One policy gives good results, time to do more
It’s been less than a year since the government allowed oil companies the freedom to engage in continuous exploration, and the policy has already yielded good results. Cairn has, two days ago, said its discovery was ready to go commercial, RIL-BP has two new discoveries—one in Cauvery and one in the KG Basin—that it says are significant and ONGC has made five new discoveries. Since none of the companies has done all the tests, numbers are hard to freeze, but Cairn’s flow rate is estimated at around 450 barrels a day while ONGC’s initial estimates of the KG-DWN-98/2 discovery are that it contains 4.8 tcf of gas and around 100 million tonnes of oil in place. These are, by any reckoning, significant numbers, and all due to a simple administrative decision. In the past, India allowed oil firms a fixed seven years to explore for oil. Once this was done, the next 18 years of a production sharing contract had to be spent in developing the wells. But, firms argued for years, this was hurting the country since, with new technology available and the experience they have gained of the reservoir while exploration, the companies could well find more oil/gas in blocks that had been thought to have poor prospects earlier. While 2D seismic was replaced with 3D seismic several years ago, even this has given way to 4D seismic which is essentially 3D seismic with a time dimension added to it—Cairn is using 4D seismic to find out what oil pockets have been left in its Ravva fields. So, once the government allowed continuous exploration, oil companies went back to their blocks/fields and have already managed to deliver impressive results.
Linked to this is the next step, of extending the period of the lease/concession. Now that Cairn, for instance, has found more oil, the company wants the government to extend its contract beyond 2020. The government, so far, is loathe to do this since it will be seen as favouring suppliers. Also, one argument is that, were the contracts not to be extended and these fields put up in future bidding rounds, it is possible a new bidder may offer the government more than the 20-30% share of profit petroleum that Cairn is currently giving. While that seems logical since, now that Cairn—and the argument can be extended to ONGC and RIL as well—has found the oil, there is no exploration risk at all, there are attendant risks to this strategy as well. The biggest being that, were this to be done, few oil companies will carry on continuous exploration beyond the first 7-10 years of a contract so as to give themselves adequate time to extract oil/gas. Given that a Cairn produces oil at under $4 per barrel out of its Rajasthan fields as compared to the current global price of $108, that’s a serious risk the government is taking. It is also worth keeping in mind that Cairn contributes more than three-fourths of the R7,300 crore of profit petroleum that the government earned in April-December 2012 and that, of the 256 blocks bid out in various NELP rounds, commerciality has been established in just 31 and the development plan has been approved in just 13—a bird in hand is worth two in the bush.