ONGC to buy out GSPC's 80% stake in KG basin gas block for $1.2 billion

State-owned Oil and Natural Gas Corporation (ONGC) will buy out debt-laden Gujarat State Petroleum Corporation's (GSPC) entire 80-per cent stake in KG-basin gas block in a $1.2-billion deal.

The ONGC board had last month approved execution of "farm-in, farm-out" agreement with GSPC in respect of acquisition of 80 per cent participative interest and operatorship in the NELP–III block KG-OSN-2001/3.

The two companies also held several rounds of discussions and legal due diligence before setting the terms and conditions to be incorporated in the farm-in / farm-out agreement.

The agreement sets forth the modalities to be followed to effect the assignment of participative interest and change of operatorship with the approval of the government as per the existing production sharing contract and joint operating agreement of the block.

The company will close the deal after regulatory approvals like government nod for transfer of participating interest and change of operatorship are secured.

"We are hopeful that the deal will be closed in April," he said.

ONGC will pay $995.26 million for three discoveries in the KG-OSN-2001/3 block that are under trial production since August 2014 and another $200 million for six other discoveries for which GSPC has been finalising investment plan.

Jubilant Offshore Drilling Pvt Ltd and Geo Global Resources (India) Inc hold 10 per cent stake in the block.

GSPC had earlier offered ONGC 50 per cent stake in the block together with operatorship, for which it was not interested. Subsequently, GSPC offered its entire 80 per cent stake in the block and ONGC on 23 December last year agreed to acquire the same for $1.2 billion.

ONGC will also have to pay for the entire development cost of the six discoveries, which may far exceed the acquisition cost.

GSPC, with a debt of Rs19,716.27 crore as of 31 March 2015, has so far made nine gas discoveries in the Bay of Bengal block. Of these, three - KG-08, KG-17, KG-15 commonly known as Deendayal West (DDW) fields - have been approved for development.

However, GSPC's total expenditure on developing the block has ballooned to $3.41 billion as of 31 March 2015 against the approved field development plan (FDP) cost of $2.75 billion.

GSPC is also yet to develop 12 more wells as per the requirement of the field development plan (FDP), which will further increase the project cost.

Trial production from the DDW field commenced in August 2014, but the average production achieved is only 19.45 million standard cubic feet per day against a targeted commercial production of 200 mmscfd.

The DDW fields were estimated to have in-place oil and gas reserves of 1.95 trillion cubic feet (tcf).