If gas were hoarded, pressure decline curve would've changed in KG-D6: Atul Chandra

Reliance Industries Ltd (RIL) got a breather from the government in the form of a higher gas price from next year in return for a bank guarantee but the company would still need to prove its innocence on the charge of gas hoarding. Atul Chandra, an industry veteran who has worked with RIL as president (petroleum business) and ONGC Videsh as managing director, spoke to Jyoti Mukul on how hoarding is not possible. Edited excerpts:

Why is it that gas volumes produced from KG-D6 are less, though RIL had projected higher production?

Earth is not uniform. Through drilling, you are trying to understand an area. Drilling is based data you gather through technologies like imaging and seismic survey. Your confidence level improves as you drill. If reservoirs are more complex, mistakes happen. There are geological surprises, too. Imagine a gas cylinder. The more you draw gas, the pressure will decline and slowly it will become zero.

S K Srivastava, former director general hydrocarbons, had some time ago made a statement that Reliance is hoarding gas in the D6 field. The field was not showing any production decline at that time. By his understanding, if additional wells were drilled, higher gas production could be achieved. But soon after his statement, the field started showing distinct production and pressure decline. The main producing geo-body was well-connected, indicating that drilling additional production wells will not serve much purpose. The slope of pressure decline curve would have changed if Reliance was intentionally hoarding gas production but this is not the case.

But there are instances, especially in West Asia, where wells are shut when production is reduced.

Each reservoir behaves differently. If you do not produce at the required rate, you could lose the reserves. Sometimes, gas is released and crude oil production stops. In Assam, as head of operations with Oil and Natural Gas Corporation (ONGC), we had to shut down oil wells several times during 1988-1992 due to local bandhs and insurgency. Production could not come to the original level when production was resumed.

How is it that RIL found more gas in MJ-1 when it was under pressure from the government?

There are allegations that D55 drilling and gas discovery were deliberately delayed, which would have been termed hoarding. But the fact is MJ-1 was an exploration well in the D1-D3 mining lease area, that resulted in D55 gas discovery in a far deeper geologic formation and therefore its success (gas discovery) could not be assured in advance. Also, the government did not allow exploration in mining lease areas for several years, until an enabling policy circular was issued in 2013.

No oil company will take the risk to drill a deepwater exploration well, based on speculative 2-D seismic on early 90s vintage technology. Some experts have speculated the D-55 structure must have been known to RIL through such speculative surveys for long. D-55 prospect was identified through a focused and high technology processing, after Reliance made oil discovery in the same play in MA in 2006. Results of further exploration wells drilled subsequently in the same play outside that mining lease area were not encouraging.

Later, when BP joined Reliance, a regional study integrating all the data was carried out and the D-55 prospect was upgraded for drilling. This discovery is not only a great contribution to national wealth but has also opened new thinking in terms of exploration. Therefore, there was no deliberate delay in identifying and drilling of the D55 prospect by Reliance.

Wouldn’t you agree there was overestimation of reserves earlier, when RIL got its field development plan approved?

Based on the information available in 2005, one of the world’s most renowned consultants, Gaffney Cline & Associates, was commissioned to estimate resources.  In the model prepared by them, it looked like several sand bodies amalgamated into one large reservoir unit.  And, any inferior quality sand bodies in the fringe area would be connected and contribute to the main reservoir in the core.  The estimation of resources was based on this model. It was also understood at that point in time that drilling of these isolated or dispersed areas with lower resource concentration will not be economically viable.

Subsequent well and production data in the area showed one main pool  with large volume and dispersed volumes of gas in numerous small pools in the fringe, which were disconnected and might not be commercially exploitable. Even then, RIL drilled two wells in these inter-channel areas, with lower resource concentration to collect data. Thus, the RIL application for a mining lease was not on false pretences and the simplistic assumption that all gas pools are isolated and small is not correct.

Commercial decisions need actual data for risk mitigation before major investments. The first step in this direction is high-tech seismic survey and its processing. RIL has rightly followed this route.

Such developments, in early stages, in reserve estimation and geological surprises are a part of normal risk in the international exploration and production business, especially while dealing with virgin basins that has no analogy. We all become wiser in the hindsight.

Some in the industry say if it is not hoarding, then RIL could have damaged the reservoir.

There is a certain optimum level beyond which you cannot produce. If you start producing more than that, there could be water and sand ingression that could choke the well and damage it. But this has not happened.

There is a demand that RIL should be thrown out of the production-sharing contract (PSC). Has such a thing happened globally?

I haven’t heard of anything like that. PSCs are progressive and structured in a way to promote investment and production. Take the case of Oman. When we signed a PSC in 2005, the agreement did not have a provision for gas production. When this was pointed out to the minister there, he said the terms of contract would be changed to give a 15 per cent rate of return to the company to make gas production viable. RIL, however, surrendered the block when after drilling a few wells, it did not find oil or gas.

Even when I was in ONGC Videsh and we acquired a block in Iraq, we were asked to pay a signature bonus of some $8 million but due to UN sanctions, we could not pay it. We told their government it was not possible to pay due to unforeseen circumstances. At this, we were told we could do without paying the bonus. A country can succeed only when there are companies ready to take huge risk and when the government plays a role of an enabler.

Source: Business Standard

Gas prices may jump to $10 in 2016-17, from $4.2 now

Natural gas prices in India may jump to $ 10 within three years of implementation of the Rangarajan formula, generating enough additional revenue to meet higher subsidy outgo on the fertiliser sector.

The government has decided to price all domestically produced gas by both public and private sector firms at an average price of LNG imports into India and benchmark global gas rates from April 1, 2014.

Barclays Equity Research estimates the price will be $ 8.3 per million Britis ..

Read more at:
http://economictimes.indiatimes.com/articleshow/27795011.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

RIL-BP front-runner for picking 25% stake in Mundra Terminal

Reliance Industries-BP combine is leading the race for picking up 25 per stake in Gujarat government's planned LNG import terminal at Mundra, officials said today.

India Gas Solutions Pvt Ltd - the equal joint venture between the Mukesh Ambani-led firm and Europe's second largest oil firm - is among the three companies shortlisted by Gujarat government for giving out 25 per cent stake in the Mundra terminal.

State-owned Indian Oil Corp (IOC) and Oil and Natural Gas Corp (ONGC) are the other two firms shortlisted, officials said on the sidelines of 8th Asia Gas Partnership Summit here. Initially 8 firms including state gas utility GAIL India had expressed interest to buy 25 per cent stake in the 5 million tonnes a year liquefied natural gas (LNG) terminal being planned by the state government owned Gujarat State Petroleum Corp (GSPC).

The official said GSPC is likely to finalise the partner in next few days. 

"Essentially, GSPC is looking at a partner which can bring in LNG, can consume the imported liquid gas as well and market the fuel," he said adding RIL-BP fits the bill perfectly. BP is a producer and trader of LNG while RIL's twin refineries at Jamnagar in Gujarat as well as its large petrochemical plants are huge consumers of gas. The duo are also marketers of gas in the country. IOC and ONGC, on the other hand, are only consumers of the fuel.

Experts wonder why GAIL was left out because it unlike RIL has experience of operating LNG terminal and is owner of majority of the nation's gas pipeline network. GAIL, which has aggressively tied up LNG supplies from US to Russia, is the biggest marketer of gas in the country.

Besides the three, other firms which had expressed interest included Petronet LNG Ltd, Torrent Energy, Japan’s Mitsui & Co and Toyota Tsusho, the official said. GSPC would hold 50 per cent stake in the Rs 5,200 crore project while Adani Group would take 25 per cent.

The project is to be financed in a debt to equity ratio of 70:30. The terminal capacity would be expandable upto 10 million tonnes per annum. Sources said most of the companies that have expressed interest, want to import their own liquid gas (LNG) and sell it to consumers in the vastly energy deficit country.

GSPC has been scouting for a strategic investor for its LNG project, after Essar group — the third partner with a 25 per cent stake in the venture — exited from the terminal. The LNG terminal will have two LNG storage tanks. It will have LNG receiving, re-gasification and gas evacuation facilities.

GSPC has awarded the front-end engineering and design (FEED) contract to Tractebel of Belgium. Mundra will be the third LNG import terminal in Gujarat, after Petronet's 10 million tonnes per annum capacity facility at Dahej and Shell's 5 million tonnes Hazira LNG terminal. The terminal is expected to go on stream by first quarter of 2016, sources said. Gujarat is mulling another LNG terminal at Pipavav of 2.5 to 5 million tonnes capacity.

Source:Financial Chronicle

Private oil & gas companies may get nod to explore shale resources soon

The oil ministry may soon move a Cabinet note allowing exploration of shale resources by private firms in blocks held by them, a move that comes at a time when it is also preparing the ground for launching the fifth round of bidding for coal bed methane blocks after a gap of more than three years. 

The government also plans to extend, albeit with a few stringent conditions, the recently approved shale exploration policy which allows only state-run ONGC and Oil India to explore shale resources in their existing oil and gas blocks, officials said.

The ministry has proposed automatic extension of lease period in blocks held by private companies if they are interested in exploring shale oil and gas. But only such blocks will get extension where the lease will expire after two years, officials said.

Energy explorers have slammed this condition for extension. "If two years, why not two days? What is the purpose of the government? Is it to encourage exploration or restrict it? India has no proven shale oil and gas and the restriction will discourage private investments," said a member of Association of Oil and Gas Operators (AOGO), requesting anonymity.

About two dozen energy firms, including Cairn India, ONGC, Reliance Industries, BP and BG, are members of AOGO.

Oil ministry officials, however, justified the cut-off date to avoid the misuse of shale exploration policy. "Cut-off date is a must so that private operators do not give the excuse of shale exploration to extend their lease periods," an official said, adding, "Blocks where the lease period will expire in less than two years will be re-auctioned after the expiry of the licence under the unified exploration policy."

The proposed unified exploration policy will allow energy firms to explore all kinds of oil and gas resources, including shale gas and coal bed methane (CBM) in a block. Currently, operators get separate licences for exploring conventional oil and gas and CBM.

The oil ministry is also considering launch of the fifth round of CBM auction, for which it has already identified five-six blocks. "We plan to offer about 10 CBM blocks in the round," another official said. The auction was frozen after the fourth round in 2010 because of Coal India's (CIL's) claim over most of the coal blocks. After initial reluctance, the oil ministry accepted the right over CBM trapped in the coal blocks held by the state-run monopoly miner's. "A formal order to allow CBM exploration by CIL in coal blocks held by them will be announced after the Cabinet's approval," the official said.

The oil ministry initially wanted to auction all blocks for CBM exploration, but after discussion with the coal ministry it realised that multiple operatorship would not only be inefficient but also risky as coal mines are susceptible to collapse. "It is better if CIL also explores CBM because it knows the topography of each coal mines," the official said. There was protracted turf war between the coal and oil ministries because the former holds rights over coal mining and the latter controls oil and gas resources, including CBM

Source: ET

Reliance Industries' new gas discovery likely biggest ever: oil minister

Reliance Industries (RIL), which has come under criticism over the falling gas production from its KG-D6 basin, got a boost when oil minister Veerappa Moily said the oil & gas major's recent gas discovery could be the biggest ever in the country.

Mukesh Ambani-owned RIL in May this year had announced a huge natural gas discovery, possibly the biggest find ever in the country. The new discovery could be the key to arresting the falling output from KG-D6 block.

Addressing a press conference, Mr Moily said RIL's new gas discovery could be the biggest ever in the KG basin.

The discovery, named 'D-55', has been notified to the government of India. This discovery is expected to add to the hydrocarbon resources in the KG D6 block. RIL is the operator of KG D6 with 60 per cent equity. BP has a 30 per cent share and NIKO the remaining 10 per cent.

Reliance Industries'  D-55 gas discovery, which is located two-kilometers below the currently producing fields in the eastern offshore KG-D6 block, may span about 60 square kilometers, RIL's partner NIKO recently said.

RIL shares were flat today, trading at Rs. 850 on the BSE at 12:14 pm. The falling gas output from the KG-D6 wells have been a drag on the RIL's shares which have not been able to outperform the broader markets despite good performance from its refining and petrochem businesses

Source: NDTV

RIL to repair wells to increase KG-D6 gas output

Reliance Industries will repair a third of the wells shut at its main gas field in the eastern offshore KG-D6 block to boost output in the first quarter of 2014.

RIL closed half of the 18 producing wells at the Dhirubhai-1 and 3 gas fields in the KG-DWN-98/3, or KG-D6 block, due to sand and water flooding, leading to an 85 per cent output drop at 9.4 million standard cubic meters a day.

The company is mobilising a drilling rig for the D1&D3 fields "to commence a three-well workover programme that is expected to increase the volumes from this field in the fourth quarter of the fiscal year (ending March 31, 2013)," said Niko Resources, a minority partner in the KG-D6 block.

Workover is the process of performing major maintenance or remedial treatment on an oil or gas well.

Niko, which holds a 10 per cent interest in the KG-D6 block, said in its second-quarter earnings statement that the workovers will "contribute" to an increase in gas production.

BP Plc of UK holds the remaining 30 per cent in KG-D6. RIL, the operator of the block with a 60 per cent stake, produced 12.26 mmscmd from the D1&D3 gas fields and the MA oil and gas field in the block in the Bay of Bengal in the week ended October 27, according to a status report of the Directorate General of Hydrocarbons (DGH).

RIL had also shut two of the six wells at the MA field due to high water and sand ingress. The DGH report said the D1&D3 fields produced 9.39 mmscmd of gas, while the remainder came from the MA field.

The KG-D6 fields, which began gas production in April 2009, hit a peak output of 69.43 mmscmd in March 2010 before water and sand ingress shut down well after well.

D1&D3, the largest of the 18 gas discoveries in the KG-D6 block, produced 66.35 mmscmd, while 3.07 mmscmd was the output from the MA field, the only oil discovery on the block.

Besides the fall in output from D1&D3, gas production from the MA field, which had hit a peak of 6.78 mmscmd in January 2012, has dropped.

Niko said a development well, MA-8, has been spud at the MA field. "The well is expected to be on-stream in December."

The well and the workovers will help reverse the drop in output at KG-D6.

Sources said the workovers had been stuck for almost two years as the Oil Ministry and the DGH refused to approve their budgets. They were cleared only after Oil Minister M Veerappa Moily intervened.

The DGH report said 12 mmscmd of the last reported output at KG-D6 was sold to urea manufacturing plants and no sale was made to power plants. The remaining production was consumed by the pipeline that transports the KG-D6 gas, it said.

Source: http://profit.ndtv.com/news/corporates/article-ril-to-repair-wells-to-increase-kg-d6-gas-output-372454

Gas becomes important as non OECD Asia becomes an importer for first time since 2011

In Asia non OECD Asia is set to become a large importer of LNG from being an exporter of natural gas till 2011. This is with the backdrop Asia-Pacific will be the driver of global gas growth over the next decade. Demand side factors such as rising per capita wealth, urbanization, pollution concerns in China and a shift from nuclear in Asia post Fukushima, delays in the Asian shale revolution all point to major LNG and pipeline imports. With rapid demand growth, non-OECD Asia will move from net exporter to importer with the entire Asia-Pacific region forecast to have a 333 MTPA gas deficit by 2025.

India is all set to treble its LNG imports by 2020. Imports may touch 140 odd MMSCMD from 41 MMSCD currently. While India is growing regas capacity, there remains relatively few long term LNG contracts which have been signed up given the differential between affordability in India and oil linked LNG prices. India currently has signed long term contracts for 11 mtpa although one expects this to increase significantly over the coming years given gas shortages in India and the increased activity from PSUs in Mozambique and Yamal LNG projects. The GAIL Rasgas contract was signed at $14.20/mmbtu recently. However pricing is a concern. Any attempt to delink LNG prices from oil is doomed as LNG prices will be linked to oil and one cannot take an infinite bet on low US shale gas prices. LNG contract prices can still be lowered if they are kept linked to oil, by decreasing the slope, or discount to oil prices, and by putting ceilings in place say crude at $100/bbl. 

The government needs to address efficiencies in end user industries. India suffers from High T&D losses and fertiliser plants are less efficient. These efficiencies will only kick in if the Government allows gas to be sold at its true opportunity cost. In the absence of gas on gas competition and severely restricted and highly segmented markets, many CNG distribution networks make supernormal profits. Market reforms across the value chain and extending to the end user sectors are key to our survival. Power Sector end user reform a major issue and gas pricing has to be linked to efficiencies in the power and the fertiliser sectors.

More than half of India’s power stations run on coal. Slowing domestic production of the fuel over the past three years because of dwindling supply, means that the country is becoming more dependent on imports to provide for the energy hungry Indian market.

The state-run electricity distribution companies won’t be able to absorb the higher production costs because they are saddled with past losses running in to billions of dollars and the slump in rupee’s value to the U.S dollar in recent weeks would add to the cost burden of importing coal, although international prices have declined by 12% in the last year.

With CIL unable to raise output and Government not keen to let go of the Coal sector, Indian consumers will most likely have to pay 3% more per unit of power because of the higher pass through of imported coal. On average, electricity costs roughly 6 rupees per unit in India.

However further similar measures toward a more market-based energy-pricing system could be difficult. A general election next year may weigh on efforts to raise prices consumers pay. More domestic production, though, could be a major help toward India’s surging demands. Instead of wasted efforts on failed attempts to buy overseas assets, India’s oil and gas companies need more encouragement to develop the country’s abundant resources at home.

Reform also means that Power distribution companies need to be privatised along with Coal India Limited. More than half of the population, suffer either no connection or completely unreliable connections to the national grid. 

The problem is that the upcoming election is bad news for energy reforms even though the poor fiscal health of the government implies that it may have limited ability to shield consumers from rising tariffs. The result therefore could well be more fiscal mayhem.

Through the looking Glass

“Alice: Would you tell me, please, which way I ought to go from here?

The Cheshire Cat: That depends a good deal on where you want to get to.

Alice: I don't much care where.

The Cheshire Cat: Then it doesn't much matter which way you go.

Alice: ...So long as I get somewhere.

Why is India’s economic growth slowing? Why has India stalled? Where are we heading? Much like Alice, the destination is blurred.

The government reported year-over-year growth in the last quarter of only 4.4 percent. From a euphoric 9 percent in 2008 the promise of high growth has not panned out over the past four years.

The causes for this slowdown are varied. There is an attitudinal shift toward foreign business and investment. Domestic private capital is rapacious. The imperial foreigners are out to colonize us. So who needs them? Change laws withn retrospective effect, rethink all exemptions, and get back to taxing them to Kingdome come. After all the only object of the Government, as any CAG will tell you is to make as much money as it possibly can!

Stature, Contracts and policy declarations be hanged. Business deals can be taxed retroactively after incomes are earned and reported. WE don’t believe in responsible legislation or contracts. Te onkly rule of law known to this country is that the law can be changed any time. And what cant be changed by law can always be taken care of by ordinances, rules, and even simple office memos and guidelines. 

SO impose  controls on natural gas. Every minister and bureaucrat loves a good allocation and rationing policy. We love quotas and the power these give to not just petty officialdom but even Groups of Minsiters. 

What does it matter if the country is voted as the “biggest disappointment” amongst a group of anyway crumbling BRIC nations .

SO further liberalization and market-oriented reforms are out. What is in is : a relentlessly falling rupee and stock market .The current economic malaise reflected in double digit inflation while the Indian credit rating diving to the bottom of the investment grade range .

It was not so four years ago .The growth story was stoked by energy demand and supply. During the last five years, India's gas consumption had grown by 14 per cent. Supplies were assured .The Indian economy seemed to be basking in the golden age of gas , solely on the back- to -back discoveries by RIL , ONGC and GSPC in the East coast of India , hitherto unexplored deep waters. 

Then the KG D6 devil brought on a climate of distrust and scepticism .Today while India’s’ demand for energy is soaring providers of energy are seen as adversaries , which strains the confidence of India ever meeting its energy security mandate. 

The devil then seems to be on the side of he energy importers impacting GDP, Balance of payments and growth.

While the domestic discovery of Gas assured India of an energy source that can help meet the demand , subsequent decisions and the risk/reward imbalance has discouraged exploration and development of discovered gas in deep waters of India.

Uncertainty on pricing and fluctuating decisions on gas allocation make it impossible to evaluate techno commercial decisions on investments .The lack of consumer confidence in gas, both its supply and its price impact the development of the sector. 

Whatever policy the government adopts, it needs to first to undertake confidence building measures before it announces the next NELP rounds . Poor and reduced participation is an indication of how oil majors view the rounds.

The response to NELP has slowed over the years. The first five rounds of NELP attracted total investments of $7 billion, which by end of three more rounds went up to just $11 billion. In the nine rounds of NELP till date (since 1999), out of the 268 blocks offered, more than 50 per cent are now with state-owned companies.  companies .

SO what is the answer to the exploration challenges in India. In an estimated area of 3.14 million sq. km, comprising 26 sedimentary basins, there are limitations to hydrocarbon reserves. The worst dampener is the lack of confidence in the role of the DGH in developing these reserves. Planning Commission estimates that by 2015, 100 per cent of the Indian sedimentary basin area is likely to be under exploration. The DGH’s obduracy on all accounts will not help that. 

If the government is keen to realize the objective of NELP as conceived in the 1990s, which is to address the increasing demand-supply gap in energy, it has to remove the red tape on tax and pricing. No risk no gain is the principle on which exploration of oil and gas works. If the Government wants to shun all the risks it can be sure there will be no one left to explore Indian basins.

Why are experts asking questions and not offering solutions

Ever since Veerappa Moily has taken over as the Petroleum Minister and ever since the Rangarajan committee devised a rather convoluted formula that seems to have confused everyone we have seen many experts given free advice to the government on the issue of gas pricing. 

However in all the rantings of these so called experts I have failed to understand some basic issues:

1) The New Exploration Licensing Policy has been around for the last ten years if no more. How come these wise cracks took so long to wake up and that too after a few billion dollars had already been sunk under the PSCs. 

2) Some of these PSCs were signed when the NDA was around, So why are they haranguing only poor Moily. What happened to Ram Naik, Mani Shamkar, Murli Deora and Jaipal Reddy? Did they not approve and sign these PSCs and the many things that are now said to be totally wrong with them? 

3) Out of over two hundred PSCs how come we only know of one? What on earth has happened in the others? 

4) ANd finally what kind of experts are those who like Kejriwal propose that cheap (read free!) energy is the answer to all our problems. Are we hearing experts or politicians? 

Surya Sethi, prone to mimic a now famous prime time TV anchor has once again, vented his  umbrage at the Petroleum Minister by asking direct questions. Is he an expert or journalist who thinks his only job is to ask questions and not offer any solutions. After all having been in the Planning Commission and what all, where was e when these contracts were being farmed? Could he not have asked these questions, raised these objections when these PSCs were being signed? Or has he like so many others of his ilk become cleverer post retirement having had the benefit of hindsight?  As an expert Mr Sethi you should be offering solutions. And not solutions for one sector at the cost of the other but like a true Planning Commission expert, for the overall energy crisis that India faces. You cannot Dear Mr Sethi solve the problems of the power sector or the fertilizer sector a the cost of the oil and gas sector. That is what politicians and not experts do! You must suggest ways in which India can sole its overall energy problem. To enable it to get more oil, gas whatever in the long run. And the long run means not today not five years later but for the next generation.

Maybe all the private sector players are looting the country, the public sector companies are useless and the politicians are hand-in-glove with them, but what are the options left ? Is importing oil the only solution ? Is India going to be perpetual and eternal market forever transferring its wealth to foreign shores? Will we never like the US work towards energy security and make ourselves less vulnerable to manipulation by more powerful economies? 

Can M/s Sethi, Sarma and Dasgupta, who seem to have no other objective but to have held the Petroleum ministry to ransom, offer some solutions for increasing India’s oil & gas output in the next three years, instead of making unsubstantiated claims and charges. Shouldn’t India like America and China work towards energy security and ensure that the current and future generations are not held hostage to some middle eastern Sheiks who can turn our taps of energy, stifle our growth and starve our population.

Let’s hope these self-proclaimed experts do churn out some solutions instead of spending their time on slander and insinuation, emulating crab-like mentalities. 

Maybe we are in a mad world. So who better than Alice to steer us !

Fuelling the oil and gas sector

The period between 2009 and 2013 saw the nadir of Indian upstream activity. In 2009, production started at two of the largest discoveries in India—KG-D6 and Mangala. Everyone had predicted the sunrise of Indian gas and oil, with gas production doubling and the new oil from Rajasthan. More than 200 Production Sharing Contracts (PSCs) had been signed and were being implemented. Oil prices were reasonable. International companies had started looking at Indian upstream with interest. Even the petroleum ministry wanted to be involved in the contract management as it was uncomfortable with the idea of such momentous changes occurring without its guidance.

But soon, the slump came. It was around this time that various scams started surfacing. The scam-plagued government shied away from defending even those terms of the contracts (PSCs) that it had signed through a transparent bidding process. The CAG rode roughshod over a weak-kneed bureaucracy managing PSCs. The junior officers implementing PSCs could not find any senior to support and defend their legitimate decisions. Decision-making had stalled.

Decisions that could have led to increased exploration and production, new discoveries or continuation of production in the existing areas were waylaid on frivolous pretexts. 'Zero decision', or not taking one, became the safest bet.

Even the obvious decisions like more exploration in the existing producing fields took years to be cleared. Worse, officials added additional punitive conditions beyond the contract requirements—just to be doubly safe. Discoveries, development plans and declarations of commerciality for gas, etc, were not cleared under rather simplistic fig leafs like “gas development at a (artificial) price of $4.2/mmBtu”. This happened even as the country imported LNG at over $10/ mmBtu. The industry had come to a standstill. The final result is that only a handful of the 200+ PSCs signed are in operation today. The sad fact is that all this happened in a country that is energy deficit and forex constrained. The situation was exacerbated by factors that were within the control of the administration.

The AOGO-A T Kearney Index of the Attractiveness of India as a Global Upstream Destination slipped. With a possible score of 5, (Minimum 1, maximum 5, average 3), India made it to 2.7 last year. This was despite boasting of the best PSC terms, most transparent bidding system, level playing field, tax benefits, etc.

The number of bids per block was propped up only by “S” (small) blocks, where new domestic entrants could take the entry risk. In significant horizons often it was only the PSUs that kept the bid-box open.

The withdrawal of private sector defeated one of the prime objectives of the NELP, viz. attracting increasing exploration risk capital from private investors. Meanwhile, friendlier new provinces in East Africa and the Mediterranean opened up to explorers.

Why did the shine rub off so fast?

A well-crafted contract with a reasonable flexibility for companies to work independently had been usurped by the bureaucracy. In the process, the contract lost the objective of enhancing energy security of the country. Administrators forgot that the contract was designed as a win-win or lose-lose preposition and could not be administered as a win-lose exercise. In this case the regulator wanted to be administrator as well! Quick successive discoveries also gave rise to the fear of loss of crown jewels. Just when the industry should have expanded, given the robust international market, it contracted. The CAG did the rest. Thus, the best allocation and management systems got sabotaged.

The fall arrested

With a stalemate in all quarters, the government set up the Rangarajan Committee to break the logjam. Rangarajan identified the ills but his prescriptions were economically compromised to make them bureaucratically and politically acceptable. His suggestions—remove financial issues from the model, or since gas price calculated under PSC shall mean a higher fertiliser subsidy, increase it only halfway, etc—stand as evidence. He was hampered, no doubt, by the quality of data provided. But, the negative impact of the inappropriate model for Indian geology, or the continuation of uncertainty over gas prices remained unaddressed by the committee.

The increasing CAD, the rupee's downward spiral, increasing energy imports ultimately forced the government to attempt a more holistic view. Economist Vijay Kelkar has now been entrusted with coming up with a long-term vision for the Indian upstream sector.

In the last few months, the industry has seen a number of measures to reduce the backlog. These include holding MC meetings, confirming minutes of meetings and even routhine things like the appointments of auditors. The industry now sees a genuine effort by the petroleum ministry to generate a faster response. These decisions would be unremarkable in a normal environment. However, for an industry that has been struggling to breathe, these are a whiff of fresh air. Even the half-hearted change of gas price determination using RR formulation (which is still inadequate) is being accepted as a first step and a move in the direction of basing it on formula pricing.

The department secretary or the minister admitting that the system is process-driven and not focussed on results and press releases owning up to the backlog offer hope—after all, acknowledgement of problems has to be the first step for any course correction!

The way forward

What the government needs to do is, first, set a clear mission, objective and policy. The commitment to implement should be, and be seen to be, absolute. Like defence and foreign affairs, energy security should be made a national priority and kept above petty politics of the day. The Cabinet also needs to endorse all honest decisions taken towards fulfilling the policy objectives and ensure that these shall be supported and defended at the senior-most level. Such assurances need to be written, as the normal systems and verbal assurances have lost their credibility.

The government also needs to separate its sovereign function from its regulatory and administrative ones. The regulator should guard the national assets. The contract administrator 's mission should be to get the contract implemented in time and facilitate maximisation of exploration and production. Both these jobs don’t belong to the policy maker. The demand by the industry for an empowered upstream regulator has been ignored for over the last fifteen years. The paralysis of the last few years shows how detrimental this omission has been.

With regulating functions isolated, the administrators of contract (the government) and the executors of the contract (the operators) have to be on the same page. If there is an alignment in vision there is no reason that they should not be able to brainstorm together to find the best ways forward.

Source: Financial Express

Gas price hike will draw investments into exploration, say experts

Lack of clarity in gas pricing is the biggest hurdle for fresh investment in the gas exploration sector. Increase in gas prices by the government will directly attract investments into exploration and result in increased output.

This was the view expressed by industry leaders and experts at an energy summit organised by the Indian School of Business here. Karunakaran Hari, Head (Commercial) Cairn India, said gas pricing was a major driver for exploration and production companies to put in fresh investments.

The current price at which producers can sell gas is $4.2 per mmBtu. The Rangarajan Committee recommendations, which suggested uniform gas pricing based on volume-weighted average of international prices, could push up the price to $8.4 mmBtu.

Hari said studies have shown that if gas is priced at $6, there could be an additional 4.9 trillion cubic feet of gas production, as producers would be encouraged to put in fresh investments. At $8 per mmBtu, there could be additional 20 TCF of gas production and at $10 , the total additional production could even go up to20 TCF. There is a direct link between gas prices and fresh investments.

Debasish Mishra, Senior Director, Deloitte India (Energy Practices), agreed that there was no price signal for investors in India to put in fresh investments in the gas exploration sector. “No explorer will be willing to pump in investments if he is not clear at what price he could sell the gas,” he said.

He however felt that India would have to depend on coal for power production. “Shale gas will remain a local commodity. We expect gas prices could touch $11.5 and even at this level, gas-based power will be more expensive than coal, which today has a share of 72 per cent in the energy basket,” he pointed out.

N.K. Bansal, Executive Director (Corporate Planning) of Indian Oil Corporation, said investment plans in the Indian oil and gas sector for the 12{+t}{+h} Plan was Rs 436,250 crore, including Rs 311,000 crore for exploration and production.

On gas supplies, Bansal pointed out that the domestic gas demand could rise to 473 mmscmd by 2016-17, by which time domestic supplies could barely touch 209 mmscmd. He underscored the need for beefing up gas import infrastructure, including port handling and storage.

Source: HBL

Government to allow private energy firms to explore shale oil and gas from their blocks: Veerappa Moily

Oil Minister Veerappa Moily said on Thursday that the government would soon allow private energy firms such as Reliance Industries, Cairn India and BP and BG to explore shale oil and gas from their existing fields.

"The cabinet has approved shale gas exploration policy for national oil companies, Oil India and ONGC. Soon, the same will be extended to other companies including private energy players," Moily told reporters after the inaugural session of the Global HSE Conference.

The cabinet on Tuesday approved a shale gas and oil exploration policy, which paved way for state-run ONGC and Oil India to hunt for non-conventional resources in blocks awarded to them without auction.

"Initially, I was in favour of an integrated shale gas policy for all players, but there were some issues to be resolved. We decided to move ahead with ONGC and OIL. At least one step forward is better than waiting," Moily said.

He said, the government would also launch the tenth bidding round of oil and gas blocks after certain policy issues are resolved. "We have nine rounds so far. Several issues came up in the Nelp (New exploration licensing policy) rounds. We have learnt lessons. We are working on the next round. The tenth will be the perfect round," he said.

The government has auctioned more than 250 blocks under nine Nelp rounds since 1999, but only two of them are so far producing, that too with several disputes, oil ministry and industry officials said. Reliance Industries, which is producing oil and gas from its KG-D6 block auctioned in the first Nelp round, is facing several contractual issues. It evoked the arbitration clause of the contract in last year after the oil ministry disallowed it to recover its expenditure in developing the D6 gas fields because output from the block fell sharply.

Moily said, the government would resolve differences over interpretations of various contractual provisions soon. "I had a three and a half hour meeting with Reliance and BP last week . That shows we want to resolve the issues," he said.

RIL is protesting the government's move to deny rights over eight gas discoveries worth more than $8 billion because timeline expired and challenged the oil ministry's proposal to deny it the benefit of increased gas price from April 1.

Moily said gas price hike proposed by the Rangarajan committee would be uniformly applicable. "There are no gray areas. There will be uniform gas price for all," he said. He, however, declined to comment on any particular case.

Source: ET

India seeks more crude oil, fields from Venezuela

India on Tuesday asked Venezuela for more crude oil supplies and oil fields.

India’s Minister for Petroleum and Natural Gas, M. Veerappa Moily, met the Minister of Popular Power of Petroleum and Mining of the Latin American nation, Rafael Ramírez, today in New Delhi. Both the nations discussed ways to strengthen oil trade between them.

“We are asking for more oil fields and crude oil. We would also like to provide infrastructure and technology,” Moily told media persons after more than an hour long meeting with Ramírez.

Indian companies, both privately held and Government firms, would visit Caracas during October 7 and October 8 to finetune the deals that are being discussed on Tuesday.Moily said that India would like to invite Venezuela President, Nicolás Maduro, shortly.Ramirez said that his country is willing to ramp up crude oil supplies to India.“We have contract to sell to India 400,000 barrels of oil per day, because India has a huge refinery capacity, which process heavy oil that is produced by Venezuela,” Ramirez told media persons.

Asked how much additional crude oil would the Organization of the Petroleum Exporting Countries member is likely to sell to India, Ramirez said that those would be finalised when the contract is being signed.

Venezuela has proven crude oil reserves of 297.74 billion barrels, and its current crude oil production is about 2.804 million barrels, according to information available with OPEC. Venezuela’s oil revenues account for about 95 per cent of export earnings. The oil and gas sector is around 25 per cent of gross domestic product.

India’s ONGC Videsh Ltd has 40 per cent participating interest in San Cristobal Project, Venezuela. During 2011-12, the Government-owned explorer’s share of oil production was 0.894 million tonnes as compared to 0.757 million tonnes during 2010-11 and current production is nearly 40,000 bopd. OVL has invested about $ 191 million in the project till March 31 2012.

Also, OVL along with Indian Oil Corporation Ltd (IOC) and Oil India Ltd (OIL) are engaged in Carabobo-1 project of the Latin American nation. On September 3, private explorer Reliance Industries Ltd said that it is evaluating investments in two-three oil blocks in Venezuela.

“We are looking at two things in Venezuela. One is, we have a long-term (crude oil) supply contract and we are looking at enhancing the quantities under this contract, possibly from next year,” RIL Executive Director, PMS Prasad, had said.

Currently, the Mukesh Ambani-owned company imports 300,000 bopd from Venezuela.

Source: HBL

Despite recent discoveries, India shudders under rising import tab

The unprecedented depreciation of the Indian rupee has worsened the balance-of-payment crisis that is stalking India. India’s already-high annual import tab for petroleum and its products of over $160 billion will see an escalation of nearly 30% this fiscal year only on account of the rupee depreciation alone; a dollar today fetches nearly Rs. 65.56, compared to Rs. 55.59 about a year ago and Rs. 45.64 in August 2011.
India’s petroleum minister, Veerappa Moily, lamented, in a recent Times of India newspaper article about the worsening trade deficit. “Indian companies have invested or committed over $100 billion to develop and import oil and gas from overseas—the monies that could have been profitably invested in India. What is the logic in supporting other economies at the cost of our own fiscal health?” wondered Moily.

Moily rues the fact that, despite being “under-explored” and having good resource potential, India has not been able to attract large players or substantial upstream investments. He calls it a matter of concern, that only two blocks have begun production out of 254 blocks that have been awarded under the New Exploration Licensing Policy (NELP) since 1991.

Meanwhile, Indian E&P operators have made some discoveries in the past five months, even though they are insignificant in comparison to the elephantine discoveries made offshore Brazil, Gulf of Mexico and West Africa. Nevertheless, these provide some positive trends.

The first quarter of this fiscal year has proved particularly lucky for India’s state-owned Oil & Natural Gas Corporation (ONGC). A significant gas discovery was made in NELP Block Krishna-Godavari-OSN-2004/1. The discovery well produced 66.6 Mscmgd through a ¼-in. choke. Earlier, discoveries were made at Chandrika South, Alankari and Saveri, making the latest discovery as fourth in this block. Gas was also discovered on a new prospect in the Krishna onshore basin. These discoveries augur well for undertaking a cluster development in this block. Two new pool gas discoveries were also made in the eastern fault block in the Western offshore basin, while oil was discovered in an exploratory Gandhar-686 well in the same basin, which produced 631 bopd and 6,433 scmd through a 6-mm bean. Thus, these new pool discoveries in the southwest of the main Gandhar field provide a portent for further exploration and exploitation.

Two gas-condensate discoveries were also made in May and August of this year, on Krishna-Godavari’s D-5 and D-6 Blocks, off the East Coast of India. Consortium partners, Reliance and BP, are both justifiably delighted at this significant discovery that is estimated to hold 719 Bcf of gas reserves, of which about 62%, or 447 Bcf, can be recovered. The discovery is also expected to hold about 11 MMbbl of oil.
Meanwhile, ONGC’s overseas arm, OVL, signed, on Aug. 24, definitive agreements with Anadarko Petroleum to acquire a direct 10% participating interest in the Rovuma Area 1 offshore block in Mozambique, for $2.64 billion. Earlier it had, in partnership with Oil India, acquired 10% indirect interest in the same Area 1 from Videocon Mauritius Energy, a private subsidiary of an Indian conglomerate. Incidentally, Area 1 represents the largest gas discovery offshore East Africa, with estimated recoverable resources of 35 to 65 Tcf. This acquisition is in line with an effort to look outside the country for future oil and gas production.

At the company’s annual general meeting, Reliance Industries Chairman Mukesh Ambani was understandably jubilant at the four years of “uninterrupted and incident-free,” ongoing operations in the KG D-6 Block, and proudly claimed that “these fields have supplied more than 2 Tcf of natural gas and about 22 MMbbl of crude oil” to numerous domestic consumers. All this output, in itself, has saved the country over $30 billion on its energy import bill.

Not far behind is the youngest E&P explorer, Cairn India, that found its El Dorado in Barmer, Rajasthan. Effectively starting in 2002 as Cairn Energy, this Johnny-come-lately has made 26 discoveries in the prolific Rajasthan Block and has produced, in the past three years, 100 MMbbl of crude valued at $9 billion from five oil fields in the block.

Now renamed as Cairn India under its new owner, Anil Agarwal-led Vedanta Resources, the company is confident of achieving its vision of 300,000 bopd from the Barmer basin. When that happens, Cairn India will be producing 35% of the country’s entire domestic crude oil. Even today, Cairn produces every fourth barrel of crude in the country, a remarkable achievement for an explorer so young. Its budget for the current fiscal year (2013-14), in this block alone, is $1.2 billion. In March, the company even commenced commercial sales of gas, a first step toward unlocking and monetizing the block’s existing gas potential.
Meanwhile, to the south of India, Cairn India’s subsidiary, Cairn Lanka, is encouraged by initial successes offshore Sri Lanka. The island nation does not produce any oil, and it is fully dependent on imported petroleum products. Under exploration Phases I and II in the Mannar basin, on the eastern side of Sri Lanka, Cairn has made two gas discoveries out of the four exploratory wells drilled so far. “Cairn Lanka is currently considering appraisal options for the gas discoveries thus made, and for further extending exploration into Phase III,” according to a Cairn India spokesman.

Continued exploration seems to be the only way for both India and Sri Lanka to reduce their dependency on imported petroleum products

Source: World Oil

Turn off the gas for fertilisers

If more industries were to run on gas rather than diesel, forex outgo can fall by $6.35 billion.

Natural gas, like most other energy sources, is a scarce commodity in India. Domestic production is limited and the demand-supply deficit is met through imports.

The Government has stepped in to regulate supply, with a certain prioritisation of who is to receive the gas. However, this mechanism is short-sighted and flawed.

The average production of natural gas in India was 106 mmscmd in FY13. Projections for the 12th Five Year Plan indicate a demand for gas of 466 mmscmd against an optimistic domestic production of 209 mmscmd.

While the domestically produced gas is in short supply, the current gas pricing mechanism ensures a wide price disparity between domestic gas (priced in the range of $4.2-5.5/mmbtu) and imported gas (global spot prices of LNG are in the $13-15/mmbtu range).

The artificially low price of domestic gas has led to a desperate claim on this gas from various industries such as power generation, petrochemicals, fertilisers, sponge iron plants, city gas distribution (CGD), refineries, and other industrial users.

THE PRIORITY LIST

The Government came out with a “Gas Utilisation Policy” in 2008, applicable for five years and to be reviewed after that.

Hence, this is a good time to assess the effectiveness of this policy and its financial impact on our nation.

The policy allocates gas according to sectoral priorities, with existing users having priority over greenfield users. The order of preference is as follows:

For existing customers, it is fertiliser producers, LPG and petrochemicals, Power plants, CGD, refineries and finally, others.

For greenfield users, it is fertiliser producers, petrochemicals, CGD, refineries, and power plants.

With such a system, power and fertiliser sectors consumed 61 and 37 mmscmd of gas, respectively, in FY12. The policy intends to further encourage new fertiliser plants, with the gas consumption in the fertiliser industry projected to rise to 106 mmscmd by FY17.

The question arises, why do we have this specific priority list? Could there be a better way of prioritising gas usage? Let us try and develop a more rational and quantitative framework for evaluating the trade-offs.

ENERGY SOURCES

We should look at the price paid per unit of energy in order to compare costs across different fuels. From an energy or calorific value perspective, domestically produced natural gas is priced over four times cheaper than crude oil or diesel ($4.2 per mmbtu, against $18.1 per mmbtu and $22.2 per mmbtu in the case of crude oil and diesel, respectively, assuming the dollar at Rs 65.). The price of domestic and imported coal, however, works out to $1 per mmbtu and $3.17 per mmbtu, respectively.

Over the medium term, we should try and increase use of domestic coal as well as imported coal, while substituting diesel/crude/LPG with other fuels wherever possible.

What are the potential applications for gas?In the short term, there is a clear benefit of using the available gas for generating power and hence reducing the use of diesel generators, saving on the costliest form of fuel (diesel). In the long term (applicable to greenfield projects) gas should be used for refineries, LPG, CGD, fertilisers, petrochemicals and then power, in that order of priority.

Fertiliser, which is a current priority sector, goes significantly down the list, whether it is from a shorter or a longer-term perspective.

A change in allocation could lead to a saving of Rs 41,000 crore per year.

Let us compare our current policy of “Prioritise gas allocation to fertiliser (urea) manufacturing and import diesel/crude” with a modified policy of “Use domestic gas to substitute diesel/crude usage and import fertilisers”.

TRY TO REPRIORITISE

In the fertiliser industry, natural gas is used primarily in urea production, both as a raw material and as a fuel for processing.

About 26 mmbtu of gas is required to produce a tonne of urea. India currently produces around 21 million tonnes of urea every year, which implies that a total of 546 million mmbtu of natural gas is utilised.

In energy terms, this natural gas can substitute 4.25 billion gallons of diesel, a reduction of $13.16 billion.

However, the resulting decrease in urea production needs to be met through urea imports which would add an additional cost of $6.81 billion to the economy.

Therefore the de-prioritisation of the fertiliser sector could mean potential savings of $6.35 billion (Rs 41,200 crore) per year – in other words, diesel usage being reduced by using domestically available natural gas.

Thus, the “fertiliser first” policy is clearly sub-optimal. India would be much better off importing fertilisers and using domestically available gas to replace costlier diesel.

The annual benefit of doing this (Rs 41,200 crore) would be spread across a wide set of consuming industries, as well as commercial and residential households (by not having to use diesel either for power generation or as fuel)

Unfortunately, the Government does not look at the benefit of the nation, but cares more about its own finances.

In order to keep the fertiliser subsidy at a lower level, it imposes this additional cost of Rs 41,200 crore on various consumers, increasing input costs to our industries as well as our service sector, and affecting the global competitiveness of these industries. The Government needs to correct its policy direction.

(The author of this article is Global Partner and Managing Director, India & Asia Pacific, Strategic Decisions Group )

Source: HBL

The dooms day of crude oil

When crude oil price was rising during the years 2003 to 2008, oil-theorists were busy with their doom’s day predictions.

First in 1956 and later in 1975, Shell’s geologist M K Hubert correctly predicted that the US oil will peak. Prompted by this, starting from late 1990s, influenced by Hubert’s model, oil theorists used to argue that either peak oil has happened or would happen soon.

When they were shown the facts which were contrary to their predictions, some continued to argue by saying the date might have moved by few years, but that the decline was around the corner. Now the US shale revolution has conclusively proved the theorists wrong.

One of the problems of Hubert’s model was that it failed to anticipate the game changing technological developments like fracking and horizontal drilling to produce oil and gas from shale reserves.

An often quoted Harvard University study of 2012 argued that oil supply capacity is growing worldwide at such an unprecedented level that it might outpace consumption. Not only it debunked the peak oil concept, it showed that there are plenty of oil reserves to meet the increasing oil demand.

Some floated the theory of peak oil demand. Their often mentioned aphorism was that the Stone Age did not come to an end because we ran out of stones! A recent study by Stanford University has tried to show that the world oil demand may peak even before 2035.

Is it possible that the peak oil demand theorists may turn out to be wrong like the peak oil theorists?

Factors supporting peak demand are: potential to replace petrol by compressed natural gas, abundance of shale gas, improving car fuel efficiency, replacement of petrol and diesel cars by plug-in and hybrid cars, power generators in the Middle East replacing oil by natural gas, demographic trends influencing car ownership and car use peak in developed countries.

The fault in peak oil demand prediction

While these are compelling reasons to convince the sceptics of the conclusions of the peak oil demand, the proponents seem to ignore the unmet needs of the developing country. Just like the peak oil theorists failed to consider how technological breakthroughs can add to oil reserves, peak demand proponents may be proven wrong regarding the insatiable appetite of developing countries to consume oil.

Like the developed countries, the developing countries will consume increasing quantity of oil to improve their standard of living when their per capita income increases in the future. China and India are good examples of this scenario. Stanford model might have underestimated the oil consumption to explore different alternatives to meet the climate change requirements of reducing green house gas emissions.

The way India is showering energy sector subsidies especially in oil sector,  (currently more than Rs 100,000 crores annually) it seems to dismiss peak oil concept while accepting peak demand theory. Implicitly they are assuming that India will have access to cheap and affordable oil and they need not take politically difficult decision of liberalising energy market.

Source:Industrial Economist

Fiscal stability & contractual sanctity are very important

Sashi Mukundan, Region President and Head of Country, India, BP Group, says that partner, Reliance Industries, is not suppressing production from the field.

Multi-national oil major, BP, has invested $7.2 billion in Reliance Industries’ oil blocks, including the controversial KG Basin fields. In this interview done in the backdrop of the raging controversy over pricing of gas, Sashi Mukundan, Region President and Head of Country, India, BP Group, says that partner, Reliance Industries, is not suppressing production from the field. He argues that the field is more complex than originally assumed, and, therefore, the recoverable reserves had to be downsized to 3 trillion cubic feet (tcf) from the 10 tcf that was initially estimated. Mr. Mukundan is confident that his company’s big investment in Reliance’s fields will not go bad. Excerpts from the interview, parts of which were done by email:

There has been a raging controversy over drop in output from the KG D6 block. Different opinions are expressed including holding back of production in anticipation of a price increase. What is the truth?

At the outset, let me assure you that RIL is operating the field as a prudent and responsible operator. This is completely in line with global standards of optimising hydrocarbon recovery. RIL is currently producing volumes at a rate which will keep the field going until additional projects are put into place. These rates reflect the remaining volume to be recovered and the challenges of deepwater operations. Speculation that production was being held back is completely unfounded and ill-informed. By the same logic, how would you describe discoveries which are yet to be approved or developed for years and projects which now have a price advantage due to delayed/inefficient completion? Is this also collusion to hoard oil and gas?

On the allegations that RIL did not drill all the wells as per the amended Field development plan, I would like to state that D1-D3 fields have so far produced over 2 TCF of reserves and has another 1TCF plus left to produce. With the downward revision of reserves by 7 TCF, international prudent development practices would not support drilling additional wells as it does not make technical or commercial sense. BP fully agrees with the operating practices of RIL. It would result in inefficient spend and potential accusations of increased cost recovery.

P. Gopalakrishnan, the one-man committee appointed by Director General of Hydrocarbons, has blamed the fall in output on the failure to drill an adequate number of wells as per the Approved Development Plan (ADP). Do you accept this assessment?

International prudent development practices do not support drilling additional wells as the existing wells will exploit the main gas bearing intervals. Drilling the remaining 11 wells to comply with the last Approved Development Plan would result in an inefficient spend of over $2 billion with no economic benefit. The plan is to produce the remaining D1D3 reserves efficiently by performing work-overs, installing compression while continually looking for additional opportunities in the field. The pre-production assessments made by the operator were certified by an international consultant and reviewed and endorsed by the government to be around 10 tcf. Facilities to produce this quantum of gas were designed and necessary approvals were given by the government.

As production commenced, it became evident that the field was more complex than originally envisioned, and detailed technical assessment shows that around 3 tcf of gas can be ultimately recovered from D1D3. This is not the first field ever to face such a revision. There are examples across the globe and in India of this.

If the explanations around reduced reserves and dwindling production are indeed true, how does this bode for BP’s $7.2 billion investment?

This was and continues to be a great investment for BP. We see three very clear sources of value for BP. First, from the substantial medium-term opportunities for developing the already discovered gas; second from finding new oil and gas across different blocks; and third from establishing our gas marketing joint venture.

KG-D6 is one of the blocks we acquired a working interest in. Further, D1D3 and MA are only the two currently producing fields in KG-D6.

The decline in the two producing fields in KG-D6 is consistent with our judgment at the time of entering into the alliance. There are several discoveries in the KG-D6 block, which are in various phases of approval for development.

This year we have had major discoveries in KG-D6 and Cauvery blocks. We are working together to define and implement an integrated development plan for KG-D6 block, including currently producing fields, already discovered fields and potential future discoveries.

How do you see India’s gas potential? What do you suppose went wrong with D1-D3 and when do you hope to revive it in future?

The estimated gas volume pre-production was too large. As the field produced it became apparent that the in-place volume was smaller. An initial over-estimate of volumes is by no means unheard of in the oil and gas industry. RIL is now aggressively progressing activities to arrest the decline in D1-D3 following Government approvals that were on hold for three years. We are hopeful that the field will continue to produce until compression is installed in early 2015. At that point we anticipate incremental production from the field. The current production could have been 50-75 per cent more than today’s levels had timely approvals been received. There are over a dozen discoveries in the KG D6 block totaling about 2.5 TCF of resources that await various approvals. If these had been approved for development in a timely manner, the first would have commenced production around 2014 adding to/sustaining the gas supply from KG D6. Unfortunately, that has not happened and now the earliest development of these fields has been pushed to 2017 or even 2018 – at a huge cost to the nation.

As the CEO of the Indian operations of one of the world’s largest Oil & Gas companies’, what do you see as India’s Gas potential?

Indian sedimentary basins are sparsely explored. Estimates made by the DGH, International Energy Agency, US Geological Survey and the US Department of Energy indicate that there are over 300 TCF or $4 trillion of yet-to-find natural gas resources to be discovered in India. Even if only a third of these estimates come true or 100 TCF of natural gas is discovered and produced, over $1.3 trillion worth of energy imports can be avoided over the next two decades. A recent study carried out by a renowned think-tank, IHS-CERA, has indicated that at prices equivalent to imported LNG prices, 90 TCF of gas can be economically produced. This increased domestic production can provide $450 billion in revenue to the government and attract over $600 billion in investments and create associated skilled jobs.

The NELP policy has seen its ups and downs –what ails India’s oil and gas sector?

Of the 254 NELP Production Sharing Contracts (PSC) signed since 2000, only 3 are producing. Interestingly, all these three currently suffer from regulatory logjam. Development of over 10 TCF discovered resources which could provide roughly 80-100mmscmd of production today awaits approvals for production. Unfortunately, in the last few years, administrative focus and decision making has moved away from enabling activities. The focus is now on protecting notional government revenue. This focus is stifling activity and as a result very few activities to bring on new production are getting through. There were over 200 decisions pending at the end of 2012. Once the government has picked a competent operator for a block, they should be worried about are -- the contractor completing the agreed work programme; blocks being progressed to development or relinquished on time; resource potential range of discoveries being assessed based on industry standards and production maximised and no fraudulent activities. Similarly, providing fiscal stability and contractual sanctity is very important as sanctity of contracts and fiscal terms has been repeatedly challenged; whether it is the tax holiday or the freedom to price and market gas as per terms of the PSC. There is a need to bring back the clarity on natural gas pricing by following the PSC terms. Given most oil and gas investments relate to a 20-30 year production profile, clarity of a pricing structure is critical before evaluating and approving any investment.

Talking of the recent gas price hike, what was the rationale behind the demand to review prices now?

Oil and gas projects take a long time to develop and then produce for multiple decades. To make investment decisions, we need clarity on the pricing and economics of the project. On the East Coast, deep water construction activities can only take place during the December to April weather window. It hence takes 3-4 years after an investment decision to procure, construct and install facilities and for a field to start production. Investment decisions made today will yield additional production only from 2017. The PSC allows for the contractor to discover an arms-length market-determined price for gas produced. The intent is to ensure value is maximised for all partners, including the government. Gas price for our current production was agreed and fixed till April 2014. With a lack of clarity on arms-length prices beyond that period and in the absence of freedom to discover such price, it becomes difficult for RIL or BP to sanction investments to develop the 4-5 TCF of discovered resources.

Will raising gas prices have an adverse impact on the economy?

I must clearly dispel this false notion that higher domestic gas prices will have an adverse impact on the economy. If domestic gas is allowed to be priced at market levels, a lion’s share of profits from increased revenues will go to the government in addition to the earnings from royalty and taxes. As per the IHS-CERA study, an average 30 per cent of all revenue generated will go to the government as profit share, taxes and royalty. Another 40 per cent will be invested in facilities and infrastructure and close to 15-20 per cent on operating costs. Further, more risk capital will be invested into exploration by experienced players. In the absence of market prices, limited investments will happens and more energy imports will be needed– with all benefits going to the exporting country. Would the Indian economy be better off importing LNG or producing the same gas domestically and hence earning from share of profit petroleum, royalty and taxes? Additionally the multiplier effect on the Indian economy of domestic multi-billion dollar projects is immeasurably huge. One should bear in mind that the alternative to higher domestic gas price is not domestic gas at lower price. It is actually, no domestic gas and more imports.

Why are big multinational companies not making investments or participating in NELP rounds?

BP was the first and only international energy major to make a very significant commitment to the upstream oil and gas sector in India as we believe in the hydrocarbon potential of India. Our investment to date is the single largest FDI into India. Within two years of our presence, together with partners, we have had two major discoveries in the KG and Cauvery basins. We are working with our partner to develop the 4-5 TCF of existing discovered resources. All of this despite of the fact that we have seen the sanctity of contracts challenged multiple times and day-to-day approvals stuck for years, grinding business to a standstill. Indian E&P companies too have found it easier to grow business abroad rather than in India. It is the above-ground factors that have severely hobbled investments. We are now seeing the effects of this come home with the energy import bill at $186 billion and the currency depreciating with flight of capital away from India. I think these facts have been understood by the government and corrective actions are being finally taken.

There has been a talk that hike in gas prices will benefit RIL hugely. Could you throw light on what the factual situation is?

Nearly 80-85 per cent of domestic gas produced in India comes from government companies like ONGC and OIL. RIL and BP through the KG D6 production account for about 10-15 per cent of the gas supplied. Any move towards pricing domestic gas at market levels will benefit the PSUs and the country more. Unfortunately, with the delays, none of our new projects will start production before 2017. More production will reduce imports, increase investment and provide employment. We will be able to attract experienced international companies to explore and invest in India. Government will gain through an increased share of profits, royalties and taxes. Customers will benefit from an increased and sustainable gas supply.

Source: The Hindu

Too much (gas) over too little

It was in 1999, in the face of years of stagnating oil and gas production and a mounting import bill, that the country launched the New Exploration Licensing Policy to attract domestic and foreign investors to bring in frontline technologies to the exploration of oil and gas. This was the first time that India offered hitherto unexplored deepwater blocks, requiring huge risk capital and state-of-art technologies for exploration. The terms and conditions of NELP were formulated by the Government to compete globally with offer terms elsewhere in the world in order to attract the best in both investments and technology. Over 250, Blocks including <br>KG D6</br>, were consequently awarded by following an open International Competitive Bidding system. Yet, 116 discoveries later we find that a mere 6 producing anything. 

For all the noise in the media about the costs of the project and declining production, KG D 6, sadly does represent the first of its kind of project in the country. For all its detractors, and they seem a dime a dozen these days, and with all due apologies to ONGC and its untiring efforts as the flag bearer of the country’s exploration efforts so far, there are no similar projects in the country ---so no benchmarks on costs. However, benchmarks on under-performance there exist aplenty – beginning with the Neelam fields, to the redevelopment of Mumbai High; not to forget that truly Imperial venture in Russia. And all these are not even been deep water fields! 

Therefore given these high and mighty precedents it is pernicious indeed to suggest that D1D3 be singled out for penalties on account of underperformance. Even if some of us pretend not to understand the nature of the business let us at least get a level playing field out there. Even more pernicious are demands that that the cost of production must be made the determinant of the price of gas. 

Wisecracks advocating cost plus pricing forget that since its inception, the Production Contract Regime followed in India expressly and deliberately mandates a market determined rather than a cost based price for both oil and natural gas. The same pricing regimes and the same contracts govern the exploration and development of oil and gas with no difference between the bid terms of the two. Those who glibly advocate cost based pricing for gas should therefore legitimately be demanding a roll back in international prices for oil once it crosses $ 65 a barrel. 

In a PSC regime, such as the one now adopted in India, a contractor takes all exploration and development risks. In case he does not find any producible oil and gas the entire exploration investment is a loss exclusively borne by the contractor rather than the Government or the taxpayer. E&P players therefore account for sunk exploration costs by working on the basis of a global portfolio which balances economies across countries and regions. Commercial activities happen on a rolling basis as the results of future exploration plans can never be known in a business in which the inputs are determinable but the outputs highly probabilistic and dependent on the vagaries of the international market. Given the inherent uncertain nature of the oil and gas business, cost plus regimes everywhere (including in India) have time and again proved extremely inefficient, slow in adapting to technology changes, and prone to passing on mounting capex and opex burden onto consumers as the cost of managerial and technological inefficiency. After years of experimenting with cost plus regimes for oil and gas only to see production first stagnate (with the promise of impending decline), India thankfully, abandoned all cost plus hangovers in favour of a market related regime that could be globally competitive. 

Today with a 74% import dependence on imports of hydrocarbons which will only increase with the years, the country needs to produce not just 6 but several hundred discoveries (a few dozen already existing) before it can congratulate itself on being able to produce more gas than it can use. We may have once flattered ourselves by dubbing the Bay of Bengal the North Sea of Asia but as the experience of NELP has shown there are no investors queuing up to explore it just yet. Before we gloat over the huge potential of the East Coast let us not forget that after D1 D3 in 2002, we have had to wait almost eleven years for the recently announced finds in Cauvery and MJ1. 

If the professed burden of the Government is to use its approval functions under the PSC to keep gas prices low in order to save on subsidies then the proposed solution is itself bound to flame the very problem it seeks to eliminate. To understand this a few comparisons are in order: International crude prices of $ 100 a barrel represent in energy terms a price of $ 16 a mmbtu; diesel in Delhi today sells at an equivalent pump price of $ 23 a mmbtu, while six cylinders of subsidized LPG is bought everyday by housewives in Delhi are $ 12 per mmbtu. The remaining cost $ 24. Natural gas prices on the other hand range from delivery point prices of $ 4.2 per mmbtu to the $ 8.4 proposed by Rangarajan. Is that too high?

Ultimately, gas prices unrelated to markets only encourage the flight of investments to alternative businesses or more market friendly destinations. Today it is not just private investors who shy away from investing in unpredictable markets where policy uncertainty clouds long term risk taking - State owned oil and gas companies flush with funds are equally aggressively scouring overseas for higher returns in more market friendly destinations to limit price risk exposure in their own home countries. The expected consequence is that with declining domestic production, consumers who for immediate short term gains demand cheap gas will find themselves forced to shift to more expensive alternative fuels as supplies dwindle. Don’t forget that not to long back, in 2008, Fertilizer companies found LNG at $ 24 per mmbtu far cheaper than alternative naphtha.

Before one begins glibly advocating the interests of free loaders on the country’s huge and unending gravy (subsidy) train it is best to remember that the price of free gas is not merely no gas but a debilitating dependence on international markets as well.

New exploration policy

Oil explorers can finally heave a sigh of relief. The petroleum ministry, as our lead story today points out, has decided to get out of their way, not completely but to a large extent. Indeed, the process has been under way for some months now. Till February, for instance, the work schedule of exploration firms was excessively compartmentalised—they could explore for oil/gas for 8 years, after which the next 17 years of the license had to be spent only ‘developing’ the fields. Oil exploration firms argued that this was ridiculous since, with the passage of time, there could be new tools developed or new insights got which could help find oil/gas in even areas where no oil/gas was found earlier. In February, the petroleum ministry finally allowed this ‘continuous exploration’, and rightly so.

Another problem, which has now been partially resolved, relates to the process of getting a ‘declaration of commerciality’ (DoC) certificate from the Directorate General of Hydrocarbons (DGH) for each discovery. If the DGH does not give a DoC, never mind how confident the oil company is of the reserves it has found, it cannot go ahead and develop the fields. That is the law. Just last month, as FE reported, the oil ministry all but asked RIL to leave the NEC 25 gas blocks off the coast of Orissa—since the DGH refused to give RIL a DoC for its discoveries here, this meant RIL had not found any gas/oil within the stipulated period, so it had to relinquish the area. Had RIL got a DoC, it would not have to relinquish the area, that’s how critical the DoC is. The DGH can refuse to give the DoC for a variety of reasons—it is not convinced of the size of the find or it thinks the find is unviable at current prices of oil/gas, among others. In even the KG D6 area, RIL has not been given a DoC for 5 new fields where it thinks there are substantial gas reserves—in the event, RIL has been asked to relinquish the fields where it believes there are 0.8 trillion cubic feet of gas, worth around $10 billion based on the prices at which the country currently imports gas. 

What has now been decided, as FE has reported today, is that once a major discovery has been given a DoC by the DGH, the operators don’t have to go asking for DoCs for the other discoveries they make in the area. In the case of RIL in KG D6, this means the company would not have to wait for the DoC for these 5 discoveries—D4, D7, D8, D16 and D23—and can simply go ahead and develop the fields. The move makes perfect sense since, given the costs involved in developing fields, no company is going to go on a wild goose chase looking for oil/gas unless it is very certain there is oil/gas to be found—the government does allow costs to be defrayed but if the companies spend money recklessly without finding oil/gas, they will have no revenue against which they can defray the costs. What the government now needs to do is to find ways to quicken other processes of the DGH approving costs—it is not just RIL that has a problem, even Cairn has $1 billion of unrecovered costs. Other countries have production contracts similar to India but by using international benchmarking and other standards, manage to resolve cost disputes relatively quicker.

Source: FE

India's untapped potential in oil and gas sector

Since liberalizing its economy in the ‘90s, India has witnessed unprecedented levels of economic expansion. Driven primarily by demographic changes, rapid industrialization and a strong export-oriented services framework, the Indian gross domestic product grew more than 3.3 times from 2002 to 2012, second only to China’s.

As its economy flourished, India’s demand for energy has risen by more than 70 percent. And this trend is expected to continue in the next decade making India the third largest energy consumer globally by 2020. With the growth in automobiles, power and fertilizers, oil and gas as an energy source now represents more than 45 percent of the country’s total energy consumption.

However, this rapid surge in demand for hydrocarbons has not translated proportionately toward the growth of domestic exploration and production (E&P) in the oil and gas industry.  A case-in-point is that of the 11th five-year plan period, for which India committed to produce 206.8 million tonnes (MT) of crude oil but the actual production was 176.9 MT, equating to an incremental import burden of over $20 billion for the period at today’s prices.

In the last decade, India has taken important steps toward ensuring energy security. For instance, the New Exploration Licensing Policy (NELP) was designed to attract new activity in oil and gas exploration, and the country agreed to allow 100 percent foreign direct investment (FDI) in the upstream sector. Despite this, an FDI investment of just over $2.5 billion was recorded in the E&P sector since 2005.

Ensuring long-term energy self-sufficiency appears to be a formidable task for India, given the magnitude of the country's energy needs, the complexity of technologies involved, the large investments required, and the obstacles in the political landscape to overcome.

Despite these challenges, India has large possibilities for growth in the oil and gas sector. Only half of the country’s potential basins have been explored, and large blocks offshore remain untested, especially in deep water.  India’s total hydrocarbon reserves are estimated to be around 2 BMTOE (Billion Metric tonne of Oil Equivalent) (approximately 15 BBOE (Billion Barrels of Oil Equivalent)).  With the current oil production level of around 815,000 barrels per day, on estimated reserves of 1.2 BMT (Billion Metric Tonne), the reserves-to-production ratio is 25 years.  The potential for gas seems brighter; at the current production level of around 40 BCM (billion cubic meters) per year on an estimated reserves base of around 1,500 BCM, translating to a reserves-to-production ratio of more than 30 years. The nine rounds of NELPs have seen 247 blocks being awarded, but only 16 of those have been developed so far.

This presents great opportunities for companies across the oil and gas value chain to be involved in industry growth. New technologies and easier access to capital allows for increased activity, which may cater to requirements spanning upstream operations to downstream refineries. GE is uniquely positioned as a key contributor toward the sustainable growth of the oil and gas industry in India. We continually partner with local companies to innovate and develop technology solutions to help businesses around the world.

Our company has an advanced technology and research center in Bangalore with approximately 5,000 researchers and engineers working on next-generation technologies. In keeping with GE’s commitment to local development, we are investing approximately $200 million in a multi-technology and multi-business manufacturing facility on a 60-acre plot in Pune.

Meeting India’s energy requirements is cornerstone in ensuring that the nation’s economic growth continues. It is imperative the government works toward energy self-sufficiency. In this regard there have been some positive moves in the form of NELPs, but the immediate need is an actionable operating philosophy and favorable framework of policies that can help accelerate the efforts for exploring and developing oil and gas, thereby ensuring energy self-sufficiency for the nation.

Source: MoneyControl