ONGC Videsh's Imperial problem: Unprofitable even with crude oil at $124 a barrel

The $2.1-billion acquisition of Imperial Energy by ONGC Videsh (OVL) more than two years ago is fast turning out to be a liability for the company. At a time when crude oil prices are soaring, OVL is neither able to make enough money to justify the acquisition nor is it able to find takers for the company.

OVL had bid for Imperial, which has assets in Russia, in July 2008 when crude oil was averaging $122 a barrel and the deal was closed in December that year. The company estimated that it could make the promised money (10 per cent internal rate of return) from the asset if crude oil moved beyond $83 a barrel. Investments were made to push up the production from as low as 8,000 barrels per day at the time of the deal, to 32,000 bpd by 2011-12. The peak production is estimated to be 80,000 bpd.

Two years down the line, crude oil prices have not only moved up but compared to 2008 they have stayed over $100 a barrel for a longer duration.

However, except for a marginal improvement in production from 16,000 bpd in mid-2010 to 19,000 bpd, which is simply “not enough” to reach anywhere near the originally projected returns, Imperial's troubles continue.

Difficult asset

“It's a very difficult asset,” says a company official, adding that there is little hope of scaling up the output to 32,000 bpd in the foreseeable future. “Leave aside the technical problems, even the weather window is not on our side,” the official said.

Recently, the Comptroller and Auditor-General (CAG) passed adverse remarks on the deal underlining the differences between the promises and reality of this acquisition. According to CAG, the reserves of Imperial were inflated and reduced by OVL post-acquisition.

Russian tax

According to ONGC sources, apart from the technical issues, the steep Russian tax structure, which practically “retains most of the revenues generated for crude prices above $30,” should also be blamed for the low returns. New Delhi reportedly initiated discussions with the Russians nearly a year ago to solve the “tax puzzle” but without much headway, so far.

Exit from the asset also appears to be difficult as there are not many takers for the same. “Who will buy it?” said an ONGC official when asked why the company should not call it quits from Imperial.

“We are trying to reduce the losses by roping in a Russian upstream company as partner,” he suggests.

The search has been on for nearly a year now. And, no one in the company is ready to put a deadline for such a deal.

COMMENT NOW