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Business News/ Politics / Policy/  CCEA proposes three options for testing reserves of Nelp blocks
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CCEA proposes three options for testing reserves of Nelp blocks

Govt move prompted by delays over testing, mandatory before an operator can declare the potential of the find

The new policy will settle the long-pending issue with regard to 12 discoveries in five blocks that together hold almost 90 billion cubic metres of natural gas. Premium
The new policy will settle the long-pending issue with regard to 12 discoveries in five blocks that together hold almost 90 billion cubic metres of natural gas.

Mumbai: The government on Wednesday proposed a policy to bring India’s 12 deepwater oil discoveries to production faster, amid doubts whether it will really help thanks to uncertainty over the price of gas produced from them.

The new policy to test the hydrocarbon potential of blocks allocated under the New Exploration Licensing Policy (Nelp) aims to ease the development of blocks operated by state-owned Oil and Natural Gas Corp. and Reliance Industries Ltd.

The cabinet committee on economic affairs (CCEA) has offered three options for operators to test the hydrocarbon potential of their blocks. Such testing is mandatory before an operator can officially declare the potential of the discovery and start work. Delays over testing have prompted the government to offer these options.

An energy company that finds traces of hydrocarbons must conduct a so-called flow test, by drilling several exploration wells. After several wells are drilled and tested, the exact production potential is estimated and sent to the Directorate General of Hydrocarbons (DGH) for approval.

Currently, companies must conduct the DGH-approved drill stem test (DST). The cost of conducting the test is reimbursed by the government.

The first option under the new policy enables the winner of a block to abandon it. Under the second option, the government will foot only half the cost of conducting, up to a maximum of $15 million. This acts as a sort of penalty for not conducting the test on time.

Under a third option, the company can bypass the DST method, but will have to bear the cost of any future obligations.

The companies will have to choose one of the three options within 60 days of getting the CCEA nod, the cabinet note said.

“The (new) policy will settle the long-pending issue with regard to 12 discoveries in five blocks pertaining to six discoveries of India’s biggest state-owned company Oil and Natural Gas Corp. and six discoveries of Reliance Industries Ltd. It will also establish a clear policy for the future," said the CCEA note.

The 12 discoveries together hold almost 90 billion cubic metres (bcm) of natural gas, almost equivalent to two years of India’s total natural gas consumption. The reserve, once monetized, would be valued at more than 1 trillion at current gas price of $4.66 per million British thermal units (mmBtu).

Meanwhile, RIL has said that it had already relinquished one of its six discoveries. “Six discoveries mentioned in CCEA note are D29, 30 & 31 in KG-D6 block, D-32 & D-40 in NEC 25 block and D52 in KG V D3 block. We have already relinquished KG V D3 block and associated discovery," said an RIL spokesperson in response to an email.

A mail seeking response of ONGC on the new policy was not immediately answered.

According to earlier media reports, DGH had disapproved discoveries made in the two blocks of ONGC in the Krishna-Godavari basin—KG-DWN-98/2 and G4 as the DST method was not used. Discoveries of RIL also had to face the same fate as the company followed a different testing method called as modular dynamic test (MDT).

“DST was the traditional way of testing. It is time consuming and expensive. The Society of Petroleum Engineers (a global body on oil and gas exploration and production) propose MDT as the global standard for testing as it is cheaper and helps mitigate the risks just as a DST does," a senior executive from an Indian upstream company told Mint in March.

Analysts welcomed the move but said it is the pricing of the gas from these blocks which matters the most. “DST has been a contentious issue; therefore, clarity on that front is good. But one thing to note here is that the blocks where DST norms have been relaxed by CCEA today are the deep-water blocks of India. Unless a premium price is paid to the natural gas extracted from those blocks, contractors will not develop them," said the vice-president of the oil and gas research from a domestic brokerage. He did not want to be named due to his company policy.

On 18 October, CCEA had said that all newly discovered deep water blocks—those located in offshore areas below water depths of 1,000 metres—will command a premium over and above the natural gas price determined by the new gas pricing formula. However, the government has so far not clarified whether the premium will be paid to the discoveries retrospectively.

The analyst mentioned above said even if the companies start developing the blocks approved by CCEA right away, it will take at least four years for the first batch of natural gas to hit the market.

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Published: 30 Apr 2015, 12:35 AM IST
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