A global short supply of rigs and strict domestic anti-corruption guidelines are hurting exploration and production activities of state-run Oil and Natural Gas Corp. Ltd, or ONGC, its chairman and managing director has said. If unchecked, this could affect the company’s ability to prospect for and produce oil and gas and hurt the country’s energy security.
According to the guidelines laid down by the Central Vigilance Commission, or CVC, a government body that monitors the financial transactions of state-owned firms, companies such as ONGC can enter into procurement contracts only through an open tendering process and not on the basis of negotiations.
Tough times: A file photo of ONGC chairman R.S. Sharma. (Photograph by Harikrishna Katragadda / MINT)
“The rise in crude prices has also resulted in exponential increase in the cost of exploration services such as trained manpower and rigs. We cannot hire rigs on a negotiated basis, while world over it is being done in this manner,” ONGC chairman and managing director R.S. Sharma said on Monday after declaring the company’s first quarter results for fiscal 2009.
Increased exploration activity has meant that rigs are in short supply globally. This has pushed up daily rentals for a deep-water rig to around $500,000 (Rs2.12 crore). Rent for an ultra-deep-water rig could go up to $550,000 (excluding service cost).
The shortage of rigs has already affected ONGC’s exploration and production plans and it has surrendered three of its 10 blocks in the Kerala-Konkan basin to the government. The company is now awaiting the delivery of a deep-water exploration rig for production from its deep-water block KG-DWN-98/2 in the Krishna-Godavari basin, off the coast of Andhra Pradesh.
“Putting the discovery into production depends upon the availability of the rigs. We expect to submit the development plan for the block within six months. There are around 85 shallow-water, deep-water and ultra-deep-water rigs in various stages of construction around the world,” Sharma added.
Worldwide, contractors are investing in drill ships to meet rising demand from oil and gas companies that are pumping money into exploration activities following a surge in oil prices. Yards in China, Singapore and the US are operating at near-peak capacities, but are still unable to cope with growing demand.
The paucity of rigs had forced the government to delay the seventh round of New Exploration Licensing Policy, or Nelp, where exploration blocks are auctioned.
“The rig market is entirely a suppliers’ market and involves a significant amount of negotiations. Firms are not being able to tie-up for rigs because the existing rig users are extending their contracts keeping in mind the shortage in the market,” said Prayesh Jain, an analyst at research firm India Infoline Ltd.
India’s long-term objective of tapping all its oil and gas resources in the interests of its energy security will suffer on account of this shortage of rigs, particularly the deep-water ones. The demand for deep-water rigs, however, is likely to ease out in 2009-10 when 57 new rigs are due for delivery.
Analysts say energy security is the key to India’s ability to sustain growth of an economy that expanded by 9.4% last year and could grow by at least 8% this year. They add that the exploration efforts, if successful, could cut the flow of dollars out of the country. India imports almost 70% of its oil and gas requirement.