What's ailing GSPC: 5 challenges faced by the PSU

Also, the Congress has sought a judicial probe into alleged irregularities of Rs 20,000 crore in the GSPC

Gujarat State Petroleum Corporation Limited's (GSPC's) struggles continue as it 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, and as its debt for 2014-15 stands at over Rs 20,000 crore. 

The KG-OSN-2001/3 block, which was once touted as the "biggest ever" natural gas discovery in the Krishna Godavari (KG) basin, was awarded to GSPC in the third round of auctions held under the new exploration and licensing policy (NELP) in 2003. With 80% interest, GSPC is the operator of this particular block, while Canada's GeoGlobal Resources and Jubilant Energy, part of the Jubilant Bhartia Group, hold 10% each.

 

Meanwhile, the Congress has sought a judicial probe into alleged irregularities of Rs 20,000 crore in the GSPC. 

Here are the key challenges faced by GSPC:

1) Technical difficulties:

The block, which was meant to go on stream by the end of 2011, has seen delays over technical issues, according to a GSPC executive. 

The Krishna-Godavari Deen Dayal West (KG-DDW) discovery, part of the larger Deendayal Upadhyaya block, has seen the company grapple with having to drill 5,000 metres below the sea-bed. Developed by GSPC at a depth of 5,000 metres below the sea bed, wells drilled in DDW fall in the high pressure and high temperature (HPHT) category with temperature of 400 degree Fahrenheit and pressure of 12,000 PSI.

The company is trying out hydraulic fracturing, also known as Hydrofracking, in order to overcome the technical challenges. 

2) CAG says prospects uncertain:

The Comptroller and Auditor General (CAG) has called into question GSPC's investment of Rs 19,576 crore in its KG block project, saying "future prospects" of the block remain shrouded in "uncertainty". 

Additionally, CAG, in its report tabled before the Gujarat Assembly in April this year, painted a gloomy picture of GSPC's finances, as its borrowing stood at Rs 19,716 crore as of March 2015, a jump of 177% since 2011.

3) Ballooning debt:

Additionally, GSPC's debt on account of exploration and production jumped to Rs 20,038 crore in 2014-15. 

"The company had to rely heavily on borrowings mainly for activities in the KG block. The total interest burden rose from Rs 981.71 crore in 2011-12 to Rs 1,804.06 crore in 2014-15," the CAG report said.

As a result, it is restructuring its business to improve its credit profile. According to the scheme, GSPC will hive-off its participating interest in KG-DDW and its related assets and liabilities to GSPC Offshore. The remainder of GSPC's businesses will be amalgamated into GSPC Energy. The scheme is subject to approval by lenders, the Gujarat High Court, other relevant regulators, and is to be completed by March.

4) Escalating costs:

Delayed production and confusion about how much the blocks hold have left the lenders worried.

According to the CAG report, the company has already spent $2.8 billion as 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. The report goes on to say that 12 more development wells are yet to be completed under the plan, which would further escalate the project cost.

5) Overseas blocks:

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," the CAG report said.