loopholes

Established in January 1979, GSPC is the second largest gas transporter and trader in the country after GAIL (India) but exploration has been a tough nut to crack for GSPC. Out of the 11 overseas blocks it held as on April 1, 2011, it has surrendered 10 till March 2015. "The company went ahead acquiring overseas blocks during 2006-10 mainly as an operator with considerably high participating interests without any prior experience overseas as an operator," CAG said.

The auditor also pointed out to the lapses in tendering processes for the Deen Dayal West block. In March 2010, it awarded contract for platform rigs to a consortium of Tuff Drilling and Spartan Offshore Drilling. CAG noticed that Tuff Drilling had not designed, engineered or constructed a modular platform rig on its own, though when GSPC sought a clarification Tuff Drilling replied that its subcontractor had relevant experience, which was accepted by it. CAG said this was despite the tender condition for considering the experience of individual consortium members in case of special purpose vehicle or joint venture companies.

For cash-rich Reliance and ONGC, the challenges in KG basin did not impact their credit worthiness but for precariously placed GSPC, upstream dreams have turned out to be too risky not just for itself but also its lenders.