NEW DELHI: The oil ministry’s move to disallow Reliance Industries (RIL) recovery of $1 billion cost at its KG D6 block until gas production improves, is unlikely to hurt the company significantly. For the government, the move at this juncture would mean an immediate revenue flow of $100 million as its share of profits from the venture.
The government wants RIL not to recover the $1 billion cost in the two years when gas production fell below target (2010-11 and 2011-12) and add the disallowed cost to the profits of those years. Under the production sharing contract (PSC), profits are required to be shared with the government according to a formula.
So, even after disallowing the cost, Reliance would still get 90% of such incremental profit ($900 million) as its share of profit petroleum without any delay. The remaining $100 million would, of course, go to the government cumulatively for the two years, said a government official, quoting the PSC’s terms.
If the government had not attempted to restrict cost recovery, it would not have got even this $100 million right now. For the company, the difference is only of $100 million over the above two years. So, the dis-allowance would have only a marginal, temporary impact on both the government and the company.
In its notice issues last week to restrict RIL’s cost recovery proportionate to the use of infrastructure built, the ministry said the company under-utilised the facilities. RIL considers this wrongful denial of cost recovery which is unwarranted and violative of the PSC.
Production, which exceeded the targeted 27.6 million metric standard cubic metres (mmscmd) in 2009-10, faltered subsequently and has now dropped to 27 units against the targeted 80 units, for which the government blames RIL’s unfulfilled drilling commitment. RIL thinks drilling more wells goes against ‘well economics’ – that is, economically unviable unless the geological challenges affecting production are fixed.
As per the contract, RIL is entitled to recover cost from 90% of the revenue in the initial years of production, sharing the remaining 10% with the government a 9:1 ratio. If $1.005 billion is disallowed as recovery of costs, the same is added to the profits to be shared, most of which would go back to RIL. Once the costs are fully recovered, the investment multiple (how many times the earnings are compared to the investment) would turn in government’s favour and as it touches 3.5, the state would get about 85% of profit petroleum, leaving the rest to the company, said another person privy to the contract terms. The proposed restriction on cost recovery in the initial years of production could only marginally boost the government’s share of profits, while it could delay the change in profit-sharing ratio. The oil ministry on Friday clarified that its direction to the company only requires it to defer cost recovery till gas production is raised to the targets committed.
RIL stated on Friday that a contractor is entitled to recover all of its costs under the terms of the PSC and that there are no provisions that entitle the government to disallow recovery of any contract cost as defined in the PSC. The ministry’s notice to RIL said the company has so far recovered $5.25 billion of the $5.69 billion spent on developing the field.
The oil ministry’s move to restrict cost recovery follows the Comptroller and Auditor General ofIndia’s observations last year on the management of the field. The statutory auditor had said the increase in the capital expenditure from $2.39 billion to $8.8 billion for the D1 and D3 discoveries in the K G basin “casts doubts on the robustness of the data and assumptions underlying the development plan.”
The CAG also said the auditor could not derive assurance regarding the reasonableness of the cost incurred with respect to the large procurement contracts made by RIL in 2006-07and 2007-08 due to lack of adequate competition and major revisions in their scope, quantities and specifications. Industry executives say there are very few reliable players in certain oil field services, whom exploration companies could depend on. If the few bids received from them are not accepted in time, the exploration firm might be delaying the operations and risking further cost escalation as the audited years were marked by the global commodity boom. RIL has reiterated that it remained committed to complying with the PSC provisions and procedures including adopting good international petroleum industry practices in its operations.
GOVT POLICIES NO BIG PUMP-UP FOR OIL REFINERS
NEW DELHI/LONDON: Refining hub! Sounds good. But only on paper, says the domestic oil refinery and retailing industry.
The lack of a regulatory level playing field at home means the industry’s options are constrained, and not necessarily driven by profits or choice.
Indiais well positioned to be such a hub: Refining capacity is close to 213 million tonnes and by March 2017, it should exceed 310 mt, with modern refiners being able to churn out products that match the highest international standards.
In 2011-12, the country earned $58.23 billion from petroleum product exports, up from $43.34 billion in 2010-11, overtaking the equivalent figure for gem and jewellery exports.
In Europe,Indiais already the third largest foreign supplier of petrol and diesel, supplying 110 kb/d (thousand barrels/day). But well behind theUSandRussia, which supply 390 and 380 kb/d, respectively, according to data from Wood Mackenzie.
Both in Europe and theUS, where a number of domestic refiners have been forced to close down — as weak margins have hindered their ability to invest and upgrade — there are opportunities forIndiato increase its exports even further.
“Many European refiners are not as sophisticated as the new refiners inIndiaand theUS, which can produce well to European specifications. And the costs inEuropeare rising,” says Mr Ehsan Ul Haq, Senior Market Consultant, at KBC Energy Economics.
He cites the example ofTurkey; its shift to European specifications in 2011 meant it was not able to get as much diesel of the necessary quality fromRussia, so got most of its imported diesel supply fromIndia.
Going forward, European demand fromIndiawill be for middle distillates, as dieselisation continues, says Mr Jonathan Leitch, Senior Analyst, Downstream Team, Wood Mackenzie.
“What we are going to see are more refinery closures and more imports toEurope, but this will be fairly gradual,” says Mr Simon Wardell, Director, Global Oil at IHS Global Insight.
While these opportunities exist,India’s policy is far from being even. While standalone refiners such as Mangalore Refinery & Petrochemicals Ltd and Reliance Industries are at an advantage as far as exports are concerned, the public sector companies — Indian Oil Corporation, Bharat Petroleum Corporation, Hindustan Petroleum Corporation, being integrated refining-cum-retailing entities — are compelled to cater to domestic demand first.
Adding to the problem is the Government’s domestic fuel pricing, which means that the private sector struggles to sell domestically.
Diesel, kerosene, and domestic LPG are sold at Government-controlled prices, below market rates, by public sector retailers.
This has put private retailers at a disadvantage, compelling them to either exit or shut down their retailing business.
Though petrol has been deregulated since June 2010, artificial Government control continues.
For the industry, selling products on the global market is not always as delectable, often requiring the players to absorb freight and other costs. Besides, almost 80 per cent of the exports take place through the traders.
Being a refining hub can only be a good thing, but the Government needs to create a level playing field and leave it to the companies to decide whether they want to tap the export market or sell only within the country.
TURF WAR BETWEEN COAL, PETROLEUM MINISTRIES, A STUMBLING BLOCK FOR METHANE EXTRACTION
KOLKATA: Everyone knows that coal methane can be a viable energy source in a gas-starved Eastern Region. The region arguably pays highest prices for gas in the country indicating demands far outstripping a few thousand cubic metres of coal-bed-methane supplies. But, that doesn’t make much difference to the officialdom in the Union Government.
For more than a year now a turf battle between coal and petroleum ministries is blocking way for private investment in harnessing nearly 25 billion cubic metre of methane from gassy mines. And, even if they arrive at a ‘consensus’ as in January 24 to pave way for such investments “within a month”, Babus simply forget to live up to their promises.
In April last year, CoalIndiadecided to invite private participation for extraction of methane from five extremely gassy underground mines in Jharkhand. According to the regulations set by the Directorate General of Mine Safety, high concentration of gas made underground mining “unsafe” in the identified assets.
A tender was soon floated to pave way for extraction of methane and ensure safe underground mining of over 100 million tonne of medium grade coking coal. Used in steel manufacturing, coking coal is available in limited quantities inIndiaand is largely imported.
The tender has attracted expression of interest from a large number of private players fromIndiaand abroad engaged in coal seam exploration. They were ready to take the risk at no cost to CIL, provided they were allowed to market the gas to earn profit.
CIL actually borrowed the idea from a captive miner in Jharkhand who struck a similar JV but could not take it forward due to resistance from the officialdom.
The proposal was resisted by the ministry of petroleum and natural gas (MoPNG) which felt that the tender was overlapping in nature with CBM Policy and, should not be awarded without the requisite approval from the upstream regulator under the ministry.
The coal ministry, on the other hand, felt that the ambit of the CBM Policy does not include the CIL leasehold area. Also, in line with the Mining Act there was no space for a second “licensee” in a particular mining leasehold area.
In continuation to the never ending deliberations, the secretaries of two ministries met again on January 24. According to the available minutes, it was decided that the “MoPNG would prepare a cabinet note (for a separate policy formulation ensuring mine methane extraction) in consultation with coal ministry in the next 30 days and take it to the cabinet for its approval.”
Leave alone submission of any such proposal, sources told Business Line that the elusive note was still under preparation.
CIL, in the meantime, is understood to have been verbally asked to start working again on the tender. The pep-talk, however, has little impact as the company cannot award tenders in the absence of clear approval on commercial issues from coal ministry.
VECTRA’S ABSENCE MAY HIT OIL PRODUCERS
MUMBAI: Home ministry has withdrawn security clearance to Global Vectra Helicorp Ltd, a provider of charter services
It may be called a collateral damage. After hitting the country’s defence establishment, Vectra Group may have an impact on the oil and gas industry.
The ministry of home affairs (MHA)’s order to withdraw security clearance to Vectra Group’s aviation subsidiary, Global Vectra Helicorp Ltd, may impact the offshore operations of state-run Oil and Natural Gas Corporation (ONGC), Gujarat State Petroleum Corporation (GSPC), Reliance Industries (RIL) and British Gas (BG).
The companies are now looking at optimising operations to avoid impact to critical operations. “The move may impact our operations. We have our contingency plans in place, wherein we may seek help from our other service providers to press for more machines in service,” said a senior ONGC official, on the condition of anonymity.
Sudhir Vasudeva, ONGC’s chairman and managing director, refused to comment on the development and its impact on the company. “I have not seen any such order so far. I do not want to comment,” he said.
Exploration and production companies have two types of operations, process platform and drilling, for which they seek services of players like Global Vectra and Pawan Hans. These players help shuttle engineers or officials to process platforms and back.
Civil aviation secretary Nasim Zaidi confirmed the home ministry had withdrawn the security clearance to directors of Global Vectra Helicorp Limited. He said the Director General of Civil Aviation (DGCA) would take appropriate action in the matter but refused to elaborate. DGCA
E K Bharat Bhushan said he was still to receive a letter from the civil aviation ministry in this regard.
ONGC has eight helicopters from Global Vectra, providing services to its offshore facilities. Pawan Hans Helicopters Limited, where ONGC holds 49 per cent stake, has 12-13 helicopters operating for ONGC.
For about a decade, Global Vectra and Pawan Hans have been providing offshore helicopter services to ONGC. Contracts cover flying of staff from Juhu airport in Mumbai to offshore platforms and flights between various rigs. Earlier, Global Vectra had the contract of transporting staff from Juhu to the platforms but this year it was selected for both airport platforms and intra rig flights. Global Vectra provides sixBell412 and AW 139 helicopters.
In 2010, ONGC introduced a condition that helicopters used for offshore flights have to be less than five years old, said an official in the know of the decision. Due to which, several of Pawan Hans’ Dauphin N helicopters couldn’t be used for offshore activities, as most are 15-20 years old.
Last year, Pawan Hans acquired seven new Dauphin N3 helicopters as part of a fleet augmentation plan and these choppers are now being used for offshore services.
Executives of RIL, GSPC and BG said this move on the government’s part would impact their operations but refused to divulge further details.
“It is not that these exploration and production companies will not have a solution. Temporarily, there could be a slight impact on their operations. But there will be no vacuum. They could look at other service providers to fill the gaps till new contracts are issued,” said a senior executive from a helicopter charter company.
A civil aviation ministry official said Pawan Hans might have to operate additional flights if Global Vectra’s operations are suspended. Pawan Hans has an operational fleet of 45 helicopters.
Home ministry clearance is required for appointment of board members in airlines or non-scheduled operators, including charter companies. In the absence of a valid security clearance, the DGCA permit would stand suspended, aviation sources said. Ravinder Kumar Rishi of the Vectra Group resigned from the directorship of the company in November and his daughter, Swati Rishi, was inducted in the board.
INDIAN TRADE WITH ENERGY STARVED NEPAL UNDER TROUBLE
SILIGURI/DHULABARI(Nepal): Severe power and oil shortage inNepalis causing severe downfall in its own economic activities as well as bilateral trade withIndia, its largest trade partner. Many Indian beneficiaries are also victim of the situation.
Since the two neighbors signed bilateral trade treaty in 1996, along with its industrial activities,Nepal’s exports toIndiahave grown eight times while its import fromIndiadoubled up. According to Trade and Export Promotion Centre of Nepal statistics,India’s annual official export toNepalis of INR 19,000 crore against import of INR 3,100 crore.
But the trend has taken a downturn. Despite having 42,000MW economically viable hydropower potential,Nepal’s present production is even bellow 1000MW, much lesser than its need. The shortage forces the country’s national power monopoly, Nepal Electricity Authority, to impose mandatory load shedding for even 12 hr a day. Petroleum products are also always in short supply due to irregular payment to its only oil supplier Indian Oil Corporation.
“No power, no fuel, running the show has become too difficult. Over 40% industrial operations are now almost dead. Entrepreneurs, traders and investors from both the countries have become victim of the situation,” said the traders,” said Federation of Nepalese Chambers of Commerce and Industry (FNCCI) members.
“Administrative stability is a must for us to go full fledged in our business activities. And that is missing here,” said Mr. B. Jalan, a veteran businessman of Dhulabari, main indo-Nepal trade center in eastern Nepal adjoining to West Bengal in India.Nepalhas failed to have a stable Government after downfall of century old monarchy in 2006.
“Government’s repeated assurance for ‘peaceful business environment’ could not make business community confident enough. As a new trend, traders, entrepreneurs have started shifting in border adjoining towns like Siliguri after liquidating their assets inNepal,” they said.
“The large scale outbound trend of people with huge cash in hand fromNepal’s commercial sector is bound to influence the socio economy in nearby towns like Siliguri. And it is not likely to be always positive. The issue needs immediate diplomatic level intervention,” said Indian exporters engaged in trade withNepal.
INDIA INC HOLDS ON TO ITS CASH
MUMBAI: “Cash is king” is an old expression and Indian companies seem to be following it to a tee.
Sample this: 10 Indian companies are holding as much as Rs 2.34 lakh crore. The companies include Reliance Industries (RIL), Infosys, CoalIndia, CairnIndiaand ONGC, among others. Almost one-third the amount, or Rs 70,252 crore, is held by just one company — RIL. The amount is 19.5 per cent of the company’s annual revenue.
Infosys’ Rs 20,591-crore (around $4-billion) cash represents 61 per cent of the company’s sales for the year. OilIndiawas sitting on Rs 12,589 crore of cash and cash equivalent in September itself. The number at 134.9 per cent exceeded its sales substantially.
No wonder, analysts are beginning to ask questions. While CLSA has written an open letter to Infosys CEO
S D Shibulal, others are asking companies like RIL and ONGC how they wish to deploy their cash.
“One of the reasons why large companies are holding cash is because they are unable to identify large projects and are, hence, unable to execute it fast enough. I don’t think it is a good idea to hold too much cash because the return on equity is reduced. They should look at investing instead, or go for buybacks or give better dividends. This applies to public sector companies, too,” said Rakesh Arora, managing director at Macquarie Capital Securities (India).
Globally, companies with cash often use it to buy back shares or go for acquisitions. RIL has recently announced a buyback of Rs 10,000 crore. Interestingly, RIL has debt almost equal to its cash and cash equivalent. On debt dues of Rs 68,259 crore, it pays interest of Rs 2,667 crore. While on a cash and cash equivalent of Rs 70,252 crore, the company earns Rs 4,414 crore.
Then, there is Infosys. “At over $4.1 billion, Infosys’ cash balance has multiplied 12 times in the last nine years. A number of reasons drive me to believe that cash accumulation is value-dilutive for shareholders and returning cash (either through dividends or buybacks) would be the correct thing to do. Cash on Infosys’ books is earning just a six-seven per cent yield, with implied cost of equity of 12-13 per cent. Infosys’ return on equity has also deteriorated significantly (down 15 percentage points over FY 06-12) due to this cash accumulation. This implies the benefits of the high margins Infosys has are not seeping down to shareholders due to its unwillingness to pay out the cash,” said Nimish Joshi in his report.
But, Infosys CFO V Balakrishnan believes holding on to cash makes sense. “It is a very interesting problem to have. Cash is a good thing to have, since we have seen volatility, economic uncertainty and changes in technology. When you have more cash, your ability to reinvest and come back to growth is very high. If we do not find the use for a longer term, probably we will look at paying back but not now,” said he, adding that cash was needed for possible acquisition targets as well.
Mohandas Pai, chairman, Manipal Global Education Services, and a former board of director of Infosys, said in the case of IT firms, having cash on the books was good, as they did not have real assets to leverage and it gave them greater flexibility.
He feels many Indian companies such as CoalIndia, ONGC and NMDC had plans to acquire assets globally, but except a couple, no one has been greatly successful. “My view is that global acquisitions are best done by borrowing abroad, as it lowers the cost of capital and gives protection against currency movements. On top of this, having cash on the balance sheet would obviously give bankers greater comfort,” added Pai.
In the case of ONGC, Sudhir Vasudeva, chairman and managing director, said, “We have reserves of Rs 11,000 crore, which will be used for operations, as well as international acquisitions for ONGC Videsh Limited.” The last acquisition the company made was of Imperial Energy inRussia, for $2.1 billion in 2009. The company recently announced it would invest Rs 600 crore in phase III of the redevelopment of the Mumbai High South Field.
But, investors and shareholders aren’t too happy with the situation. “It is a disadvantage to hold cash, especially if beyond a point it is not yielding into either expansion or new assets or projects. Cash will remain just as it is even after 10 years. Having too much also means the return on equity going down. If companies do not announce plans of cash deployment for one or two quarters, it’s fine. But if it continues for three-four years, then it’s a worry,” said Jagannadham Thunuguntla, head of research at SMC Global Securities.
Ideally, companies should keep cash to meet one year’s expenses, not expenses on purchase of raw material but expenses for running the enterprise, says Pai. Globally, too, companies are becoming more conservative with cash. The top 10 firms listed on the Nasdaq show they are sitting on cash and cash equivalent of $117.6 billion (over Rs 6 lakh crore).
“Ideally, firms should not hold on to cash for long. But after 2008, having cash on the books is turning out to be the most sensible thing to do. This is not true only for Indian firms but globally, too. Even Berkshire Hathway has huge cash. In such a macro environment, firms will prefer to hold on to cash,” said Sonam Udasi, head of research at IDBI Capital. He says after every five years, companies should look at this component and act accordingly.
THE DIESEL PRICING DILEMMA
Everyone knows it is heavily subsidised. Yet, any talk of a price increase in diesel raises the hackles of political parties. And amidst this chaos, expensive cars and SUVs are making the most of a hugely cheap fuel.
Oil companies are losing Rs 15/litre on diesel and are terribly concerned because it is already accounting for over 50 per cent of their projected losses of over Rs 2,00,000 crore this fiscal. Kerosene and cooking gas take up the balance but diesel continues to be the biggest area of concern because its use extends to a host of applications.
The transport sector is only a part of the actual problem. Thanks to the severe power crisis in many States, generator sets have become inevitable and need to be powered by diesel. Furnace oil, used in a variety of industrial applications, has given way to diesel which is a less expensive option.
“Diesel is being used just about everywhere and has got all of us extremely worried,” an oil sector official told Business Line.
In the automobile sector, petrol has virtually been relegated to the sidelines since it is dearer by a good Rs 25/litre. This differential could increase to Rs 30 if the oil companies have their way and go in for a petrol price hike in the coming weeks. When that happens, use of diesel in cars will literally shoot through the roof.
Automakers reckon that if this trend continues, diesel cars will account for 85 per cent of total sales which is catastrophic news for manufacturers like Honda whose lifeline is petrol.
Logically, the subsidy element on diesel should also be knocked off at one go in order to bridge this yawning gap with petrol but the Government can, at best, contemplate a hike of only Rs 3/litre. Even this will have the Opposition baying for its blood as was evident recently when the subject of diesel price deregulation cropped up.
As long as this inaction continues, use of diesel will continue unabated even as its supplier trio – Indian Oil, Hindustan Petroleum Corporation and Bharat Petroleum Corporation – is bleeding by the hour. It was all very nice for the Government to reiterate after the Budget that it would have to ‘bite the bullet’ on fuel pricing but reality is different.
Inflation is hurting households already and the fear is that a diesel price hike will only make things a lot worse. However, this impasse will only see losses piling up for the oil majors and there is no telling when the bubble will burst eventually.
IOC, HPCL and BPCL are already borrowing heavily and the combined figure is already in excess of Rs 1,30,000 crore. Officials of these companies are concerned that this will lead to an ‘Air India-like situation’ when banks will simply refuse to lend one day. “When that happens, we are dead and this is something the country just cannot afford at this point,” an oil industry executive said.
By the end of the day, it is the responsibility of the PSU oil marketing companies to ensure fuel supplies across the country. Their private sector counterparts like Reliance Petroleum and Essar Oil have no such obligation simply because they cannot afford to retail petrol or diesel at a subsidy. And even if they choose to, they are not eligible for a compensation mechanism like IOC, BPCL or HPCL. The best bet, therefore, is exports and this has emerged a profitable option for private players.
Clearly, the Government has a tough task on its hands. Its fiscal deficit projection of 5.1 per cent for 2012-13 could just go out of the window if the issue of fuel pricing is not taken up quickly. The oil companies have literally resigned themselves to the fact that nothing radical is likely to happen especially when petrol prices have remained untouched for months.
In June 2010, the Government had proclaimed that petrol would be removed from the administered pricing mechanism. Since then, its price has gone up by over 50 per cent but, of late, amidst stiff political protests, the companies have been asked to put off any further price increases. Little wonder, therefore, that they are sceptical about any revision in diesel prices.
“It is all very nice to maintain the status quo and pretend that nothing is wrong. However, it is only when each of the oil companies begins falling sick and fuel supplies are severely affected will people realise that paying more is a better option,” an oil sector official cautioned. By then, it could just end up being a little too late.
And tough times are here to stay. Global crude prices are already averaging $115 per barrel and show no signs of cooling off. The need of the hour is some tough talking from the Government. There are no indications of this happening for sometime now.
OIL DRILLING FIRMS FACE SEA OF TROUBLES IN KG BASIN
MUMBAI/AHMEDABAD: Once seen as the solution toIndia’s energy problems, theKrishna-GodavariBasin’s gas reserves, and the companies that have drilled there, are in a sea of troubles with mounting uncertainty over government policy and question marks about how much gas can be extracted.
Apart from Reliance Industries Ltd, which has surrendered a block in KG Basin and has seen output from the prolific KG-D6 block almost halve in two years to 35 mmscmd, state-run firms Oil and Natural Gas Corp (ONGC) and Gujarat State Petroleum Corp (GSPC) have also struggled to deliver in the deep-sea region, which requires specialised technology and equipment. Reliance’s output has fallen to about 34 mmscmd instead of rising to 80 mmscmd, and the company has been sternly treated by the Director General of Hydrocarbons and the oil ministry, but other companies have either not started production or are pumping tiny quantities of oil and gas, much behind schedule.
ONGC’s GS-15 field in the KG Basin is producing barely 0.19 mmscmd of gas and 9,400 barrels of crude oil per day. ONGC was slated to start production from the GI block by July 2012, but now that could be delayed. “Due to operational issues, production from the GI block could be delayed,” ONGC chairman Sudhir Vasudeva told ET. In 2004, ONGC had declared that G1 and GS15 would beIndia’s first “digital fields” with “smart wells” and contracts had been awarded to develop them.
Gas output from both these fields, being developed at a cost of 1,200 crore, was slated to go up to 1.52 mmscmd from July this year and 1.72 mmscmd in 2013-14. G-1 and GS-15 are small fields that were awarded to ONGC on a nomination basis, but the company also has a bigger block, KG DWN 98/2, RIL’s D6.
ONGC says the block holds 25.61 MT oil and 197 billion cubic metres of natural gas. It plans to invest $7.3 billion to develop the block, but this would take more time. It has sought permission for more exploratory work to assess the full potential of the area before submitting a concrete field development plan.
The block also hasIndia’s deepest offshore gas discovery UD-1, where ONGC plans to spend $2.89 billion to produce about 20 mmscmd after its starts production by 2016-17. The company is seeking foreign partners. “Apart from ENI and BG we have invited a lot of companies and should be announcing a partnership soon,” said SV RAO, director, exploration.
Another company that began its KG Basin story with a big-bang announcement is state-run Gujarat State Petroleum Corp. In 2005,Gujaratchief minister Narendra Modi said the company had discovered 20 trillion cubic feet (tcf) of reserves in the basin, or twice as much as RIL’s two producing gas fields. Production was expected to start in 2007.
Five years after the expected start of production and several missed target dates – once because of a fishermen’s agitation – GSPC hopes to start producing gas in July 2013, from scaled-down reserves of 2 tcf from a part of its block in the KG Basin. Its cost has risen from $1.6 billion to $2.3 billion.
“GSPC is struggling with high temperature and high pressure in the KG Basin,” a company executive said. Industry experts say that deep-sea production, which began inIndiawith RIL’s D6 block, requires frontier technology and involves huge risks.
GSPC is now borrowing funds from financial institutions and exploring possibilities to bring in strategic partner. GSPC is at logger heads over terms of payments with its Canadian partner GeoGlobal Resources.
Another significant producing asset in the basin is the Ravva field of CairnIndia, ONGC, Videocon and Ravva Oil. It was originally estimated to produce 101 million barrels of crude oil but has produced around 245 million barrels of oil and 330 bcf of gas. CairnIndia, the operator of the block, is optimistic about future production.
The on-shore areas of the KG Basin have also seen a lot of activity. Cairn India recently announced that two reservoirs in its KG-ONN-2003/1 block where it holds a 49% stake and ONGC has a 51% stake, have reserves of around 550 million barrels equivalent of in-place oil and gas. “This is the most significant onshore oil discovery to-date in the KG basin and establishes a significant potential for the operators,” said a source close to the developments.
“The Nagayalanka SE discovery is the largest oil discovery in the onshore part of the KG basin to date, 2 successive oil discoveries in the block establish significant potential in the KG basin. This is the first time that such a thick oil bearing pay has been encountered in the onshore part of the KG basin. The oil is very light and of low viscosity. The second phase will conclude in August this year,” the source added.
State-run OilIndiatoo is planning to take up exploratory drilling in its on-land block KG-ONN-2004/1 in the KG basin in the first quarter this fiscal.
NORWAY‘S STATOIL SIGNS ARCTIC DEAL WITH RUSSIA’S ROSNEFT
MOSCOW—Norway’s Statoil STO -2.47% ASA on Saturday signed a deal with Russian
state oil company OAO Rosneft to developRussia’s mostly untapped offshore energy resources in theArctic, in a venture that could require an investment of as much as $100 billion over decades.
Statoil joined U.S.-based Exxon Mobil Corp. XOM -1.26% andItaly’s Eni SpA,
E -2.47% which have signed similar deals, in the scramble for the Russian Arctic, followingMoscow’s approval of long-awaited tax breaks for the potentially rich offshore fields.
Russiafaces declining production from its traditional oil regions and is eager to attract Western energy companies with money and expertise to develop the country’s Arctic shelf. Russian President-elect Vladimir Putin, who was at the signing ceremonies for all three deals, has actively supported the opening of the shelf to foreign companies.
People familiar with the matter saidRussia’s energy czar, Deputy Prime Minister Igor Sechin, who isn’t expected to join the new Russian government set to be unveiled in coming days, had a prominent role in securing the agreements.
Statoil’s deal is similar in structure to those Exxon and Eni signed with Rosneft. Statoil will set up joint ventures with its Russian partner to develop fields in the Barents Sea andSeaofOkhotsk, holding 33.33% in each. Statoil is to pay all costs for exploration, while Rosneft may get stakes in Statoil projects inNorway’s offshore zones.
“Partnership between Rosneft and Statoil will contribute significantly to the development of economic relations betweenRussiaandNorway, signifying a new era of unprecedented levels of trust,” said Rosneft President Eduard Khudainatov. The deal followed the final demarcation of the sea border betweenRussiaandNorwayin 2011.
“This agreement is at the core of our strategy, supporting our long-term growth ambitions,” said Helge Lund, chief executive of Statoil, in a statement.
The licenses, the Perseevsky in the Barents Sea and the Kashevarovsky, Lisyansky and Magadan-1 north ofSakhalinIsland, cover an area of more than 40,000 square miles, and may demand an investment of between $65 billion and $100 billion over several decades.
Statoil was one of the first Western oil majors to open an office inMoscowafter the collapse of communism. Until recently, however, it has failed to secure any big deal in the country.
Statoil, together with Total SA FP.FR -1.78% of France andRussia’s Gazprom, is set to
develop the Shtokman liquefied-natural-gas project off the Russian Arctic Circle, but the project has suffered several delays on the investment decision.
The deal signed Saturday “has been discussed for some time, and it’s really good that it’s finally done,” Troika Dialog analyst Valery Nesterov said, adding that the fields “are not at all bad for exploration”
“It’s a sign thatRussiais eager to intensify exploration at the Arctic shelf, and is trying to minimize risks by diversifying the partners,” he added.
Another Western player, BP BP.LN -3.11% PLC, is also interested in participating in
Arctic projects inRussia. The company may only invest inRussiathrough TNK-BP, its 50-50 joint venture with a group of local billionaires, in order to avoid violating a shareholders’ agreement. Last year BP’s Russian partners forced the company to give up an Arctic exploration project and share-swap deal with Rosneft.
Chris Einchcomb, TNK-BP’s senior vice president of exploration and appraisal, said the company responded positively to Rosneft’s invitation to participate in the Arctic projects. “We look forward to starting working-group meetings with Rosneft in the nearest future,” he said, adding that the company is able to bring in BP’s and its own offshore experience.
OAO Lukoil,Russia’s largest private-sector oil producer, also has expressed interest in a venture with Rosneft on the shelf.
IRAQ TOPPLES IRAN, BECOMES 2ND LARGEST CRUDE OIL SUPPLIER TO INDIA
NEW DELHI: The pressure of US sanctions onIranis evident with Indian refiners shifting attention to other crude oil producing nations. ThoughIndiahas been maintaining that it is not reducing imports fromIran, the import numbers for 2011-12 tell a different story.
Supplies fromIraqandKuwaithave seen a significant increase, even asSaudi Arabiamaintained its position as the largest supplier. Till now,IranwasIndia’s second-biggest crude oil supplier afterSaudi Arabia, meeting about 12 per cent of the country’s needs, but the position has been taken over byIraq.
Domestic refiners such as Hindustan Petroleum Corporation, Mangalore Refinery and Petrochemicals Ltd and Essar Oil are expected to cut sourcing fromIranby at least 10 per cent. Bharat Petroleum Corporation has already stopped sourcing.
According to industry observers,Iraqhas emerged as the next major supplier as two big domestic refiners — Indian Oil Corporation and Reliance Industries — source their crude oil from there.
Sourcing fromIranmay see a further drop after June, unless there is a diplomatic intervention. India is hosting the US Secretary of State, Ms Hillary Clinton, starting Sunday (in Kolkata) followed by two days in New Delhi, sources said.
Indian refiners imported 171.41 million tonnes of crude oil in 2011-12. Of this, 32.63 mt came from Saudi Arabia, 24.51 million tonnes from Iraq, 17.67 mt from Kuwait, and 15.79 mt from UAE (14.706 mt in 2010-11).
The sanctions also made payments for supplies fromIrandifficult. A third-country payment mechanism was worked out. Indian refiners paid for their Iranian oil imports throughTurkey’s Halkbank. But, there is a fear that this system may collapse because of the newUSsanctions.
A method was also worked out wherein National Iranian Oil Company would accept a share of the payments in rupees in an account opened in UCO Bank. However, the 40 per cent withholding tax component made the mechanism a non-starter. Domestic refiners had refused to shoulder the additional tax burden, which made sourcing fromIranvery expensive.
In the Budget for 2012-13, the Government stepped in to exempt tax on payment received by a foreign company in Indian currency on account of sale of crude oil to any person inIndia.
However, certain conditions would have to be met before benefiting from the tax exemption.
US EYES MORE CUTS IN INDIA’S OIL IMPORTS FROM IRAN
DHAKA: US Secretary of State Hillary Rodham Clinton will use a two-day visit toIndiathis week to urge further reductions in Indian imports of Iranian oil.
A senior official traveling withClintoninBangladeshahead of her arrival inIndiaon Sunday said the matter will be at the top of the secretary’s agenda in talks with Indian leaders.
India, which has tremendous energy needs to fuel its rapid growth, has made some progress in easing its dependence on Iranian oil, but the official said theUSwants to see more.
The official, who spoke on condition of anonymity to previewClinton’s private discussions in Kolkata andNew Delhi, said the “trend lines are good” but “we really need to receive assurances that they are going to continue to make good progress.”
The official noted that India had recently stepped up imports of oil from Saudi Arabia to make up for the reduction in Iranian oil and that the US was eager to see the Indians explore other alternatives.
Like other major consumers of Iranian oil,Indiacould face US sanctions by the end of June if the Obama administration determines it has not made significant cuts in imports under a law aimed at squeezingIran’s petroleum industry to press the country to comply with international demands over its nuclear program.
A dozen European nations andJapanhave already been spared from those sanctions after the administration determined they had substantially reduced their Iranian oil imports.India, along withChina,South Korea,TurkeyandSouth Africahave still not received such waivers.
TheUSspecial envoy for global energy issues, Carlos Pasqual, will visitIndialater in May to follow up onClinton’s talks, the official said.
Because of its energy needs,Indiahas bristled at US calls to seek alternatives to cheap Iranian oil. The official said the Indian parliament is especially resistant to comply with demands fromWashingtononIran.
After visitingKolkata,India’s major eastern city,Clintonwill travel on Monday toNew Delhiwhere her visit will coincide with that of a major Iranian trade delegation seeking opportunities in the Indian market. TheUSofficial downplayed the presence of the delegation, which he said was centered on consumer goods. “I don’t think we are too concerned about it,” he said.
In her talks with Indian officials,Clintonwill also be pressing for the country to continue economic reforms and trade liberalization, including dropping restrictions on foreign investment in the finance sector and allowing large western retailers to open up, the official said.
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