Novedades de Petroleo y Algo mas

outsourcing of off-shore marginal fields comes as a refreshing surprise. By letting out a total of 19 fields—lumped into eight different clusters—on a service contract basis, ONGC has hit upon a seemingly brilliant initiative which appears to merit its own Eureka! Simply put, the plan is for the bidder to be chosen on the basis of the highest financial return that is promised to ONGC, in terms of percentage share of oil price from the output of any given cluster. Through a single stroke, the company brass seem to have solved the so-far vexed issue of surplus gas output from these marginal fields. Earlier, when the onland marginal fields were farmed out through service contracts, the contractor was told to pay the international price for the gas, but debarred from selling the gas to a third party. He was only allowed to use the gas for internal consumption or to generate power for which he—and not ONGC —had to find a market. As a result, there was a lukewarm response to the onland gas fields on offer. What ONGC has now proposed is that it will buy the power generated by the contractor from the surplus gas in the offshore oil fields.

The bidder will bid for a percentage share of the "well head price of power" which is delivered to ONGC, a novel concept no doubt. A stipulation that rides this model is that only companies with sufficient financial clout—with a turnover of $5 million for foreign bidders and Rs 22 crore for Indian companies—can bid for a cluster of fields. The investments in developing the clusters will be the responsibility of the bidder—and the bidder’s minimum share from each cluster is expected to be pegged at more than Rs 50 crore per annum. The evaluation is set to be based on the quoted percentage share of oil price for oil clusters and on a percentage share of power for gas clusters. Besides, there will be technical and commercial pre-qualification criteria for bidders before the price bids are opened. What is slated, of course, is that there will be a committed work programme and, after the end of the development phase, the bidder can either enter into commercial production or simply quit.

The company which provides ONGC with the highest return in terms of financial share of the proposed output—to be calculated in terms of the net present value—will be the winner. However, the predicament that risks the efficacy of the entire methodology is that benchmark oil prices will be pegged at anything between $18/bbl to $35/bbl. In other words, the overall financial return is set to be calculated at a ceiling oil price of $35/bbl if international crude prices hover at a level higher than this, making this caveat clearly loaded against the service contractor. Let’s say, the ruling price is $18/bbl—if the crude price falls below this level, ONGC will continue to guarantee a $18/bbl price to the producer. At a crude price of $50/bbl, for instance, the arrangement will ensure that ONGC pockets a neat $15/bbl over and above the percentage share it will get out of the $35/bbl from the contractor.

Given competitive bidding and the fact that ONGC will have to be given a percentage share high enough to provide a reasonable return after taking care of the statutory payments to be made on the crude produced, the producer will be literally skinned to the bone. Of course, ONGC could argue that there is a floor price to compensate the contractor if prices slide but, given the way demand-supply forces are arranged, it is extremely unlikely that prices would plummet below the $20 mark. Moreover, it would surely be unviable for the contractor to produce crude from an offshore field at a percentage of the floor price. Besides, there is no guarantee that ONGC would allow a contractor to produce at all, in the event of prices hitting rock bottom. On careful examination of the fine print within the contracts for onland marginal fields, one would discover that the contract clearly states that ONGC may either pay the floor price or opt to call for a temporary production shutdown until prices begin to rise again. Loaded as is it heavily in favour of ONGC and against the contractor, the producer for all practical purposes would have his hands tied behind him. He would have to bear all the risk of development without being allowed to fully enjoy the rewards of this risk. Tiresome memory recalls the fiasco ONGC reduced the last round of the onshore bidding brouhaha to. Agitated bidders threatened to walk out after ONGC officials sheepishly withdrew two lucrative fields based in Gujarat—South Patan and Khombai—from the bidding process in the middle of a pre-bid conference, ostensibly because Gujarat Chief Minister Narendra Modi wanted them to be allocated on a nomination basis to the Gujarat State Petroleum Corporation.

At the time, of the 17 fields available, the tender evaluation committee had recommended that 10 fields be awarded to 5 short-listed bidders. But when the contracts were finally announced, only six fields were awarded to two companies. By this yardstick, ONGC’s contention that the outsourcing of onshore marginal fields was a success is pretty much open to debate. One can only hope that this round of bidding isn’t converted into a near-disaster like the last round. Innovation appears to be the name of the game at ONGC at the moment, but where’s the guarantee that the towering tiger doesn’t metamorphose into a humdrum dog-in-the-manger? Frankly, none!