JP Morgan to study Sakhalin cost overrun

ONGC Videsh Ltd is likely to appoint JP Morgan Chase to examine the reasons behind the cost escalation in the $1.74-billion Sakhalin-1 oil and natural gas project, India's largest overseas investment.

An empowered committee of secretaries (ECS) had asked OVL to examine the reasons behind the 45 per cent cost overrun in Sakhalin-1 oil and gas project before allowing more funds to be committed to the development off eastern Russia.

"OVL is hiring JP Morgan Chase to detail the reasons leading to the Exxonmobil-led Sakahlin-1 consortium to ask OVL for an additional $800 million," industry sources said.

Interestingly, JP Morgan was the firm that advised OVL in 2000 to invest $1.74 billion in Sakhalin-1 project and had projected a 10 per cent decrease in capital expenditure.

The committee, comprising secretaries from the ministries of petroleum, law, external affairs and finance, and the Planning Commission, has asked OVL, which has so far invested $921.31 million in the Sakhalin-1 project, to explain why cost escalations of such magnitude have happened in the first place. It also wanted to be sure that no further cost overruns happened.

OVL officials, however, insist that there is only "a very small cost escalation" because the development plan has been revised and oil production estimates jacked up to 250,000 barrels per day from the earlier figure of 200,000 barrels per day.

OVL officials said the cost escalation was due to changes in drilling locations, more local content in contracts, building telecom and airport infrastructure, and providing for 20 per cent contingency money.

Besides bureaucratic hurdles, some environmental curbs had forced the drilling of some wells from on-land points rather than offshore, they said. OVL's $1.74 billion investment included a one-time payment of $225 million premium, past cost of $94.243 million to Rosneft and a $711.2 million loan to Rosneft.

India invested its highest equity abroad in Sakhalin in the hope that it would get about two million tonnes of crude oil each year for 15 years before the field goes on a natural decline and two million tonnes per annum for first five years against its loan to Rosneft.

It would also get 5-8 million cubic metres of gas per day for 15 years and another 5-8 million in the first five years from Rosneft's share.

Though OVL is still confident of the viability of the project, some analysts say the payback period may be longer, extending to not less than 15 years.

The Sakhalin-1 project includes three offshore fields: Chayvo, Odoptu, and Arkutun Dagi. Exxonmobil is the operator with 30 per cent stake, while Japanese consortium Sodeco has another 30 per cent. Affiliates of Rosneft have the remaining 20 per cent.

Sakhalin-1 potential recoverable resources are 2.3 billion barrels oil and 17.3 trillion cubic feet of gas.