The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.
Yash Malani, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur
Oil and gas exploration, especially in deepwater, is a risky business that requires highly advanced technology which, in turn, requires huge funding. Those hoping to strike riches without equipping themselves with the appropriate technology and adequate expertise will almost certainly come to grief, as the Gujarat State Petroleum Corporation (GSPC) has.
Considering future prospects, the state-owned company has spent Rs. 19,576 crore over the last five years in the Krishna-Godavari Basin (KG Basin) with nothing to show for it in terms of either oil or gas output. A report of the Comptroller and Auditor-General of India (CAG) points out that the project was not properly planned, thereby leading to both cost and time overruns.
In 2005, Gujarat Chief Minister Narendra Modi had declared that the block had reserves of more than 20 trillion cubic feet (tcf) of gas, which was even more than 14 tcf of neighbouring block of Reliance Industries. The block was named as Deendayal block after Pandit Deendayal Upadhyaya.
It is clear that GSPC’s and Reliance’s reserves were highly overestimated. From an estimated output of 80 million scmd (standard cubic meters per day) of gas at its peak, Reliance’s production is now in the low single digits. The upstream regulator, the Directorate General of Hydrocarbons (DGH) has marked down GSPC reserves to 1.8 tcf after scrutinising field data from old estimate of 20 tcf.
CAG, in its report, painted a gloomy picture of GSPC’s finances, as its borrowing stood at Rs 19,716 crore as of March 31, 2015, which was 177% higher than Rs 7,126.67 crore as of March 31, 2011.
Even the biggest and best oil companies make miscalculations while exploring frontier basins; such failures go with the territory — they occur despite the deployment of the latest technologies, often because oil and gas reservoirs are formed in complex depositional environments. The GSPC’s big mistake was not overestimation, but the somewhat unrealistic assumption that it could develop the highly complex deepwater field on its own.
Given the difficult nature of the high-temperature and high-pressure KG Basin field, GSPC should have roped in a technology partner, as Reliance did with BP. The company could have even considered collaborating with other PSUs such as ONGC or Oil India. GSPC is probably also guilty of not correcting the course after seeing that Reliance ran into technical problems in the same deepwater field despite accessing cutting-edge technology and global expertise. The urge to strike out independently despite a clear lack of technical expertise in a business fraught with risks has proved costly indeed for the company and for the taxpayer.