The Hindu Business Line : Gas strike: Possible versus proven

The Krishna-Godavari basin find is `possible' and not `proven' till another three wells get drilled and confirm the results. The company was looking for a reprieve as even a `possible' gas strike attracts up to 50 per cent weightage with the rating agencies.

THE ANNOUNCEMENT of a 20 trillion cubic feet (TCF) gas strike by Gujarat State Petroleum Corporation (GSPC) — purportedly the biggest in the country in many decades — is only four days old and already the sceptics are out, questioning the credibility of the find. Doubts have been raised on the grounds whether such a major announcement could be made on the strength of drilling one exploratory well.

The debate whether it was not a premature announcement will continue for a while and not without reason. In the E&P (exploration and production) parlance, the Krishna-Godavari basin find is `possible' and not `proven' till another three wells get drilled and confirm the results. But the Gujarat Government, the owner of GSPC, simply could not afford to wait that long, having already sunk $17 million, $8 million and $28 million respectively in the three wells drilled so far. The third well, which has taken over five months, is far from finished and the meter is still ticking. Clearly, the company was looking for a reprieve as even a `possible' gas strike attracts up to 50 per cent weightage with the rating agencies. Whether a 20 TCF reserve can claim a 85 per cent recovery is a moot question and calls for a throw-back to November, 2002 when one of the equity-holders in the KG OSN 2001/3 block, Mr Jean Paul Roy, told Business Line that the field had a prognosticated reserves of initial gas in place to the tune of 44 TCF with a conservative estimate of recoverable gas put at 10 TCF.

At that time, Mr Roy, President and CEO of Geoglobal Resources that owns 10 per cent in the KG block, had said that there are four potential reservoir zones, where the depth of the first level would be in the 900-1,100 metre range and that in the fourth level up to 4,400 metres. As it transpired, gas was struck here at a depth of 5,061 metres. And Mr Roy has just returned to Canada, telling his fellow investors what a good thing they have going in India, though he too cannot make any official claim as yet.

Being a 100 per cent Government-owned company, GSPC was under considerable pressure the last one year to show results as it was incurring enormous expenditure each day at the exploration block. Having `temporarily' abandoned its first two wells there at 2,625 metres and 2,875 metres, the company had indicated in early February that it was going for the kill at the third well.

The first well had cost Rs 71 crore, the second well Rs 33 crore and, thus, GSPC was fairly up against the wall when it spudded the third well on January 17. Against 90-100 days as originally scheduled it took a while longer, but struck it rich, on May 13.

The financial blood-letting at Krishna-Godavari had begun to hurt GSPC as it signed a Memorandum of Understanding with IOC to securitise the expenditure incurred at the exploration site. The broad understanding was that IOC could pick up equity in KG basin while GSPC could get a stake in the South Pars field in Iran. Now that it is sitting on a treasure trove worth $50 billion, there will no longer be any dearth of potential suitors for the Gujarat company. A number of companies are actively wooing GSPC and one hears the name of an Ahmedabad-based corporate to have emerged the favourite with the State government.

This, even as talks of an IPO are also doing the rounds, in a bid to raise the funds — Rs 1,500 crore — for the gas field to reach the commercial production stage by 2007-end. Not that GSPC needs to look elsewhere for funds, being cash rich itself, with a turnover of Rs 1,100 crore (mostly from its Hazira gas fields) and Rs 400 crore from associate companies.

More important, its net profit exceeds Rs 500 crore, ensuring that internal accruals, along with a healthy line of credit should easily suffice, if the corporation decides to go it alone. With only four wells in production till date at Hazira offshore, GSPC still has an assured revenue stream from that site for four-five more years.

More than raising funds, an IPO is seen as to unshackle GSPC, as a 100 per cent government-owned company, weighed down by various rules and regulations. Thus, the proponents of GSPC tapping the market say that while the company may not actually need the cash, it will provide an opportunity to take on the hue of a regular E&P company.

With the gas strike under wraps, the next big move expected from GSPC is to expedite the hiring of its second rig at the K-G basin, something that has been kept in abeyance for over six months. This is significant as the GSPC-led consortium is contract-bound to drill 14 wells in the 30-month period ending September 2005, with only three months left to complete another 11 wells.

In all likelihood, GSPC will now request the Ministry of Petroleum and Natural Gas for a one-year extension, citing such factors as the average depth per well going beyond the prescribed 2,300 metres; the 5,061-metre third well being put up as an example. Just as GSPC is looking to extend the contract for the current rig, with Saipem, Italy, from four wells to 10, it is also planning to raise the performance bar for the second rig, as the drilling depth could routinely exceed the 5,000-metre mark.

It is another matter that such a rig could well cost double that of the existing one hired out at $62,000 a day. The upside is that, given the sharing of basic infrastructure, the overall operating cost would come down by 20 per cent, once the second rig gets commissioned, the average daily cost incurred at the exploration block now being $1,30,000.

The second initiative expected from GSPC is the invitation of bids for constructing an offshore platform at the K-G basin. It is expected that the company will try and place an order by September, given the 6-7 month lead time required to procure the required steel and a like period to fabricate the platform. There could be many contenders, including Clough Inc, Australia that fabricated the offshore platform for GSPC at Hazira.

This means come 2006-end, KG OSN 2001/3 block would have the necessary infrastructure in place to commence production of gas. GSPC will then need to only lay a 9-km sub-sea pipeline to bring gas to the Kakinada coast, just as its own subsidiary, Gujarat State Petronet Ltd that is into the pipeline construction business, would be looking to lay trunk route gas transmission grid to bring gas to the west coast.

But there will be many rivers to cross before reaching that bridge. Also, one cannot write off some kind of sharing of infrastructure by the major producers of the region, whether it is GSPC, ONGC or Reliance Industries. Till then, one will get to hear these players come out with periodic shouts of new discoveries as there is no way this is going to be the last word on gas strikes from this part of the world. After all, the present strike is from a 15 sq km region. True, a clear picture will not emerge till another four wells are drilled, but GSPC is standing by its claim that the present find is all of 20 TCF. If anything, the State PSU expects the going to get better once it drills the fourth well in this pool.

While the third well is located is in the Southern Basin Extension of the 1,850-sq-km block, the first and second wells are located in the Central Horst Complex. This leaves the third pool of the block — Northern Graben (some 30 km from the successful well) — still unexplored and this is where the GSPC-led consortium expects more gas strikes.

However, all this activity has left the global oil and gas major cold as it is only the lesser known Cairns Energy, Niko Resources and the like that actively consider prospecting in India. The rationale is not hard to digest, as India is a big market for the big players, something that cannot be spoiled by turning it into a production hub.

Historically, global E&P majors have kept themselves moored to underdeveloped countries and India simply does not fit into their scheme of things. Thus, the onus continues to be on India to find and produce its own gas and oil. In India, the pecking order is clearly laid out among the established set of petroleum sector players and GSPC till now did not figure high on this list.

Dubbed a one-field wonder, reference being to the Hazira field abandoned by ONGC as marginal, GSPC seems on course set right a few things in the next couple of years. The company, originally set up as Gujarat State Petrochemicals Corporation along the lines of IPCL, seems to have justified its decision to re-invent itself in petroleum exploration and production.

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