The Penny King's Free and Clear M&A Fund

[thepennyking]

OVL hires JP Morgan to study Sakhalin cost rise

NEW DELHI: ONGC Videsh Ltd is likely to appoint JP Morgan Chase to examine the reasons behind the cost escalation in the $1.74-billion Sakhalin-1 oil and natural gas project, India’s largest overseas investment. An Empowered Committee of Secretaries (ECS) had asked OVL to examine the reasons behind the 45% cost overrun in Sakhalin-1 oil and gas project before allowing more funds to be committed to the development off eastern Russia.


“OVL is hiring JP Morgan Chase to detail the reasons leading to the ExxonMobil-led Sakahlin-1 consortium to ask OVL for an additional $800 million,” industry sources said.

Interestingly, JP Morgan was the firm that advised OVL in the year 2000 to invest $1.74 billion in Sakhalin-1 project and had projected a 10% decrease in capital expenditure.

The committee, comprising secretaries from ministries of petroleum, law, external affairs and finance, and Planning Commission, has asked OVL, which has so far invested $921.31 million in the Sakhalin-1 project, to explain why cost escalations of such magnitude have happened in the first place. It also wanted to be sure that no further cost overruns would happen.

Senior OVL officials, however, insist that there is only “a very small cost escalation” because the development plan has been revised and oil production estimates jacked up to 250,000 barrels per day from the earlier figure of 200,000 barrels per day. OVL officials said the cost escalation was due to changes in drilling locations, more local content in contracts, building telecom and airport infrastructure, and providing for 20% contingency money.