Sweet deals are made of gas

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Soon after the deal was signed, Roy made a string of questionable share transactions by which he transferred half of GeoGlobal’s 10 percent stake in a company he incorporated in Mauritius. The contract between GeoGlobal and GSPC was signed in March 2003. In the same month, GeoGlobal entered into a “Participating Interest Agreement” with Roy Group (Mauritius) Inc, a corporate entity fully controlled by Roy, by which the company assigned 50 percent of the benefits and obligations of the production-sharing contract pertaining to the KG offshore block, i.e., 5 percent of its participating interest, to this newly incorporated entity in Mauritius. This transfer of 50 percent of its stake by GeoGlobal within days of inking the deal with GSPC raises serious questions about its motives and the mala fide of the entire deal.

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The CAG’s Problems with the Gas Deal

  • Though the services of a technical expert could be measured in monetary terms, GeoGlobal was given 10 percent stake without any basis
  • Geoglobal’s geological model had failed with respect to well depth estimate, its location and exploration cost estimates
  • The technical modelprepared by GeoGlobal was so deficient that GSPC had to hire another technical expert at a cost of Rs 2.64 crore
  • GSPC’s contention  that GeoGlobal would not have agreed to do the technical evaluation without a stake that was not supported by any documents
  • GSPC manipulated  the cost of exploration and underestimated the cost of hiring a rig at the time of bid submission
  • GSPC has suffered  a loss of interest running into hundreds of crores of rupees by agreeing to contribute GeoGlobal’s share of 10 percent to the venture fund

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After around five months, GeoGlobal effected a reverse takeover of a US company named Suite101.com. By this deal, all outstanding capital stock of GeoGlobal was exchanged for 34 million shares of Suite101.com. In addition, Roy was paid $2 million. As per the deal, 14.5 million shares of Suite101.com were delivered to Roy and the remaining 19.5 million shares were held in escrow to be released on the occurrence of certain events related to the KG Basin offshore exploration. On 2 February 2004, Suite101.com changed its name to GeoGlobal Resources Inc. The nominal value of the shares of GeoGlobal was one-tenth of a US cent ($0.001). But within a few years, in January 2006, the shares reached a trading rate of $14.92. In other words, there was a 15,000-time appreciation in the share value, which was primarily on the strength of the sweetened KG block deal.

The joint venture between GSPC and GeoGlobal raises serious questions about the management of natural resources, in general, and the production-sharing contracts signed between private parties and the Government of India in the oil and gas sector, in particular. Sources at the Directorate General of Hydrocarbons (DGH) told TEHELKA that GSPC would start gas production by July 2013 and it is scheduled to drill 11 deepwater wells. As of today, the DGH reckons that the gas discovered so far is about 2 trillion cubic feet, which would be worth more than $1 billion. However, DGH sources added that it was possible that the company could discover more gas in the future.

TEHELKA sent detailed questionnaires to both the Gujarat government and GeoGlobal, and waited for more than 10 days for their response. Despite repeated reminders, both the parties failed to respond.

The so-called technical expertise provided by GeoGlobal and its promoter Roy has now been described as sub-standard, misleading and deficient by the CAG. According to sources, beyond the 10 percent stake, GSPC also paid hefty consultation fees to Roy for his technical assistance. TEHELKA could not get a confirmation or denial of the same by any of the parties concerned.

Geoglobal prepared an erroneous and deficient Geological model, says the CAG

IN APRIL, the CAG tabled a report on state PSUs in the Gujarat Assembly where it made a series of damning observations on the structure and the implementation of the joint venture between GSPC and GeoGlobal. However, unlike the CAG’s reports on 2G and coalmines, the audit body’s report on GSPC and its joint venture with GeoGlobal has gone unnoticed.

“Though the services of a technical expert could be measured and determined in monetary terms, the company admitted GeoGlobal Resources with 10 percent Participating Interest without any basis,” the CAG noted. The audit body also observed that GeoGlobal submitted a deficient and erroneous geological model, which not only delayed the exploration activities, but also led to a steep escalation of costs. The technical model prepared by GeoGlobal was so deficient, the CAG observed, that GSPC had to hire another technical expert viz, Petrotel USA, at a cost of Rs 2.64 crore. “The geological model of GeoGlobal had failed in respect of well depth estimate, its location and exploration cost estimates. Hence, Petrotel was engaged to thoroughly revise GeoGlobal’s geological model,” says the report.

The question that arises is that if the preparation of a new geological model, which has also yielded results, costs just Rs 2.64 crore, why did the Gujarat government give away a 10 percent permanent stake to GeoGlobal for the same kind of work — though it has proven to be deficient and faulty?

In its defence, the Gujarat government told the CAG that, “Mr Jean Paul Roy of GGR, being a technical expert in the field, was admitted as a joint-venture partner for the block. He would not have agreed to solely carry out a technical evaluation of the block for bidding without being offered a Participating Interest in the block” (GSPC’s reply as paraphrased in the CAG report).

But the CAG has rejected GSPC’s contention. “The reply is not tenable. The company’s contention that Mr Roy would not have agreed to carry out the technical evaluation without a Participating Interest being offered to him was an invalid apprehension not supported by any documents.”

GSPC’s reply also admits the fact that an individual geologist was passed off as a company for the purpose of forming a consortium and participating in the bid.

TEHELKA spoke with many retired ONGC, GAIL and DGH officials. Though none of them agreed to speak on record, they all agreed that natural resources need to be explored and utilised in a more transparent and just manner. They also raised questions on the pre-bid qualification process.

“The joint venture between GSPC and GeoGlobal should have failed at the pre-bid stage itself,” says an industry insider. “There is a difference between a company with years of experience, proven track record and a team of experts as its employees, and an individual geologist. It defies logic why GSPC should tie up with a shady company for such a difficult and complex deepwater exploration work.”

There is not much information available on Jean Paul Roy in the public domain except his Linkedin profile, which describes him as a geologist with “excess of 28 years of geological and geophysical experience in basins worldwide. Since 1981, he has held geophysical positions with Niko Resources, Gujarat State Petroleum Corporation, Reliance Industries, Cubacan Exploration, Petro-Canada, GEDCO, Eurocan USA and British Petroleum”.

GSPC manipulated the bidding cost to win the KG block, says the CAG

THE CAG report has slammed GSPC for deliberately underestimating the cost of exploration to qualify for the bid. The total net worth of the consortium between GSPC, GeoGlobal and Jubilant was $60.5 million. The consortium submitted that the estimated cost of drilling during Phase 1 would be $59.23 million.

“We observed that the estimated cost of Phase 1 was worked out on the lower side and if the cost of hiring rig and associated services that prevailed at the time of submission of bid was considered realistically, the estimated cost would have been $169.270 million, i.e., almost three times of the cost projected,” the report said.

GSPC deliberately kept the estimated cost less than its net worth so that it qualified the pre-bid stage.

So far, the state PSU has spent $3.069 billion towards exploration costs, more than 60 times of its estimate given at the time of bidding. By deliberately underplaying the cost of bidding and keeping it at an unrealistically low level, GSPC could justify its joint venture with a nonentity like GeoGlobal.

TEHELKA was told by a senior Gujarat IAS officer (now retired), who at one point was involved with the affairs of GSPC, that sometime in 2006-07, the government realised that the deal was scandalous and could be a source of embarrassment for the government. To correct things retrospectively, GSPC wrote to GeoGlobal and asked it to contribute towards the escalating exploration costs.

GSPC contended that the excess amount spent towards exploration costs was not within the terms of the Carried Interest Agreement, as per which GSPC had agreed to spend GeoGlobal’s share of 10 percent towards the project costs and recover the same from the company only after the commencement of commercial operations. But GeoGlobal has refused to pay anything to GSPC citing the contract.

“We estimate that the amount of GSPC’s claim as of 30 June 2012 to be approximately $306.9 million plus interest, of which 50 percent is for the account of Roy Group (Mauritius) Inc,” GeoGlobal has disclosed in its latest shareholders report.

In another report, GeoGlobal has stated its legal counsels have advised it that it was not liable to pay any amount to GSPC. “We have advised GSPC that it has no right to seek the payment and that we believe the payment GSPC is seeking is in breach of the Carried Interest Agreement,” says one of GeoGlobal’s quarterly reports filed before the US Securities and Exchange Commission.

In effect, GeoGlobal has walked away with a substantial stake in the KG Basin offshore block without investing a dime and without making any meaningful technical contribution.

Ashish Khetan is Editor, Investigations with Tehelka.
ashish.khetan@tehelka.com

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