The Hindu Business Line : Sakhalin project: OVL cost over-runs put at $550-850 m

ONGC Videsh Ltd, the overseas investment arm of Oil and Natural Gas Corporation, on Tuesday informed the Government that its $1.77-billion Sakhalin oil and gas project in Russia has suffered a cost overrun between $550 million and $850 million. Hence, OVL's total investment in the project has been pegged in the $2.32 billion to $2.62 billion range.

So far, the ONGC investment arm has invested $1.3 billion in the project.

The revised cost estimates will pare the internal rate of return to 10-11 per cent, down from the original level of 14 per cent in 2001, when OVL entered the project.

The Petroleum Ministry will now approach the Cabinet Committee on Economic Affairs and apprise it of the revised financials of the project.

OVL indicated to the Government last November that the project was heading for an $800-million cost overrun. However, the final estimates were awaited. OVL officials said the main reason for the cost overrun is the fact that 70 per cent of the machinery for exploration is being sourced from Russia, a mandatory stipulation enforced by the Russian Government. Other reasons for the cost overrun include delay in obtaining clearances from the Russian Government.

The oil and gas reserves estimates of the Sakhalin block have been raised significantly since 2001, when OVL decided to participate in the project.

While Exxon Mobil claimed that the estimates have risen by 25-30 per cent, the Russian Oil Ministry pegged it at a more conservative figure between 6 per cent and 9 per cent.

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 2.5 million tonnes per annum for the first five years of production against its loan to Rosneft, the Russian State-owned oil company.

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

OVL 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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