The accounting magic at one stroke converts the Rs 57 crore of accumulated losses of ONGC Videsh into capital expenditure, to be set off against earnings from its gasfield in Vietnam, scheduled to go on stream three years later. The new accounting policy has already been adopted for last year's balance sheet, but was formally approved by the ONGC board on June 16.

The overseas exploration arm of the ONGC now shows more than 100 per cent growth in net worth to Rs 130 crore, from Rs 58 crore in 1996-97. The company's books reveal a profit of Rs 2.19 crore for the 1997-98 fiscal, after achieving a break-even somehow the year before.

The accounting wizardry that transforms ONGC Videsh into a dynamic overseas oil exploration venture from an ``navratna'' subsidiary with burnt fingers, isan often employed system of carrying forward capital losses. In the past, ONGC Videsh had followed the ``successful'' method of charging all capital losses in the same year, to be able to avail of tax benefits.

ONGC Videsh director, finance, NC Pany, hotly denied that the company had resorted to some accounting magic, saying that its books now showed ``the correct expression of the status of the company,'' as stipulated in company law. ``Where is the loss?'' he asked, pointing out that the Rs 57 crore shown as accumulated losses in the company's books were not operational losses, but capital expenditure incurred in the course of business.

By the same definition the Rs 2.19 crore of surplus on the company's books last year was also not an operational gain. It was mostly ``other income'' from high-yield investments and consultancy services offered by ONGC Videsh staff overseas.

ONGC Videsh has rectified an accounting ``anomaly,'' by redefining its accumulated losses as capital expenditure. The capitallosses were incurred in the course of the usual hits and misses that exploration companies have to risk, in their search for hydrocarbon reserves.

Oil exploration companies usually have a ratio of 1: 6 for oil and gas discoveries to dry wells. ONGC Videsh has in the recent past, drilled four dry wells and struck gas at one in Vietnam.

The gasfield, however, will not be operational till the year 2001. ONGC Videsh consequently has no revenue to match its capital expenditure. Section 42 of the Income Tax Act does allow companies in high-risk businesses like oil exploration to carry forward capital losses for upto eight years, to be set off against revenue earnings at a later date.

The provision, however, is subject to the approval of the Central Board of Direct Taxes and subsequently, both Houses of Parliament. During 1996-97 alone, ONGC Videsh spent Rs 66.31 crore in drilling wells that proved barren.

A well drilled in the Offshore Concession off Egypt, in partnership with British Gas, was found to bedry and abandoned in June 1996. Two oil wells drilled in Yemen and one in Tunisia, also proved dry and the expenses were written off in 1996-97, resulting in a net loss of Rs 16.76 crore.

ONGC Videsh was able to set off the capital losses from its Rs 88.22 crore of reserves and surplus acquired from successful operations in the seventies. Hydrocarbon India Limited, which later metamorphosed into ONGC Videsh, had for instance, discovered oil in Iran in partnership with Philip Petroleum of the US and AGIP of Italy.

The huge reserves enabled the company to break even in 1996-97, but it still carried forward accumulated losses of Rs 59.74 crore. The Rs 2.19 crore of surplus generated last year reduces the accumulated losses to Rs 57 crore, which ONGC Videsh hopes to set off against earnings from the Vietnam gasfield.

The gasfield, in which ONGC Videsh has a 55 per cent stake, is estimated to contain 2.6 trillion cubic feet of gas reserves. The earnings from gas sales from the Vietnam field should more thancompensate ONGC Videsh for its capital losses from wells that proved dry.