The Hindu Business Line : ONGC's Sakhalin project sees $800 m cost overrun

ONGC Videsh Ltd (OVL), the overseas investment arm of Oil and Natural Gas Corporation (ONGC), has informed the Government that its biggest project, the $1.77-billion Sakhalin oil and gas project in Russia, is set to witness a cost overrun of $800 million, or 45 per cent of the original estimate.

Of this, $400 million would be lent to the Russian State oil company and a project stakeholder, Rosneft, at an interest rate of Libor plus 3 per cent.

In a meeting held today of the Empowered Committee of Secretaries (ECS), OVL officials said that the Internal Rate of Return (IRR) of the project would dip from 14 per cent to around 12 per cent and the total project cost would be around $2.5 billion as against the original estimate of $1.77 billion. Importantly, the cost increases are entirely recoverable with the loss being on the recovery time factor on the investments.

While the oil production is set to be deferred from 2005 to 2006, the gas production would be deferred from 2006 to 2008. Major portion of gas production would be deferred even further, sources said.

The final estimate of the cost overrun is likely to be firmed up by February next year by the operator of the block and stakeholder — Exxon Mobil. Significantly, the Russian oil ministry has said that oil and gas reserves of the Sakhalin block, where OVL has a 20 per cent stake, has gone up by only 6-9 per cent as against 25-30 per cent claimed by Exxon Mobil.

OVL officials when contacted said that they were not perturbed with the development since projects as large as this are prone to uncertainties and an IRR of 12 per cent can still be defined as an attractive project. "The Chinese are doing even small projects at 7-10 per cent IRR," the official said. On the lower assessment of improvement of reserves, the official said, "The Russian method of calculation of reserves is conservative and the US method is the industry standard."

Following the upward revision in estimates, OVL expects to get about 2.5 million tonnes of crude each year for 15 years before the field goes on a natural decline besides another 2.5 million tonnes per annum for the first five years of production against its loan to Rosneft.

The ONGC arm would also obtain 8 million standard cubic metres of gas per day for 15 years and another 8 million in the first five years of production from Rosneft's share.

OVL has lent Rosneft around $770 million at an interest rate of Libor plus 3 per cent when it bought 20 per cent stake in the oil and gas block from Rosneft in 2001.

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