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

Gas price hike makes India attractive for exploration: Veerappa Moily, Oil Minister

India has become an attractive investment destination for gas exploration because it has decided to raise gas prices from April, which will also contain the spurt in gas demand, Oil Minister Veerappa Moily said.

Moily said investors had been shying away from investing in India because of low prices of domestic gas. The government has decided to raise the price of gas from next financial year, which would "certainly make India an attractive destination for investment in the sector", he said.

"India has large proven reserves of gas that remain unexploited. While the total proven reserves are 1.3 trillion cubic metres, what is currently exploited is only 0.04 tcm," Moily said in the keynote address at the LNG producer-consumer conference in Tokyo. Moily said there was a gas demand-supply mismatch in India because of artificially depressed gas prices. The country's gas demand is estimated to jump by 94% over 2012-17, while output growth will be 66%, he said.

In case, gas prices are below $5.8-6.5 per unit, its demand would soar to 260-350 million standard cubic meters per day, he said citing a study. If prices were raised to $10-12 per unit, potential domestic gas demand would be lower at around 180 mmscmd. And at $12-18 per unit, the potential demand would be limited to 38 mmscmd only, he added.

Moily said consumers in the Asia-Pacific region are paying high prices for imported gas compared to North America and Europe. "This is in spite of the fact that the Asia-Pacific region is the largest consumer of LNG globally, accounting for 66% of the global consumption and also hosts the major producers of LNG," he said.

"This unreasonable burden on the buyers of the Asia-Pacific region is the 'Asian Premium'. We don't find any rationale for such a premium now. Such high prices in the region would benefit neither the buyers nor the producers/suppliers. If this trend continues, there is no doubt that demand would drift away from LNG to other competing fuels," he said.

Ideally, the price of a commodity should reflect the demand-supply dynamics of the commodity in the markets where it is traded. Between markets, the price differential should reflect only the transport and other logistics costs involved. This unfortunately is not the case in the Asia-Pacific region. The practice of the 'oil linkage' that has no more relevance or rationale today, is still continuing in gas pricing in the region and is largely responsible for such abnormally high prices, he said.

Source: ET

Top oil companies to push shale exploration, marketing

Indian energy firms Reliance Industries, Cairn India and Essar Oil have put shale oil and gas exploration and marketing on their priority list, encouraged with forecasts that the shale boom in North America will dislodge OPEC's hegemony over global energy trade. 

Companies are preparing plans as the government is giving final touches to the shale policy to kickstart the hunt for another sources of natural gas in the energy-hungry country. 

India is already producing gas from coal seams and importing LNG for its growing energy needs. While RIL may ship a portion of the shale gas produced in its acreages in the US to India, Cairn says it has seen a significant potential for shale oil and gas in the Barmer block which is home to the country's largest onland oil block and is lobbying with the government to allow private oil firms to explore shale potential in their existing oil and gas acreages. 

"We have the option to import a portion of the gas produced in our US shale acreages to India as there is a huge market potential. We could in fact pool this gas with the gas that BP will be importing from the Freeport LNG terminal in the US and bring it to India," PMS Prasad, executive director, RIL told ET. 

Unlike India, where RIL is grappling with a host of regulatory issues and plummeting production in its showcase KG D6 gas block, prospects in its shale acreages in the US have improved significantly. The company has predicted that production from shale gas in the US will be in excess of one-third of its aggregate gas production this year.

Source: ET

Govt looks at gas price pooling to kick-start stalled power projects

The Government has re-started discussions on pooling domestic and imported natural gas to feed fuel-starved power plants. If implemented, the move may come to the rescue of NTPC, Lanco, GMR, GVK, Torrent, Reliance Power and Essar stations, though it could mean higher tariffs for consumers.

The Power Ministry has prepared a proposal for three years, starting 2013-14. This may burden the Government with an additional subsidy of Rs 24,339 crore over this period, a senior Power Ministry official told Business Line.

The Ministry’s proposals will be reviewed by the Ministries of Petroleum & Natural Gas, Fertiliser, Law, and Finance besides the Planning Commission before it is taken up by the Cabinet Committee on Economic Affairs.

Mixing domestic and imported gas will raise the price multi-fold, resulting in higher cost of electricity generation. Government subsidies will be needed to offset the rise in electricity cost, else there won’t be any buyers, said the official.

For instance, in 2013-14, it is proposed to allocate 1.125 million standard cubic meters a day (mmscmd) of domestic gas to the power sector. This will be clubbed with 5 mmscmd of imported gas, which would make the weighted average price of gas at $11.43 per million British thermal unit (mBtu).
However, this would mean the cost of electricity generation will more than double to Rs 10.47 a unit. The Power Ministry is mooting a tariff of Rs 5.50 a unit with the difference to be subsidised. This subsidy works out to Rs 2,498 crore for 2013-14.

Similarly, for 2014-15, if 12 mmscmd of imported gas is used, the subsidy stands at Rs 10,992 crore. In 2015-16, the subsidy would be Rs 10,849 crore. “By pooling the additional available gas from domestic fields with imported gas, gradually all gas-based power plants can be operated preventing them from turning into non-performing assets and defaulting in loan repayments,” the official added.

India’s total installed power generation capacity is 225,793 MW, of which 18,714 MW, or nearly 8 per cent, is gas-based. Another 7,815 MW may be commissioned soon. To operate these stations at 70-75 per cent plant load factor (PLF), 92.34 mmscmd of gas is required. In June, just 20.70 mmscmd (17.26 mmscmd domestic and 3.44 mmscmd imported gas) was available, leaving a gap of 71.64 mmscmd.
Production from Reliance Industries-operated KG D6 fields has nose-dived from the peak of around 63 mmscmd in late 2011 to under 14 mmscmd; the supply to power sector has become zero since March 2013. This resulted in significant gas-based capacity getting stranded or operating at sub-optimal levels with an average PLF of 27.8 per cent.

The Power Ministry has proposed public sector GAIL as the ‘pool operator.’ An empowered committee headed by Additional Secretary will finalise plant-wise allocations every month. The panel will also approve the monthly pooled price and volume of imported gas. The subsidy will be released every quarter to GAIL from the Power Ministry’s budget to GAIL.

Source: HBL

Policies are not designed to upgrade our efficiency: PMS Prasad, Executive Director, RIL

Gas consumers want Reliance Industries to supply cheap gas, the oil ministry has penalised the company for building too much infrastructure and leftist politicians have lambasted the government for raising gas prices to help Reliance. But RIL Executive Director PMS Prasad firmly asserts that the company is merely seeking reasonable returns it is contractually entitled to. In a candid interview with ET says its contract allows market prices and has no provision for penalties, but "our contract, which is supposed to be cast-in-concrete, is now only written in sand, because left and right, things are being changed at will." Excerpts: 

Has the government formally informed you about new gas prices? Will you invest in gas fields assuming the letter will follow? 

We don't have any written intimation from the government on pricing yet. We also are awaiting several approvals on plans that have been submitted, work programs, budgets and decisions on discoveries notified in the past to the Government. You can't assume anything in today's environment. The price, yes, will be key determinant in deciding which of the plans will be viable and deserving of investments. That is something which not just RIL, but each of the boards of the partners in the consortium will need to evaluate and give approval for the final investment decision. So we are waiting not just this notification but also specific approval for each of the plans. 

Doesn't the Rangarajan formula raise gas prices too much? 

The formula still arrives at a price which energy for energy is at a 60% discount to oil. It is at 40% discount to the price at which LNG is being imported into the county. For that reason the RangarajanCommittee also said this is not the market price and that the country would need to transition to the true arms-length market price as per the PSC. As producers, is this price good enough for us? It is clearly not good enough because it is not the arm's length market price I was promised when I bid under NELP and what I'm eligible to under the contract. Is it too high or is it too low? The arms-length market price is a price as decided freely between unrelated buyers and sellers in an open market. It is not a price decreed for an allocated quantity of gas which cannot be sold in the open market. 

Let a free arms-length market price prevail wherein it is for the buyers to decide whether it is too high. If too high they have the option of switching to what are cheaper alternatives. If it is too low, the sellers have the option of not producing it and investing elsewhere in resources that are cheaper to produce. From the producers vantage price will determine how much gas will be produced, because it decides which fields will be viable, and which technologies will be worth investing in. 

The point is what is right? Okay, you don't' want to pay the domestic producer. Fine, the gas will not come out. The money is not going into my pocket. Why is ONGCBSE -2.33 % not developing KGD5? The first discovery was made in 2001. It Is STILL not developed because they have not found it viable. Why should a company produce when it is going to make losses on every mmscmd of gas it produces? The presence of substantial deep water gas infrastructure on the East Coast is now, however, making some of these discoveries viable. Therefore ONGC is saying they will use our infrastructure, which we will now be happy to provide. Given the new prices that gas will come out in 2017, 2018. 

Will infrastructure sharing with ONGC end charges of gold plating? 

Unlike some sectors, an oil and gas PSC is not a cost-plus contract. Therefore there is no incentive to gold plating. The more I spend the less I earn. Costs are not profits. Adding costs does not give me returns. It only increases my interest burden and pushes profits into the distant future. If facilities exist they are there to be used by whoever can benefit. If existing facilities make some discoveries of ONGC viable to produce, the country benefits. 

But, I don't need to rely on ONGC. My own discoveries, if allowed to be developed will take production back to 50-60 in the next few years. If I hadn't created that infrastructure, I would not have been able to monetize them. Building separate infrastructure for each discovery would have cost 1.5 to 2 times at current market rates making them unviable to be developed. 

Won't high gas prices stoke inflation and worsen current account deficit? 

Given that gas-based energy comes at a tremendous discount to oil there is every logic that gas be used to substitute oil. We should import more gas. At $108 per barrel oil, energy equivalent gas prices are $18 per Million BTU. Yet even LNG today is available at $13-14 per Million BTU. At a 20% discount it makes sense to promote the usage of gas, provided this gas substitutes oil. It is counter inflationary rather than stoking inflation. 

Domestic gas is even cheaper. Even at $ 8.4 per Million BTU (the so called Dr.Rangarajan Price) it is a great substitute for both LNG as well as oil. It saves precious foreign exchange and improves the CAD. Again, domestic gas brings royalty, profit share and taxes to the Government, offsetting the so called increase in subsidies which imported gas does not do. Therefore, if higher prices can increase domestic production, there is every reason why it should be incentivized. This is a domestic resource. When you import oil and gas, you are paying full international price. Are you creating any spinoff in the economy? Are you creating jobs here? Is the government getting anything in terms of royalty, or profit share or taxes? What are we getting? 

Power and fertilizer sectors are badly hit by the new price? 

The oil and gas sector was one of the first to introduce reforms. As part of the reforms the PSC that was adopted was not a cost of production contract. Accordingly I did not bid to supply gas at any agreed price. The PSC promised me that I would be free to sell my gas at the arms-length market price. In fact not a single power or fertilizer plant was set up on the promise of supplies of KG D6. They all were set up on alternative sources of supply which failed to materialize. 

The above reforms were supposed to follow in the fertilizer and power sectors as well. Unfortunately they did not. Fertilizer and power still run on the principle of fixed assured returns on cost of production. These leave no incentives for introducing modern technologies and promoting efficiency of production. Everywhere else in the world they use 20 Million BTU to produce one tonne of urea, in India we need 24-25Million BTU. Why can't our power plants have the same efficiency of less than 1600 kilocalories per kilowatt. In India we are still calculating our returns at a heat rate of 1800 - 1900 kilocalories. Are our policies designed to upgrade our efficiency? No! They are designed to promote wastage of precious resources which have far superior alternative uses wherein they can add greater value to the economy. I'm not a big advocate of gas for power. It's the least efficient use of gas. What are you doing? Even with a combined cycle power plant, what is the total efficiency? 45-50%. The rest of the energy is just wasted. Does that make economic sense? 

The problem is that because we failed to push reforms in the power and fertilizer sectors there will be powerful lobbies in these unreformed sectors demanding that the reforms put in place in the oil and gas sector be rolled back. We opened the refining sector and see the result. The reforms introduced ensured that you now have private refiners in India who because of their world class efficient processes and units can beat the hell out of other refineries across the world. And they are doing it here, sitting in India, not from some off shore refineries set up in other parts of the world. But now, instead of bringing these sectors up to speed we see demands that reforms introduced in oil and gas be rolled back. Instead of moving forward all around we now see unreformed sectors dragging down the process of reform in other sectors that had moved ahead. Why not reform these sectors as well. Everyone wants to see the best and most efficient power and fertilizer plants in India too. 

HOARDING GAS 

Geological tools are far from perfect and geological surprises are the staple of this industry. Their likelihood increases in deep water developments, especially so in case of fields in basins without any prior production history as is the case for the D1D3 fields in KGD6. 

I've written letters to the government and requested Petroleum ministry officials several times,if needed, why don't you appoint a reputed international expert? We will cooperate, give him all We have had to downgrade our reserves by over 7 TCF from the AIDP. This has been a serious commercial setback to each of the Contractor parties. But to add insult to injury we see all around a calumnious campaign seeking to penalize the Contractor on preposterous charges of "hoarding" non-existent gas. 

If there is gas, would I be producing so much water and sand from my wells? All the data and information is there. The technical data stares you in the face. Don't tell me this country does not even have the technical competence to draw the obvious conclusion from that data - the fact that there is not sufficient gas in the D1 D3 field!the field data, take him to the field to see what is happening. Why is it that no such effort was made? 

Meanwhile because of this campaign of calumny our approvals have got held up for years. We are in the danger of losing whatever reserve we have if we don't deal with it today. We have to extract the balance 1.3 tcf in that field. 

Doesn't the contract say the government must approve gas prices? 

The Contract gives the Government the function of approving the pricing formula proposed by the Contractor. It does so in order to ensure that the Contractor is proposing an arms-length market price which brings maximum benefit to the parties to the contract. There is a difference between approving and fixing the price. Approval is that there is a process for a market. Why is the government's approval required? Read the record of discussions and notes preceding and leading up to the PSC in its current form. They clearly say that the purpose of the approval clause is to ensure that any price at which gas is sold is really the arms' length price. It is to ensure that there is no under-invoicing and transfer pricing that would deny govt the due share of royalty, profit petroleum and tax. The purpose is to ensure that the market-discovered price is truly the arm's length price. Its purpose was not to use it as a tool to transfer Government subsidies onto oil and gas producers. 

Do you think the penalties imposed are consistent with PSC? 

RIL has provided detailed models and assessments that establish the nature of resource distribution in D1-D3. All data incontrovertibly points to the same conclusion that forced the downgrade of reserves I mentioned. That has been a big blow to us commercially. Being an oil and gas industry contract the PSC recognizes that oil and gas only exists as a probability not as a certainty. That is why reservoirs can surprise the best experts. The PSC clearly states that all figures given in any development plan are only estimates. It provides for constant revision to development plans, work programs and budgets. Nowhere in PSC it says you can impose penalties for so called shortfall in production for the simple reason that production figures given in a development plan are always estimates. 

PSCs had five things that were guaranteed to invite investors to come in. 

1. 100% Cost recovery 

2. Fiscal stability in terms of taxes etc. 

3. Tax holiday for the first seven years. 

4. Marketing freedom 

5. Arms length market price. 

Today let's see what is left of it. Market price is gone, marketing freedom is gone, tax holiday was taken away selectively for gas only. Oil, under the same contract is given international prices. It also still has a tax holiday. Why has gas been given this step motherly treatment? And you have knocked off fiscal stability - you are imposing additional taxes on offshore services. 

What was left? Cost recovery. Now you have people attacking cost recovery also. Mind you, again only for gas. Why would anybody come to this country and invest? How are you giving comfort to the investor? 

Here, our contract, which is supposed to be a cast-in-concrete, is now only written in sand, because left and right, things are being changed at will. 

Will you tell the government that contracts are being violated at will? 

A. We don't want to be fighting the government all the time. But we have risked our shareholders money and we want that they earn a fair return for the risks that they have undertaken. We have spent - billions of Dollars in failed exploration with zero return. We have spent billions of Dollars to make new discoveries only to find that technicalities are now being used to prevent us from developing them. 

We have been constantly pointing out our Contractual rights under which we participated in NELP and have made these huge investments. Why do you think we have gone into arbitration on the issue of limiting cost recovery? Because it is an outright violation of the PSC. We are reminding the Government about why prices need to be fixed not by Government committees but allowed to be decided as laid down in the PSC - on the basis of true arms-length market sales.

Source: ET

Kazakhstan to sell China 8.33 per cent in Kashagan oilfield for $5 billion: Sources

ASTANA: Kazakhstan will sell 8.33 per cent of its giant Kashagan oilfield to China for about $5 billion in a deal to be signed later on Saturday, Kazakh government sources told Reuters.

The sale and purchase agreement will be signed by the heads of Kazakh national oil and gas company KazMunaiGas and China National Petroleum Corp (CNPC) in the Kazakh capital Astana, said the officials, who requested anonymity.

"We suppose that the transaction will be closed by late September or late October," one of the officials said.

Source: ET

How to hoard oil and gas: A primer

Are highly technical oil and gas contracts to be run as per the rules laid down in the contracts or are they to be run by lynch mobs? And lately we have been seeing and hearing a lot many lynch mobs. We have see them, heard them and read them not just on prime time but even the normally more sober print media.

Unfortunately, in this dizzying marathon battle of titans it is easy to bemoan the trees being uprooted when the whole forest itself is in danger of being trampled on and decimated. With everyone and his mother today having an opinion on complex issues of cost recovery, capital spend, and profit share; not to speak of geology and risk management it is indeed impossible to see the trees for the wood.

Ever since the great gas fight has begun, everyone and everyone’s mother seems to have an opinion as well as lots of free advice – and all on prime time. Contracts be doomed.

For that matter does an otherwise respected Member of Parliament like Gurudas Dasgupta really have the authority to hold forth on prime time on whether gas  (maybe he meant onions) can be “hoarded” in oil and gas reservoirs.

But then who cares for facts  or evidence when all that matters is  the spectacle of a David taking on the big bad Goliath and that too on prime time.

But hold on! Having heard the debate I wonder. Has anyone ever told the otherwise wise Marxist that gas is found not in underground storage tanks but in deep geological traps?
That gas exists in these traps even today after forty million years precisely because it has been sealed off from escaping from within the pores. There it lies, waiting for millennia, compressed between thousands and thousands of tonnes of sand and rock. Also trapped in the same claustrophobic space deep in the bowels of the earth may be water and sometimes oil.

But we don’t expect to have time for all this on prime time.

Nor do we expect to be told by prime time prima donnas that our job as industry specialists is to exactly locate these traps. And how is that to be done? The only way to really do it is to drill a six inch hole that must be guided several kilometres below the surface of the earth. If these traps be off shore then there is the added complication of doing all this through a few thousand metres (some odd kilometres) of rough and ready seas. Finding a needle in a haystack would be a picnic by comparison.

At these depths biogenic and thermogenic processes through 40 million years and more, convert these sealed traps into a pressure cooker the size of Kolkata.  Except that a pressure cooker - and for that matter even Kolkata, believe it or not -  has a comparatively well-defined shape and dimensions. The shape and dimensions of the cooker we are talking about is best estimated by guess and good luck.

At these high temperatures and pressures, problems of permeability and porosity determine when and how much gas will flow through the six inch holes that are called gas wells.  Anyone wishing to hoard gas to prevent its flow would need more than mortal skills.

Yet, we don’t expect to be told all this on prime time – and certainly not by the likes of Dasgupta.

Once production begins it is a painstaking and constant vigil by scores of highly qualified engineers armed with the most sophisticated equipment and technology. Their job is to  carefully watch and monitor, every second, the composition of the fluids that flow.

Out surges from each well a barrage of not just gas and oil, but sand and water as well.

Production regimes involve watching out for signs of danger. Temperature and pressure have to be monitored and calibrated across dozens of wells. Too much sand or too much water are always clear signs that the reservoir is not behaving.

Somewhere something has gone wrong. Someone made a guess about its shape and extent, and went wrong.

Then there are the wizened and bespectacled, but retired babus , who have spent decades drilling through little else but copious paperwork. Dressed up now in Fabindia khadi they can hardly be expected to know that high temperatures and pressures mean that those men and women fretting over complex bar charts ad scrolling numbers  on deep water drilling rigs are literally trying to control a potential volcano in each well. Go wrong there and nature can be very unforgiving indeed.

Safety has to be the first concern. The least mistake can be fatal. That is one area where no mistakes can ever be allowed.

These guys and girls are highly qualified technical men and women. They are professionals and they know their job. They are not godown keepers entrusted with the keys to a cold storage full of onions.  They are not loaders waiting for the signal to deliver their goods into the mandi in the dark of night when the price is right.
They are certainly not hoarders.

Where do knowledge, evidence  and sincerity end and motiveless malignity begin?

Must be on prime time!