General Electric Co. (GE) said on Wednesday that it has roped in Larsen and Toubro Ltd (L&T) to build a crucial part of the sub-sea oil and gas extraction equipment that it wants to sell to energy companies that have revived interest in the Krishna-Godavari (KG) basin.
The equipment supply deal comes in the wake of plans being prepared by state-owned ONGC Ltd and the Reliance Industries Ltd-BP Plc consortium for further exploration of their blocks in the KG basin, taking advantage of the new liberal gas-pricing formula announced on 10 March by the government.
GE believes that this has opened up a potential market of $1-3 billion for deep-sea equipment over a three-year period.
As per the equipment supply deal, L&T Hydrocarbon Engineering Ltd, a fully owned subsidiary of L&T, will make sub-sea manifolds used in transferring hydrocarbons into pipelines, at its modular fabrication facility in Tamil Nadu.
This is the first time local production of such equipment is being undertaken in the country, GE said in a statement. The equipment produced could also be exported eventually.
GE Oil & Gas South Asia chief executive officer Ashish Bhandari told Mint over the phone that the sub-sea manifolds to be manufactured at the L&T facility will account for about 20-25% of the potential $1-3 billion deep-sea hydrocarbon equipment market. Most of the remaining parts will be manufactured at GE’s global facilities. The company did not disclose the finer details of the arrangement.
Describing the deal with L&T as a supply arrangement, Bhandari said the entire risk of venturing into supplying equipment for the deep-sea exploration in India’s east coast lay with GE.
“GE will provide technology and manufacturing know-how to L&T to enable manufacture of the sub-sea manifolds at its facility in Tamil Nadu. Marketing of the equipment will be undertaken by GE for projects in India and possibly in other markets. This is part of the preparatory work being undertaken by GE for projects that the company hopes to win in the KG basin,” Bhandari said.
Energy companies recently started drawing up investment plans in the basin as the government now allows a higher price for natural gas produced from deep-water, ultra-deep-water, high-tension and high-pressure areas. As per this formula, price of gas from such hard-to-reach areas has been set at $6.61 per million British thermal units (mmBtu) for the first half of this financial year, compared to $3.06 for gas from most other fields.
Experts said the increased demand for engineering goods and services in the energy industry was anticipated.
“This is a natural outcome of higher level of market certainty now available to various players in the entire hydrocarbon value chain including in upstream exploration and production. Simplification of the regulatory regime, very strong energy demand and import dependence are the other factors driving investor interest in the sector,” said Anish De, partner and head of oil and gas, KPMG in India.
The demand for engineering equipment and services is likely to remain strong considering that several discovered smaller fields are under auction at present, which will be followed by auction of larger fields next year. Also, the government is encouraging development of a natural gas highway to help improve gas consumption in the economy.
A statement from GE issued earlier in the day said the partnership will expand its contribution towards the government’s Make in India campaign.
L&T said the partnership broadens its presence in the exploration industry.
“Associating with GE will help L&T broaden its offering in the deep water space and provide a compelling value proposition to our customers. Projects of such strategic importance and magnitude bring huge responsibility and we are poised to make significant contributions to India’s growth curve going ahead,” the statement said, quoting Subramanian Sarma, chief executive officer and managing director, L&T Hydrocarbon Engineering.
In addition to the hydrocarbon equipment production venture, the companies also decided to collaborate on digital industrial solutions. L&T Infotech has joined the GE Digital Alliance Program seeking to improve the way companies manage their assets and workforce using analytics.