Wednesday, October 26, 2011

CAG raps ONGC for inflated Imperial buy

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CAG raps ONGC for inflated Imperial buy

Posted: Mar 24, 2011 at 1846 hrs IST

New Delhi The government auditor CAG has rapped ONGC Videsh Ltd for its buyout of Imperial Energy Corp saying reserves were inflated and unrealistic projections of output made to justify the Indian energy giant's most expensive acquisition ever.

OVL, the overseas arm of Oil and Natural Gas Corp (ONGC), in January 2009 acquired Russia-focused Imperial Energy for USD 2.12 billion (Rs 10,320 crore).

Imperial, whose main assets are in Tomskh region of east Russia, has produced lower than projected output and had inflated oil reserves.

"...the company has been able to achieve production of only 15,803 barrels of oil per day (bpd) as against the envisaged production levels of 35,000 bpd (at the time of acquisition)," the Comptroller and Auditor General said in its report tabled in Parliament today.

CAG calculated that lesser output meant Rs 1182.14 crore loss during 15 months from January 2009 to March 2010.

The Cabinet Committee on Economic Affairs (CCEA) had in August 2008 allowed OVL to acquire Imperial subject to stipulation that the rate of return on investment is more than 10 per cent. Also, OVL was to farm out a part of its stake to a Russian firm.

Before the acquisition, the technical consultant and OVL had estimated the 2P reserves (that have 50 per cent chance of being produced) of Imperial Energy at 790 million barrels of oil equivalent and 825 million barrels of oil equivalent respectively.

"With these estimates of reserves and long term crude price at USD 85 per barrel, the company (OVL) assessed the project as viable with the average daily rate of production of 35,000 bpd for 2009 and thereafter, to enhance the production up to 80,000 bpd by 2011," CAG said in the report.

Against this, the actual rate of production on October 20, 2008 was only about 5,634 bpd as against the projected output of 11,000 bpd. Average output in 2009 was 9067 bpd and for January-August 2010 14,724 bpd, much lower than what was projected at the time of acquisition.

"Consequent to low production, the company (OVL) could not achieve internal rate of return (IRR) of 10 per cent and incurred losses of USD 37.892 million (Rs 174.15 crore) and USD 212.464 million (Rs 1007.99 crore) for the years 2008-09 and 2009-10 respectively," CAG said.

Moreover, OVL had to reduce the proven reserve size of the asset during 2009-10 by 1.527 million tons "indicating the inflated size of reserves estimated by the company at the time of its acquisition."

"The company (OVL) did not address the reservations expressed in 2007 by Russian Resources Ministry regarding inflated reserve position declared by Imperial Energy Corp, at the time of evaluation of investment opportunity in 2008," CAG said.

CAG said OVL did not exercise the option of farming out a part of its stake in Imperial to "a local partner to leverage their combined financial strength and shared experience of the joint venture partner."

"This resulted in financial loss to OVL," it said.

CAG rejected OVL's reply that "due to discouraging and very different drilling results of 28 wells in three fields in 2008 and 2009, production could not be achieved as envisaged at the time of acquisition".

OVL "management's reply is not tenable as the subsequent drilling results and reduction of proved reserve size by 1.527 million tons during 2009-10 raises doubt about the reserve size of the Imperial Energy Corp and economic viability of the takeover," the CAG report said.

"The fact that the company even now is not in a position to generate a realistic production profile and bring out an economic analysis confirms that all the problems associated with these fields were not properly assessed at the time of evaluation of opportunity which led to poor production performance and consequent losses," CAG added.

CAG said investment risk could have been mitigated in the initial stage itself by farming out a part of its stake.

"The technical consultant while confirming the audit observation opined that it is a known fact that tight reservoir had poor productivity and also poorer recovery in comparison to a normal one. The prediction for production level was highly optimistic rather than realistic," it added.

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