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Press Release [FREE Access]
Petro Intelligence » Promise Of Free Gas Pricing: Trigger For RIL-BP Announcement?

by R.Sasankan

Bob DudleyWhen BP’s chief executive Bob Dudley and RIL’s supremo Mukesh Ambani unveiled plans to invest $6 billion to develop three fields at KG D6 in the Krishna Godavari basin, the announcement was as intriguing as it was dramatic.

The announcement came at a time when the very survival of RIL-BP alliance itself has been a subject matter of intense speculation. In 2011, BP acquired a 30 per cent stake in multiple oil and gas blocks operated by Reliance Industries including the KG D6.

RIL has retired almost its entire brains trust in the upstream sector since the production collapse in D1, D3 fields of KG D6. The only remaining expert, Ajay Khandelwal, has not had much opportunity to show his prodigious talent since conducting the drill stem test (DST) for the remaining small discoveries in the KG D6 about three years ago.

Mukesh Ambani has been busy with Reliance Jio, a huge telecom project that has consumed his entire attention in the intervening years. The RIL chieftain hates distractions when he is grappling with the challenges thrown up by a prestigious project – especially when the gas venture had started to assume the hue of an irksome misadventure.

Mukesh AmbaniThere were unconfirmed reports that Mukesh Ambani was fed up with the gas sector and did not want to waste his time and energy on it again. He felt let down by his upstream experts, international consultants and even by some of the service companies. He is still wrestling with a slew of arbitration suits, the latest being the charge of sucking out ONGC’s gas from the adjacent field. Thus, there was every reason for Mukesh to feel disgusted with the gas sector even though RIL made money from its investment in KG D6.

RIL had produced gas at a cost of $ 1/mmbtu, a remarkable achievement for a new upstream player. Niko, the Canadian 10 per cent stake holder in KG D6, had also made profits. It was BP which almost completely lost its investment. BP’s entry had coincided with the production collapse in KG D6. BP had invested $ 7.2 billion in RIL’s 21 PSC blocks. That may be peanuts for BP but it is a huge amount in terms of foreign investment in India.

So, the sudden announcement of plans for the integrated development of three fields which include – a dry gas development project at water depths of more than 2000 metres with a sub-sea tieback to the existing control and riser platform off Block KG D6 – raised more than a few eyebrows. It is claimed that the project can produce 30 million cubic metres of gas a day, coming on stream in 2020. Field Development Plan, however, will have a more reliable production figure.

Dharmendra PradhanBP and RIL are giants and cannot be expected to be attracted by the paltry reserves that these three fields hold at a time when gas market internationally is facing an unprecedented glut-like situation. Bob Dudley said the plan was to invest $ 6 billion to develop 3 TCF reserves in these three fields. What could have prompted this decision? Yes, the consortium, which includes Niko, is entitled to a premium price as KG D6 happens to be a deep water block. But the premium price itself looks small in the prevailing market conditions as it is linked to various factors including the price of crude. Indications are that gas price in future could slide.

Both Ambani and Dudley are business geniuses. They would not have made such an announcement without making some deeper calculations whose outcome they cannot be expected to disclose at this stage. The $ 6 billion investment will not be made tomorrow. A detailed feasibility report has to be carried out, followed by a Field Development Plan (FDP) which will have to be vetted by the DGH. By international standards, the entire exercise should take at least one year. By then, Mukesh Ambani may find the time and space to devote attention to something else as the 4G telecom project starts to stabilise.

The two honchos must have already made a rough financial calculation. They must have also been convinced that decent profits could be made from the gas venture only if the existing gas pricing mechanism is dismantled. The gas sector has to be freed from pricing controls so that domestically produced gas can compete with imported LNG. Domestic gas can be hugely profitable even if sold at price slightly below the delivered cost of regasified LNG.

Prime Minister Narendra Modi would not go back if he has given such an assurance to these business leaders. There is nothing objectionable in such a move as quite a few expert committees have already recommended the need to free gas prices. An official announcement to this effect can be expected in the not-too-distant future.

The Production Sharing Contract (PSC) provided for a transparent system of pricing. But this was undermined as a result of the legal battle between the two Ambani brothers, prompting the Supreme Court to direct the government to fix the price of gas as the hydrocarbon resource is a national wealth belonging to the people of this country.

The Indian market needs gas and there is no danger of a major commercial gas discovery. Even if there are a few such discoveries, the domestic market will still need gas. India’s petroleum sector badly needs a major positive development in terms of investment. The initiative for this is understood to have emanated from petroleum minister Dharmendra Pradhan who has a good equation with both the business leaders. Prime Minister Modi is appreciative of his role as petroleum minister. Pradhan has made a significant contribution to BJP’s recent electoral victories through the LPG penetration strategy.

There is no danger of history repeating itself in the new KG D6 fields. Production collapsed in D1, D3 fields as the estimated reserves did not exist. The RIL-Niko consortium claimed a reserve of 11 TCF and, on that basis, planned a peak production of 80 mmscmd. A willing DGH accepted the claim, albeit with a marginal reduction in total reserves. However, the then boss of the DGH informally claimed that the DI, D3 fields could produce up to 120 mmscmd. The rest is history.

BP’s first task was to correctly evaluate the reserves which it promptly did: reducing the estimate from 11 TCF to below 3 TCF. It was a clear case of experts taking Mukesh Ambani for a ride. He faced the humiliation stoically without blaming anyone in the team. History cannot repeat itself because the reserves of these fields were confirmed through a DST. RIL initially objected to such a stipulation but finally gave in. BP is now a 30 per cent partner. It cannot afford to see reserve estimates go wrong. It will also have a key role in selecting the right production process and the service providers.



To download the latest issue 'Volume 24 Issue 7 - July 10th 2017', click here
Petro Intelligence [FREE Access]
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Coal Bed Methane Resources in India
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State-wise GA-wise CNG Consumption during 2016-17
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India’s Gas Pipeline Status and the Initiatives
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Update : Capacity Utilization of LNG Regasifcation Terminals
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Coal Bed Methane (CBM) Gas Development in India
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CGD Factsheet as of March 2017
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Sector-wise gas consumption of domestic gas and RLNG - an update
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Update: Crude Price - Indian Basket
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Contribution of petroleum sector to exchequer
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Revised Hydrocarbon Reserves in India
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