Mumbai: The above-average strike rate of Reliance Industries Ltd’s (RIL) in finding oil and gas is falling and coming closer to the global mean, with the prospecting efforts of India’s most valuable firm yielding positive results less frequently than before.
In deep water: RIL’s platform in the KG basin. The firm’s success rate in discoveries has fallen over the last three years.
Over the last three years, the success rate—the ratio of discoveries to the total number of wells dug—of the oil-to-yarn conglomerate has slipped from 62% to 49%, a number that sector experts say is closer to that of RIL’s global peers. However, the possibility of another prolific strike, such as the D6 block in the Krishna-Godavari (KG) basin, could cause a spike in the strike rate.
Analyst presentations posted by the Mukesh Ambani-owned firm on its website peg this rate at 62% consistently from end-2006 to end-2007, at 63% in the April-June quarter of 2008 and then, at 54% for fiscal 2009. While RIL has given no update on the number for the first three quarters of the current fiscal, a research report puts it at 49%.
In a 17 February note titled “Tempering E&P (exploration and production) Expectations”, Avadhoot Sabnis, an analyst with ABN Amro Bank NV India, wrote that RIL had “announced 44 discoveries after drilling 89 wells (to date), indicating a success rate of 49%, which is higher than the industry average, but much lower than its initial rate”. ABN Amro is a part of the Royal Bank of Scotland NV.
RIL’s public relations agency didn’t respond to emailed questions.
The global industry average for the discovery-to-wells dug ratio was around 35%, said another Mumbai-based energy analyst with a foreign brokerage who declined to be identified.
The diminishing returns on exploration activities are not peculiar to RIL. On 25 February, Bloomberg reported that Chevron Corp., the second largest energy firm in the US, saw its drilling failure rate more than treble to 35% in 2009 from 10% in 2008, which means more than one-third of its exploratory wells came up dry. Houston-based ConocoPhillips Co. saw its failure rate climbing to 43% in 2009 from 32% in 2008, the agency reported on 9 March.
While these firms have been in the exploration business for decades and are now running into a rough patch, RIL entered deep-water exploration in 1998.
“RIL made a very big discovery very early on. It (the strike rate) was bound to come down as they explored more blocks, unless they got exceptionally lucky or got exceptionally good blocks. RIL is a relatively new entrant in this area. This (rate) keeps changing all the time,” said Ashu Sagar, secretary general of industry body Association of Oil and Gas Operators (AOGO), who likens prospecting to “throwing the dice”.
ABN Amro’s Sabnis is optimistic about RIL’s ability to grow reserves and his “valuation already assumes reserve creation of two million boe (barrels of oil equivalent), over and above the higher reserves in KG D6 and NEC 25”.
Sabnis, however, cut KG D6 gas volume assumptions over fiscal 2011 by 10% due to pipeline capacity constraints and oil volume assumptions by a sharper 30-50%.
RIL’s partner in the block, Canada-based Niko Resources Ltd, which owns 10% of KG D6, has reduced its peak oil production guidance from 40 kbd (thousand barrels a day) to 35 kbd—indicating the discovery may contain a little less than anticipated earlier.
RIL’s entry into exploration came when the Indian government auctioned blocks in the first round of the new exploration licensing policy. In 2002, it struck a huge reservoir of gas in KG D6 and started production in April 2009, making it the fastest and largest start-to-finish deep-water project. Back then, the firm’s presentations and statements were dotted with references of how much more successful it was compared with global firms.
From July-September 2008 onwards, these comparisons petered out, as the focus shifted to starting gas production in D6 and then scaling it up.
In the recent past, RIL’s exploration experience has been mixed. In October 2009, RIL’s partner Hardy Oil and Gas Plc announced that the duo had to “abandon” the first exploration well in KG D9—another deep-sea block in the KG basin—after encountering “poor reservoir sands”. Hardy owns a 10% stake in this block. This was followed by two discoveries by RIL—the first oil find in its Cambay basin block in November and the third straight gas discovery in KG D3, also in the KG basin in December.
“RIL’s E&P has largely been an India play so far. We don’t know how its fortunes will shape up once it explores more overseas blocks,” said the unnamed analyst quoted earlier.
Sabnis’ note on RIL’s E&P business also highlights a concern on the accounting front— the so-called “depletion charge”, which he says will increase from 1.2% in 2009 to 7% in 2010 and 13.6% in 2011.
Depletion charge is the ratio of hydrocarbon production to proven reserves. Since RIL follows the “full-cost accounting” method, all E&P costs are capitalized and charged to the profit and loss account through this “depletion charge” number. If reserves are constant and production is rising—as it is in RIL—this is a higher number each time and a larger amount is charged to the books, denting profits.
“The financial impact of the depletion charge has been evident in (RIL’s) quarterly results,” Sabnis writes.
Still, the impact of the depletion charge can be offset if the company strikes oil and gas in other blocks.
A 3 December 2008 report by Macquarie Research’s analysts Jal Irani and Scott Weaver said: “Our forensics suggest that RIL has at least five other basins that could replicate KG D6.”
However, it is also likely that with companies finding it worth their while to explore hydrocarbons in difficult locations, more digs could end in dead ends.
“Once the easy oil fields are exhausted and oil prices are rising, there is an incentive to go to frontier areas and that is going to push up the failure rates,” said AOGO’s Sagar, referring to energy firms seeking out tar sands, the deep seas, the Arctic tundra, oil shale reserves and coal-bed methane.
A lot of places are also off-limits. International oil companies (IOCs) saw assets being seized in Venezuela, blocks in the US becoming out of reach because of environmental regulations, those in Iran being blocked by economic sanctions and those in Iraq by violence.
In an April 2008 presentation to analysts, RIL said that “resource nationalism” or “larger state control of oil and gas resources” was evident from the fact that in the 1960s, IOCs had access to 85% of the world’s oil reserves while their current share is about 16%. In contrast, the access of national oil companies to global reserves had jumped from 1% to 65% during this period.