Oil & Natural Gas Corporation, India’s biggest energy exploration company, has invested about $1 billion to operate what could turn out to be the toughest field on its hands, where the reserves have been drastically scaled down and the potential output is pegged lower than the initial estimates.
ONGC acquired an 80 per cent stake held by Gujarat State Petroleum Corp (GSPC) in the Deen Dayal West field and six other areas in the Krishna Godavari Basin off the country’s east coast, the state-owned explorer said on December 23.
While the company said the acquisition of operatorship rights in the block “fits well with the strategy of ONGC to enhance natural gas production from domestic fields” at a faster pace, there are indications that the field was not a viable option. ET has followed the at-times tense negotiations between the two companies over the past few months.
Now, there is evidence that the road ahead for ONGC will indeed be difficult and at variance with the lofty claims that have been made. The challenge for ONGC lies in the findings by Ryder Scott Petroleum Consultants, a Houston-based reservoir evaluation firm hired to certify the hydrocarbons present and recoverable in the KG-OSN-2001/3 block.
In a 100-page report submitted in November, Ryder Scott placed the gas reserves in the Deen Dayal West field at about 1 trillion cubic feet (tcf), a top official with direct knowledge of the matter told ET. One tcf of natural gas is enough to heat 15 million US homes for one year or generate 100 billion units of electricity.
“Initially, we were told by GSPC that gas reserves were around 14 tcf, then asked to work around 7 tcf. There is now an indication that around 1 tcf of gas present in KG-OSN-2001/3 block,” the official said, requesting anonymity.
Still, the gas may not be easy to recover as it is a difficult field, with extremely high temperature and pressure, the official said. “We have done due diligence for this deal,” AK Dwivedi, Director (Exploration) at ONGC, said after the board approved the acquisition. “We worked around reserves of 1.05 tcf and did due diligence around that. These were our estimates also.”
According to senior ONGC officials, Ryder Scott has also projected a gas recovery rate of about 19 per cent, against ONGC’s estimate of about 24 per cent. GSPC defended the deal, saying the field holds potential that ONGC is capable of exploiting.
“Yes, I know that it is a high temperature field, but with potentiality and gas recovery is possible with technique of hydro fracking. We have done that in adjoining field D4,” said JN Singh, Managing Director of GSPC.
“This is a fair deal for both ONGC and GSPC. Our infrastructure only is worth about .Rs 8,000-9,000 crore with undersea pipelines and onshore infrastructure. ONGC has the technical expertise and financial muscle, which we lack.” However, GSPC wasn’t able to start commercial gas production at the field even after investing over $3 billion and amassing Rs 20,000 crore of debt.
The road to the deal was a rocky one. ONGC will pay $995 million for the 80 per cent stake and operatorship rights for the field in KG-OSN-2001/3 block and $200 million for the six other discoveries.
Both ONGC and GSPC had differences over the quantity of reserves in the block, the amount of capital and the operating expenditure needed, prices for gas and condensate from the block and the discount rate to calculate the net asset value, according to official sources.
According to Singh of GSPC, who spoke to ET in October, the differences between the companies would be resolved because both “are government bodies.”
Top ONGC and GSPC officials confirmed to ET that meetings were held with petroleum ministry officials in December to work out the modalities of the deal. The main worries were the volume of gas reserves and the viability of the field, even as GSPC maintained that ONGC had the technical capability to develop the asset.
“We shared our concerns that gas reserves are less than 2 tcf against claims of 14 tcf – that also very difficult to recover. That it is not an economically viable option for us,” according to an ONGC official familiar with the developments in the deal.
T Natarajan, joint managing director of GSPC, said, “ONGC has the capability and resources to develop DDW field. They have also done their internal study.” Jake Rudock JerseyShare This