In what could be a significant setback for the Mukesh Ambani-controlled Reliance Industries Ltd, or RIL, and the state-owned Oil and Natural Gas Corp. Ltd, or ONGC, the Centre has rejected a demand by the two firms to relax, by five years, the deadline by which they have to complete exploration of hydrocarbon blocks in the Kerala-Konkan basin, located on the country’s west coast.
This follows from the decision of the empowered committee of secretaries, or ECS, which decided against the extension asked for by the two companies because it would set the “wrong precedent.” RIL and ONGC had asked that the government give a research and development (R&D) status for their blocks in the Kerala-Konkan basin. That would have given them more time to develop the blocks according to prevailing policies.
REQUEST DENIED (Graphic)
“This would have given the two companies five additional years for undertaking exploration and production (E&P) in their respective blocks in addition to eight years under New Exploration Licensing Policy (Nelp),” said a senior government official who did not wish to be identified.
The firms can still seek an extension, but will be required to pay stiff penalties that may vary from block to block.
Both ONGC and RIL have seven blocks in the Kerala-Konkan basin. RIL was awarded these blocks across four rounds, Nelp 1, Nelp 2, Nelp 3, and Nelp 5, between 2000 and 2005. Mint couldn’t immediately ascertain when ONGC was awarded its blocks.
In an email, an RIL spokesperson said the firm’s “bidding strategy was based on the principle that the exploration in Kerala-Konkan basin needed a completely different approach from the traditional methodology due to volcanic emplacements (and) obscure imaging sediments. These blocks were difficult in geological prospectivity, but an interesting area for geological studies. This initiative needs more time and technology application for which RIL requested for R&D status.” He said the government’s rejection of the request was because there was no “PSC (production sharing contract) provision” and that this refusal would not have any impact on RIL’s exploration plans.
“We are aware about this decision. Our blocks in KK (Kerala-Konkan) basin are in various stages of work. We have our work programme and we’ll try to complete it. Otherwise, we will update our knowledge and will bid again for them once they are offered in the next Nelp rounds after we surrender them,” said D.K. Pande, director, exploration at ONGC.
Nelp was approved by the Centre in 1997 and launched in January 1999 as an initiative targeted at increasing exploration activity for oil and gas in the country.
The Centre awards firms the right to explore blocks through a?bidding?process and has done so in six rounds thus far. The total exploration period cannot exceed seven years for a shallow-water block and eight years for a deep-water block.
The blocks located in the Kerala-Konkan basin are deep-water blocks and require deep-water oil rigs which are currently in short supply. An R&D status would have given both firms a cushion of another five years, by which time the availability of rigs would have improved. The decision to not confer this status seems to have been driven by the fact that the two firms knew the nature of the blocks when they bid for them, yet didn’t ask for an R&D status then.
The minutes of the ECS meeting, a copy of which has been reviewed by Mint states: “The ECS has endorsed the views of the ministry of petroleum and natural gas and observed that the contractors should have seen the prospectivity of the blocks at the time of bidding and once these have been awarded to them, there does not appear any justification to treat these blocks now as R&D blocks as this has larger ramifications in blocks of other basins.”
Current policy norms allow the extension of the exploration period by 12-18 months on the payment of penalties and the provision of a “bank guarantee”, essentially a deposit. If the firms don’t avail of the extension, they will have to surrender the blocks to the government, which may then auction them in future rounds of Nelp.
ONGC has already surrendered three of its 10 blocks in the basin.
“They (RIL and ONGC) not getting the R&D status is a major setback for them. There is an acute rig shortage. E&P players are tying up rigs with a contract period of five-six years to have a firm availability schedule. Earlier it used to be for project-specific work. If the same conditions persist they might have to surrender their blocks,” said Prayesh Jain, an analyst at stock market research firm India Infoline Ltd.
With the spike in crude oil prices there has been an increase in demand for oil rigs for E&P work. The daily rentals for a deep-water rig is around $500,000, while that for an ultra deep-water rig is $550,000 (excluding service cost).
The paucity of rigs has delayed the E&P plans of several firms and also forced the government to defer the seventh round of Nelp. The demand for deep-water rig is likely to ease out in 2009-10 when 57 new rigs are due for delivery.