State-owned Oil and Natural Gas Corp (ONGC) has signed a preliminary agreement to take an operating stake in Gujarat government firm Gujarat State Petroleum Corp (GSPC)’s KG basin gas block.

The Memorandum of Understanding (MoU) signed last week has a dispute resolution mechanism set out wherein any differences over issues like valuation or natural gas reserves would be referred to a three-member committee of outside experts.

Sources said GPSC is keen to get ONGC on board to help tide over its difficulties in producing gas from the Deendayal fields, which a decade back were touted as the biggest discovery in India.

GSPC began trial production of a very small volume of gas from August 4, 2014 but has not yet reached commercial production. “Daily plateau production gas rate envisaged from Deen Dayal Upadhaya (DDN) West field is around 5.663 million standard cubic meters per day as per approved Field Development Plan (FDP) for a period of 14 years.

“There is problem of high pressure and high temperature in completion/drilling of wells in the field. No final date of commercial production has yet been given by operator (GSPC),” according to an RTI reply by the Oil Ministry’s technical arm DGH.

Sources said this is perhaps for the first time that a MoU sets out a dispute resolution committee and it perhaps is indication of the pitfalls that ONGC anticipates in buying a stake in the block.

It has already differed with GSPC on the gas reserves the block holds and has appointed US-based consultant Ryder Scott to do an independent assessment.

The three-member committee will include economist and former oil secretary Vijay Kelkar and former CVC P Shankar.

Since the BJP-led government came to power at the Centre, the Gujarat government firm GSPC has been seeking to sell a majority stake in its KG-OSN-2001/3 (Deendayal) block in Bay of Bengal to ONGC to avoid defaulting on loans.

ONGC initially was not keen to buy stake in the block as it felt the block had reserves far less than what GSPC was claiming and the asking price for the stake was not commensurate with the returns. But it has relented lately.

GSPC was to begin gas production from the block in 2013 but after sinking in USD 3.6 billion it was found that gas reserves are one-tenth of 20 trillion cubic feet claimed in 2005 and that too is technically difficult to produce.

In the process it has amassed Rs 19,576 crore of debt, on which interest cost was Rs 1,804.06 crore in 2014-15, according to the CAG. And against this, its revenue was Rs 152.51 crore in 2014-15.

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