Niko Resources, the Canadian oil company that is Reliance Industries’ partner in the D6 and NEC-25 blocks, finds the business environment in India has “improved significantly”.
“The business environment in India appears to have improved significantly as evidenced by the release of a government-appointed committee's report on domestic gas pricing,” the company’s President and CEO, Edward S. Sampson, said in a message to shareholders.
The reasons for Sampson’s happiness are easy to see. The Rangarajan Committee that went into the pricing mechanism for natural gas produced in India, recommended in December 2012 a pricing formula under which gas produced from wells in the D6 block would get between $8 and $8.50 a mmbtu, compared with $ 4.20 a mmbtu now.
Block of controversy
The recommendations of the committee are currently being reviewed by the Government of India.
The field development plan for an additional development area in the D6 Block was submitted in January 2013. The plan for the development of the NEC-25 Block is to be submitted by March 2013.
Niko Resources is happy that the field development plans have been submitted and there is increased clarity on future gas prices.
Niko has a 10 per cent share of the D6 block. Reliance Industries, which is the ‘operator’ of the block’ has 60 per cent and British Petroleum has the remaining 30 per cent.
The D6 Block is 7,645 square km lying 20 km off the Andhra Pradesh coast. In this block, natural gas was discovered in 2002 in the Dhirubhai 1 and 3 fields and crude oil in 2006 in the MA field.
In the last three years, the D6 block has come to mean ‘decline in natural gas production’ with the actual production, now around 30 million cubic metres a day, far lower than the anticipated 80 million cubic metres. The fallout has been disastrous, as a number of power plants that expected to function on the D6 gas are shut.
The decline has been due to technical reasons, but some suspect that the block licensees could be merely waiting for natural gas prices to improve. The current pricing regime, under which they would get $4.20 an mmbtu, expires in March 2014. “Reliance and the joint venture partners are evaluating work-over (repair) scenarios to bring some of the shut-in wells back online during fiscal 2014,” Sampson said in the message to shareholders.
These include measures to increase the pressure deep inside the reservoir so that the gas flows out.
In addition, the D6 is in the midst of a controversy between the block’s licence-holders and the Centre over whether or not some costs, amounting to $ 1.4 billion, are eligible for recovery by Reliance, BP and Niko. The issue is currently under arbitration.