Kalpesh Chavda
20000 Cr windfall profit….Really?
This article originally appeared in CRI content has now been subsumed in The views expressed here are personal and do not necessarily reflect those of the editors of

(Eshwar Singha is a good friend of CRI. He is a keen watcher of developments in Oil and Natural Gas industry.  CRI wishes to thank him for putting this together  despite his hectic schedule. )

Tehelka is at it, yet again. In a recently published piece, based on series of observation raised by CAG raised during the last performance audit of GSPC, it economizes the truth and misrepresents several key facts.

We did a careful reading of Tehelka piece and found out that, shorn of dramatization, its content light and fails to substantiate bombastic claims of a ‘scandal’. Not to be outdone, Kejriwal followed it up with his sideshow – a presser in Delhi. It’s now official. A series of presser based pyrotechnics represents Kejriwal brand of politics.

First things first
Was GGR deal a ‘scandal’ that Tehelka’s infamous hit and run brand of journalism portrays it to be? The piece itself does not even remotely link or establish any money trail, either with any sitting constitutional authority or political functionary of Gujarat but we still go ahead and address some of the issues.

What was the Gas Deal About

On August 27, 2002, Gujarat State Petroleum Corporation Limited (“GSPC”), together with its joint venture participants GeoGlobal Resources (GGR)( and Jubilant Enpro Limited (JEL) ( ), entered into a Joint Bidding Agreement for the purpose of submitting a bid for Exploration Block KG-OSN-2001/3 offered by the Government of India under the New Exploration Licensing Policy Third Round (NELP-III). This Exploration bid was successful and was awarded on November 29, 2002, by the Directorate General of Hydrocarbons under the Ministry of Petroleum & Natural Gas of India.

 Below are the details of Joint Venture Participating Interest tabulated for a quick reference

Name of Partner

Type of Partner

Participating Interest




Jubilant Energy (JEL)

Non Operator


Geo Global Resource(GGR)

Non Operator


The participating interest for JEL and GGR is not a 10% equity stake in GSPC, but it is a participating interest in just one of the asset/Venture in which GSPC is an operator.

Factual position  is that Jubilant or Geo Global Resource got only 10% of share of economic interest in Venture (KG-OSN-2001/3). This also means that under the terms of Joint Operating Agreement and Production sharing contract signed with Government of India, cost incurred to explore Oil & Gas and development of asset to commercial production will be shared by all Joint venture partners to the extent of their respective Participating interest.

To summarize, all cost/income/Liability/Asset etc will be shared with joint venture partner to the extent of their participating interest.

An exception to this rule and center of controversy is Carried Interest Agreement signed by GSPC with GGR.

For the benefit of common understanding, following is definition of Carried Interest

Source: – Fundamentals of Oil & Gas Accounting, 5th Edition By Charlotte J. Wright, Rebecca A. Gallun

This is what GGR has declared to New York stock exchange Page no F-11

This would effectively mean that GGR will not have to pay any cost incurred by GGR – it will be borne by GSPC.

What is Scandalous about Deal?

Before jumping to conclusion, it is important understand how GGR and JEL share of profit will be determined. GGR/JEL and GSPC share of profit is shown under ‘Contractors Take’ shown below

Entering into Carried Interest Agreement is quite a common contractual arrangement in Oil & Gas Upstream Industry. This is a standard business practice in the Oil and Gas Industry

I would like to highlight here that consortium of Partners bid together and won license to Explore/Develop/Operate. Joint Agreement and participating Interest is more or less finalized at the time of bidding itself. It is important to note that in the event of failure to win the license there is no asset itself.

Now let’s look at general concern or allegation has been raised by Tehelka and people at large questioning this deal

  • It is also important to note that priority of the payments before distribution of profit will be in following sequence
    • First, a royalty amount is taken by the government from total production, leaving the remaining total available for production sharing.
    • This amount is split between the government (taken based on Investment Multiple as per PSC) and the contractor (the “entitlement”). (
    • Having said that 10% Participating Interest and decision to carry GGR was taken at the time of bidding. And most Important is to highlight that 10% participating interest is not same as 10% equity sale.
    • It cannot be construed as sweat equity. Under sweat equity beneficiary doesn’t pay single cent, whereas under Carried Interest Contact full cost incurred on behalf of Carried Interest Partner (GGR) will be recovered from GGR share of profit.
    • In the event of Gas reserve at 2 TCF, GGR will not be able to recover its contribution; it still has to 180.9 million to GSPC. However at 20 TCF it will be to make 983 million which is close to Rs 5000 Cr

Following is high level calculation for profit sharing calculation


1: Selling Price formula is approved by EGOM for the KG D6 RIL/NIKO. Its assumed that for GSPC production too it should follow similar calculation

Particular 2 TCF







Total in $ Millions
Sales Price in MMBTU
If Crude Oil is above $60
      $ 4.2
Sales Price in MCF       $ 4.2
Revenue – at 20 TCF in USD       $ 8400
Cost       $ 5760
Royalty Payable       $ 840
Profit Before Tax       $ 1800
Profit Petroleum Share of government of India       $ 540
Contractor Share of Profit $ 126 $ 126 $ 1008 $ 1260
Carried Interest Adjustment $ (306.90)   $ 306.90 0
Net Profit Payout $ (180.90) $ 126 $ 1314.90 $ 1260


Particular 20 TCF







Total in $ Millions
Sales Price in MMBTU
If Crude Oil is above $60
      $ 4.2
Sales Price in MCF       $ 4.2
Revenue – at 20 TCF in USD       $ 84000
Cost       $ 57600
Royalty Payable       $ 8400
Profit Before Tax       $ 18000
Profit Petroleum Share of government of India       $ 5400
Contractor Share of Profit $ 1260 $ 1260 $ 10080 $ 12600
Carried Interest Adjustment $ (306.90)   $ 306.90 0
Net Profit Payout $ 953.10 $ 1260 $ 10386.90 $ 12600

2. CP Crude price in US$/Barrel is taken at weighted average of last one year 111.87 (

3. Cost of 1MCF is approximated as low as $ 2.88/MCF, this has been estimated based on lowest cost of production from various sources.

4. Royalty payable under PSC is 10% of Well head price (The value at the mouth of the well. In general, the wellhead price is considered to be the sales price obtainable from a third party in an arm’s length transaction. Posted prices, requested prices, or prices as defined by lease agreements, contracts, or tax regulations should be used where applicable. ).For simplicity of calculation well head price is considered same as sales price of $4.2 fixed by GOI

5. For the purpose of profit sharing income tax is also deducted, however I am simplifying calculation here

6. Shares between Government (GOI) and Contractor (GSPC/JEL/GGR) will be based on investment multiple. Each PSC has its own slab rates for profit share based on the Investment multiple. Investment multiple will be determine every year and profit will be shared every year. Following example of such slab

Investment Matrix







% of GoI




















More Than 3.5




Let’s assume here for the calculation purpose that average profit share government receive is 30% over life of the asset.

Let’s look at key highlight of the Investigative Journalism by Mr. Ashish Khetan

Allegation 1- Scandalous Joint Operating agreement with GGR and GGR got 10% stake free?

  • It is a very scandalous Contracts ever signed by Modi Regime where 10% equity share was given to one GeoGlobal Resources in March 2003
  • GSPC entered in to contract with GGR to funds its activity via venture fund; cost of this activity will be recovered after Joint venture starts earning revenue. GSPC has spent $3.069 billion on exploration cost and GGR should have contributed $306.90 million and tax payer has funded GGR’s 10%. GGR did not pay single cent for its 10% share to the cost of exploration, which was born by GSPC.
  • GSPC Manipulated bidding cost to win KG block say CAG, 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 GGR.
  • GSPC has suffered a loss of interest running into hundreds of Cr of Rupees by agreeing to contribute GeoGlobal’s share of 10 percent to the venture fund (11.43 Cr loss of interest between Aug 2003 to March 2007- This was planned as per phase under Common minimum program submitted to DGH)
  • Within days of signing deal GGR parked 50% of its stake in KG basin to another shell company in Mauritius

Fact 1 Joint Operating agreement with GGR

Source funding – Tax Payer money
GSPC is owned by government of Gujarat via its financial arm Gujarat State Investment Ltd. Following is summary of the balance sheet. As on 2010-11 GoG has contributed 1683.11 towards share capital

Yes 10% of the money contributed GSPC but again GSPC is self sustained professionally managed company. Going by abs no of $306.9 million approx Rs 1600 Cr, one may feel that GoG is running GSPC to fund GGR only.

Source of funding for GSPC has been mix of equity and borrowing from the market. Gujarat State Investment Ltd so far has pumped in 723.44 Cr, again this funds not only used for KG offshore asset. GSPC is Group Company with close to 9 subsidiary company. One of them is GSPL which is BSE/NSE listed Company.

$ 306.90 Million approx Rs 1600 contribution to GGR was more of business call (Entering in to Carried Interest Partner) which was taken at the time of NELP bidding. To cut it short, $ 306.90 million is paid by GSPC out of borrowing and internal accruals there was no direct pumping of money by Gujarat government.

Did GSPC manipulated NELP Bid
Cost estimates were done on realistic basis, however escalation provision was not made correctly has been stated in CAG report. What amounts to manipulation and fraud is altogether different subject discussion in this regard.

KG Basin was awarded to GSPC/JEL/GGR by DGH. Hence if CAG feels that bid has been manipulated they should have highlighted this fact in DGH performance audit so that in next NELP round such manipulation practice can be identified in advance and guilty of such manipulation are punished.

Loss of Interest
GGR was made non operator partner with 10% Participating Interest under Carried interest partner arrangement whereby GSPC agreed to carry cost incurred by GGR during Exploration and development phase.

One may argue on loss of interest for carried interest agreement, but most of the carried interest provide for penalty clause to recover this interest cost from share of the carried interest partner. However in this case there was no Penalty clause for carried cost. This is something Government should have taken care. This is fair point.

GGR parked 50% of stake in offshore company based in Mauritius

Information about entering in to Participating Interest Agreement with related party RGM based in Mauritius was public information ever since this has been done. GGR has declared this information in its annual report. Please check page F-12 of annual report

Whether entering in to participating interest agreement between GGR and RGM Mauritius is scam or not, is something should have been proved with more documents and money trail. But once again these kinds of contract are common, and know as Non Operated Ventures on billing, This type of arrangement is required where as a non-operator wants to de-risk or insure itself against Risk/Rewards associated with Venture.

Allegation 2- GGR was not competent technical Partner
GGR was brought in as technical expert but did not do its job and another technical expert was hired and geological model was revised from scratch. GSPC paid Rs 2.64 Cr for this service whereas GGR was given 10% share worth millions of dollars.

Fact 2- GGR was technical Partner
Before KG Basin bidding, GSPC had preliminary focus on onshore assets. There were hardly any offshore assets. GSPC was part of NELP bidding along with GGR.

During the course of the exploration phase it was found that original geological design was not perfect. Anyone who is associated with Oil & Gas upstream industry vouch that not many plan goes 100% perfect.

It is important note that a issues pertaining to Deep water exploration has been faced by everyone operating in KG basin. Why do you think Reliance sold 30% of its stake to BP for USD 7.2 Bln (

Reviewing technical design during course of exploration phase is quite a normal routine affair, besides Rs 2.64 paid to other technical amount is very small amount, geological redesign would cost more.

There is nothing in CAG report or Tehlka report to suggest that exploratory well were dry wells, nature of technical services (if only review with minor modification by Petrotel USA). Following is extract of CAG report

CAG has concluded that since technical review was conducted for second opinion it was conclusive proof that technical expertise did not yield desired purpose. Again it’s important to note here still CAG didn’t mention that Geological model was revised from scratch.

This is not to defend that GGR was great JV partner, it might have made mistakes. May be GSPC was also negligent from its side to make sure that GGR technical design was good, not to run in to cost overrun during exploration phase.

By Tehelka’s own report admission, sometime in 2006-07, GSPC wrote to GeoGlobal and asked it to contribute towards the escalating exploration costs.

GGR has given this detail quarter ended 30th June 2012 and informed stock exchange on the status of the dispute (

By this report, GSPC is seeking total annulment of PSC contract or revision or asking GGR to pay anything between $ 144.7 million to $ 306.90 million on the ground that GGR was not able to meet requirement set out by Common minimum Program and GGR was not able to meet role of technical expert.

This also means that GSPC has taken corrective action to make sure that its interest are protected and no undue favors done to private party. Again important to assert here is that Tehelka’s report and Kejriwal’s didn’t trigger any action from GSPC side, but legal dispute raised by GSPC has given core input to Tehelka and Kejriwal to make absurd misrepresentation.

Allegation 3- GGR is dubious company

GGR history and its earlier name can be found on GGR website itself ( GGR stock achieved highest $14.92 primarily on strength of sweetened KG block deal.

Fact 3- GGR as on date is listed company in New York Exchange.

It is important to assert here that at the time of signing Joint operating agreement GGR was registered in Barbodos, but after all corporate restructuring etc today its NYSC listed company.

Highest price on NYSC stock exchange was not only pertaining to KG deal, GGR was also partner and had Participating interest in other assets, annual filing to SEC by GGR mention that KG/OSN/2001/3 is not only asset GGR had. In fact it had various participating interest in CB-ONN-2002/2-Mehsana Block, CB-ONN-2002/3 –Sanand Miroli block, CB-ONN-2003/2 – Ankleshwar block, although its important to point GSPC are partner in most of this blocks but not necessarily Operator) and DS-ONN-2003/1 100% PI by GGR



  • 10% share given to GGR is participating interest, which makes GGR liable sharing cost/Revenue/Asset/Liability to the extent of its participating interest.
  • This is no Sweet Equity Sale, there is nothing free here
  • Whether GSPC manipulated bidding or not is difficult judgment to make, DGH was approving bid should also answer to this question.
  • Entering in to Carried Interest Partner agreement with GGR by GSPC is common practice by upstream majors.
  • Non Operator on Billing (GGR passed on 50% of 10% participating interest in KG Offshore to one of its affiliate) is also frequently use type of venture. At the same time its sold to one of the Group company registered in Tax heaven raise further question on motive of such arrangements
  • There is no Carried Interest partner with JEL. ( )
  • And finally there is no direct or indirect money trail linked with Modi or any of its minister, There is nothing in Tehelka’s article has established such links

    Some more Facts about GGR

    • Subir Raha was one of the GGR director, who joined Board of directors from September 2009 and held position till he passed away in February 2010.
    • On 22nd January 2007 GeoGlobal also announced that it has been advised by Mr. Roy, that he has transferred, by way of a gift, 500,000 shares of GeoGlobal from his personal holdings to the Gujarat Energy Research & Management Institute ( ) in Gandhinagar, India. GERMI is university funded and run under GSPC umbrella.