There are reports of Oil and Natural Gas Corporation [ONGC] – a central public sector undertaking in the upstream oil & gas sector – picking up a majority stake in gas assets of Gujarat State Petroleum Corporation [GSPC] – an undertaking of Gujarat government – in Krishna-Godavari [KG] basin near coast of Andhra Pradesh. GSPC was awarded the high profile KG-OSN-2001/3 field in the second round of the new exploration and licensing policy [NELP].
Critics are branding this as an attempt by Modi – government at the centre [it was Narendra Modi who as then, chief minister, Gujarat in 2005 had announced discovery in this area with in-place reserves of over 20 trillion cubic ft] to bail out GSPC which is struggling to bring this in to production having spent billions of dollars funded mostly by bank loans amounting to Rs 20,000 crores.
Congress leader Jairam Ramesh and minister under UPA – dispensation has gone that far to smell an alleged scam in implementation of this project saying there is hardly any gas in the field and even alluded to the possibility of the entire loan getting converted in to non-performing asset [NPA]. Now, with ONGC picking up stake in GSPC, he has again red flagged the issue noting the proceeds could be used to pay-off latter’s loans.The criticism is not based on facts.
At the outset, exploration and production of oil & gas is a highly capital intensive and highly risky venture. The risks and associated cost are greater in deep and ultra-deep water areas with high pressure and high temperature [HPHT]. The KG-OSN-2001/3 field falls in this category. It is therefore, no wonder that lot of money has been spent in its exploration and development and it will take some time before commercial production starts.
Ramesh’s statement that there is hardly any gas in the field is figment of imagination. The ministry of petroleum and natural gas [MPNG]/director general hydrocarbon [DGH] had approved its field development plan [FDP] with in-place reserves [I-PR] of 10 trillion cubic feet [tcf] and recoverable reserves [RR] of 2 tcf. However, GSPC own estimate is I-PR 14.4 tcf and RR to be 7.6 tcf. A recent assessment made by ONGC puts the RR at 3-3.5 tcf.
There is nothing unusual about variations from intial projection; it reflects the overall industry pattern globally as well as in India. For instance, in case of KG-DWN-98/3 [or KG-D6 in short] operated by Reliance Industries Limited (RIL), as per FDP submitted in 2004, I-PR and RR were estimated at 5.45 tcf and 3.81 tcf respectively. However, in an ‘addendum’ to FDP submitted in 2006, the numbers were increased to I-PR 12 tcf and RR 10-11 tcf. In 2012, these were drastically reduced to 2.9 tcf and 1.9 tcf respectively.
For KG-DWN-98/2, operated by ONGC, according to the original declaration of commerciality [DoC], the field had 1.7 tcf of I-PR of which 1.2 tcf could be recovered. However, according to De-Golyer and MacNaughthon [consultant appointed by Union government to determine alleged cross-over of gas from ONGC fields to that of RIL], the I-PR are 0.9 tcf and RR at 0.5 – 0.6 tcf [the lower figure 0.5 is based on diversion of 0.4 tcf to neighboring KG-D6].
Even taking RR at 2 tcf or 54 billion cubic metre [bcm] [37 cubic ft = 1 cubic meter] – as approved by MPNG/DGH – and the price of gas at US$ 7 per million Btu [as per guidelines issued in March, 2016, deep and ultra-deep water/HPHT areas are eligible for an incentive price that works out to almost double the normal price], this would yield a revenue of about US$ 15 billion [4 mBtu = 1 million kilo calories & 1 cubic metre = 0.01 mKcl] or Rs 100,000 crores.
This would be more than enough to amortize the investment and yield good return thereafter. Going by RR 7.6 tcf as projected by GSPC, the revenue would be US$ 57 billion or Rs 382,000 crores thereby making the venture to be very attractive [even at RR 3.5 tcf assessed by ONGC, this would be US$ 26 billion or Rs 175,000 crores]. In this backdrop, pick of a majority share by ONGC in GSPC, far from being a sell-out by former, as alleged, will be a win-win for both.
There are enough synergies that both companies can exploit to mutual advantage. For now, the investment by ONGC will help GSPC tide over its cash flow problem [still it needs to put in US$ 1-1.5 billion to complete remaining work in progress] thereby accelerating the pace of bringing the field to commercial production. ONGC too has a lot to gain by expediting extraction of gas from its own field KG-DWN-98/2 which is just about 15 km from GSPC’s field.
If, ONGC were to go alone, it will have to build a 65-km pipeline to the shore from its fields and then build infrastructure for development and operations. This means that gas from its fields cannot flow before 2018 besides entailing a spend of about Rs 13,400 crore. This money can be saved and time frame compressed by 2-3 years if it lays a 15-km pipeline to take the gas to GSPC’s platform and from thereon, it uses latter’s infrastructure to move it to onshore.
The RRs of KG-DWN-98/2 are down to 50% of original estimate. On a stand alone basis, this will affect financial viability of the field. On the other hand, it will make good economic sense if ONGC/GSPC jointly take up development of their respective fields pooling infrastructure, manpower and technology [for instance, GSPC has ‘fracturing’ technique and ONGC strength in manpower which can be gainfully employed for mutual benefit].
Currently, India imports more than 50% of its gas requirements and with increasing demand, the shortfall will only increase. Therefore, it is imperative that time frame for getting gas from both fields is compressed to maximum extent possible. From this perspective also, the two companies need to pool their resources. Fast tracking project execution will also help in reducing cost due to rock bottom prices of equipment and services [courtesy, low crude price leading to large-scale cut-back in exploration and production activity globally].
The petroleum and natural gas minister, Dharmendra Pradhan has given his endorsement of the proposed move by ONGC which makes perfect business sense promising good returns for both the companies and helping India’s progress towards energy security. Union government and the state should now take all necessary steps to ensure that the deal is consummated fast.