D6 output may not rise until 2014

This is the view of both RIL and its Canadian partner Niko Resources Ltd, as well as the Directorate General of Hydrocarbons (DGH), the nodal agency for development of hydrocarbon assets in India.

RIL, Niko, DGH and the ministry of petroleum and natural gas officials met in Delhi on 2 May to discuss the falling gas production from KG-D6. Mint has reviewed the minutes of the meeting.

The firms highlighted the various challenges they are facing in raising gas production and said they were “making all efforts to identify suitable well locations" at the meeting. They said they were interacting with DGH’s technical representatives on the issue.

RIL also asked the government to constitute a technical committee of global experts to offer advice on the best way forward. According to RIL, representatives of its partner BP Plc., the London-based oil and gas company that has a stake in the block, could be considered for this purpose.

RIL shareholders and investors had expected Mukesh Ambani, chairman of the oil-to-yarn and retail conglomerate, to speak about the issues related to increasing production at the block at the company’s annual general meeting on Friday.

Ambani touched upon the issue, but only said that RIL will work closely with BP on finding a solution. In February, the London-based company picked up a 30% stake in 23 oil and gas blocks operated by RIL—including KG-D6—for $7.2 billion.

At the 2 May meeting, D.N. Narasimha Raju, joint secretary (exploration), ministry of petroleum and natural gas, asked RIL and Niko to present a plan to the government outlining what could be done to shorten the time frame of three years.

The contractors said they would check on this and revert.

Raju also asked RIL to furnish a realistic production profile and financial projections till 2014.

An email sent to RIL on Monday remained unanswered.

S.K. Srivastava, director general of hydrocarbons, did not comment when contacted over the phone on Monday as he was busy. He could not be reached over the phone on Tuesday and an email sent to him on Monday evening remained unanswered.

“(The) DGH representative remarked that it appears any additional wells will take three years from zero date commencing from date of approval of well location by MC (management committee) and therefore the additional production from these wells is unlikely to commence before 2014," said the minutes of the meeting.

This time frame is corroborated in a presentation that RIL made to the government during the meeting, a hard copy of which was annexed to the minutes of the meeting.

The RIL presentation says it will take “minimum 34 to 36 months to connect the new wells and start production," but may even take as long as 42 to 44 months if some of the items required to construct the wells are procured after completion of the “fair-weather window (i.e. mid-April)".

In the latter case, installation of the wells can only take place upon commencement of the next fair-weather window (mid-December onwards).

To put this timeline in perspective, RIL cited its own record of completing work on 18 wells in the D1 and D3 blocks within KG-D6 in 48 months. The new wells may take less time as the “quantum of offshore work" required is less, the company added, according to the minutes.

Analysts said investors’ perception of KG-D6’s contribution to RIL’s overall valuation may change with such high uncertainty.

Alok Deshpande, oil and gas sector analyst at Elara Securities (India) Pvt. Ltd, said since KG-D6’s discovery, investors have valued it largely based on reserves and future cash flow to be generated by producing and selling the gas over the years.

RIL closed at ₹ 956.20 on the Bombay Stock Exchange on Tuesday, up 1.93%. The bourse’s benchmark index, the Sensex, gained 0.41% to close at 18,495.62 points.

Over the last year, RIL’s stock price has underperformed the Sensex, losing 4.91%, while the benchmark index gained 10.22%.

Against a targeted production of 60 million standard cubic metre per day (mscmd) of gas, the output from KG-D6 stands at around 51-52 mscmd now. In March, RIL had intimated the DGH that gas production may further slump to around 47 mscmd in 2012-13.

“With so much uncertainty in output levels and ramp-up, we believe investors will soon be shifting towards a one-year forward earnings based valuation approach for KG-D6, at least in the medium term," Deshpande said.

Three-year window

The three-year window to increase gas output, however, will open only when the location of the new well and the work plan on this is ratified by the DGH. Identifying a suitable location from where gas can be extracted cost-effectively is the crux of the problem.

The D6 field can be broadly classified into two—the main channel region that holds 40% of the total gas reserve, and the area outside the main channel that holds the remaining gas. According to the field development plan (FDP), the peak output possible from KG-D6 is 80 mscmd.

RIL has so far sunk 18 wells in the main channel area and, as per the plan, it was envisaged that wells here would be able to drain resources from outside the channel area as well.

RIL cited two years of production data at the meeting to prove that this was not happening as planned.

“Considering this, had the contractor continued with the drilling of additional wells as per FDP, unmindful of the reservoir behaviour, it would have resulted in huge capital expenditure which would be difficult to justify at a later date," RIL contended at the meeting.

In view of the unexpected variance in reservoir behaviour, RIL has also sought a revision of the work programme and the budget. The recast budget estimate for 2011-12 submitted by RIL for DGH’s approval is 30% higher than the original estimate.

Reacting to RIL’s explanation, one of the six DGH members present at the meeting insisted that the contractors should drill wells outside the channel area.

“To this, Niko enquired whether in DGH’s opinion these additional wells would be able to produce sufficient volume to justify the investment," the minutes state. The operators said the geological characteristics of the area—“thinly laminated and sparsely dispersed"—was such that it made justification of independent wells there a “key challenge".

Deshpande said matters may have reached a point where the government was unable to do much more other than wait and watch.

“It won’t be acceptable to them (the government) if RIL incurs the expenditure without any results and puts it in cost recovery as that would reduce the government’s share of profit," Deshpande said.

“Taking the block away from RIL and handing it to another operator is also not an option as it will waste a lot of time and involve a cost. The most it could do is impose a penalty on the contractor."

aveek.d@livemint.com

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