Oil & Gas Infraline

Infralines Paper on Momentous Year for the Oil & Gas Sector: Year 2006 Roundup
Year 2006 Roundup:

Momentous Year for the Oil and Gas Sector
Prepared by
TM
Research and Information Services
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Infraline Energy Research and Information Services
Year 2006 is a momentous year for the oil and gas sector in India. The year started with launching of NELP VI and CBM III Licensing Rounds in February. The Minister of Petroleum and Natural Gas saw a change at its helm from Mr. Mani Shankar Aiyar to Mr. Murli Deora. The much awaited Petroleum & Natural Gas Regulatory Board Act, 2006 finally became a reality in April. India embarked on the Integrated Energy Policy. Specially Committees to look into Alternative pricing systems for petroleum products, pricing of natural gas etc. submitted there reports. Indian oil and gas companies went on investment binge for assets abroad. The world witnessed the biggest IPO in the sector, etc. Infraline Energy Research looks at main happenings in 2006.
1. Change at the helm: Petroleum and Natural Gas Ministry
January 30, 2006 the cabinet reshuffles at the centre and Mr. Astute Mani Shankar Aiyar lost his position as Minister of Petroleum and Natural Gas and Mr. Murli Deora became the chief of Petroleum Ministry. Improving the track record of public sector oil companies in exploration, the issue of fuel subsidies, and the problems of the bleeding public sector oil marketing companies (OMCs) were earmarked as the focus areas for the new Petroleum Minister, Mr Murli Deora. Interacting with newspersons soon after assuming office today, Mr Deora said: "The track record of public sector oil companies in exploration is not good. I don't want to take names of any PSU. But we need to step up our exploration activities to achieve energy security." The Minister stressed the Government's commitment to provide vulnerable sections of the society with fuel at an affordable price, while ensuring that the State-owned oil companies did not bleed. A baffling tasks no doubt. Only time will tell how Mr. Deora fairs in his journey at the office.
2. NELP VI and CBM II Rounds

a. NELP VI: On February 2006, under the New Exploration Licensing Policy (NELP) for exploration of oil and natural gas, the Government of India announced Sixth offer of exploration blocks. Companies were invited to bid for 55 exploration blocks. A total of 25 Onland blocks, 6 shallow water blocks and 24 deepwater blocks (beyond 400 metre bathymetry) were offered. Companies were allowed to bid for one or more blocks, singly or in association with other companies, through an unincorporated or incorporated venture. The Government undertook intensive promotional efforts to promote the 55 Blocks on offer. A special web site was created which had online availability of data, bid documents including terms and conditions for NELP-VI and other promotional material. Further, the Government held promotional road shows in Delhi, Houston, Dubai, Kuala Lumpur, Perth and London. Data centers were also opened at New Delhi, Houston, London and Perth to facilitate companies to view data for NELP-VI blocks.
The main features of the sixth round were: The successful bidder would be required to enter into a Production Sharing Contract (PSC), which will be negotiated based on the Model Production Sharing Contract (MPSC). Some of the features of the attractive terms offered by the Government are: The possibility of seismic option alone in the first phase of the exploration period. Upto 100% participation by foreign companies. No minimum expenditure commitment during exploration period. No signature, discovery or production bonus. No mandatory state participation. No carried interest by National Oil Companies (NOCs). Income Tax Holiday for seven years from start of commercial production. No customs duty on imports required for petroleum operations. Biddable cost recovery: Upto 100%. Option to amortize exploration and drilling expenditures over a period of 10 years from first commercial production. Sharing of profit petroleum based on pre-tax investment multiple achieved by the contractor and is biddable. Royalty for Onland areas payable at the rate of 12.5% for crude oil and 10% for natural gas. For offshore areas, royalty payable at the rate of 10% for oil and natural gas. Royalty for discoveries in deep water areas beyond 400 m iso-bath payable at half the applicable rate for offshore areas for the first seven years of commercial production. Fiscal stability provision in the contract. Freedom to the contractor for marketing of oil and gas in the domestic market. Provisions for assignment. Arbitration and Conciliation Act, 1996, based on UNCITRAL model, applicable. To facilitate investors, a Petroleum Tax Guide (PTG) in place. The biddable terms included: Work programme commitment, Profit petroleum share expected by the contractor at various levels of pre-tax multiple of investments reached and percentage of value of annual production sought to be allocated towards cost recovery. A total of 165 bids were received for 52 blocks by the bid closing date 3 deepwater blocks namely KK-DWN-2004/2, KK-DWN-2004/3 and AN-DWN-2004/1 did not received any bid. A total 66 companies including 35 foreign companies and 31 Indian companies bid either on their own or as consortia. NELP-VI by far was the most successful round as may be seen from the following facts: 165 bids, highest ever received for 52 blocks under NELP-VI against 69 highest bids received in last round of NELP-V. A total of 310 data packages amounting to Rs. 78.60 crore were sold as against the previous best sale of Rs. 22.75 crore in previous round in NELP-V. A total of 20 new foreign companies out of 35 foreign companies submitted bids under NELP-VI. 39 blocks attracted multiple bids. One block namely, CB-ONN-2004/3 received 10 bids. 13 blocks received single bid.
One of the major achievements of NELP-VI was that besides having received bids for 21 deepwater blocks, bids have also been received for all the 12 frontier on-land blocks. This has by far been the highest offering of frontier on-land blocks and the interest shown by E&P companies in undertaking exploration in these blocks shows the maturity of the Indian sedimentary basin. Exploration activity in these blocks is likely to enhance the understanding of the thrust belt of North Eastern States and Central India. It is also a major achievement of the present round that barring the single Andaman deepwater block in the eastern offshore, bids have been received for all the 21 other deepwater blocks in the eastern offshore. The ambitious exercise to launch collection of regional data in the beginning of the year 2006 for deep waters coupled with the 6th round of NELP has been a success in bringing the eastern offshore under exploration in a large way. The renewed interest of multinationals, namely, BG, BP, Petronas, ENI and the entry of the French multinational, TOTAL augured well for the oil and gas exploration activity underway in India. NELP-VI will lead India into joining the League of Nations which will have one of the most extensive deep sea exploration programmes undertaken by some of the leading deep sea exploration companies of the world. A large number of new foreign and Indian, players on the Indian exploration scene will lead to usher in of latest technology and a variety of approach to the exploration activity underway. The list of successful bidders has not been officially announced. But Infraline extensive research on successful bidders under NELP VI yielded the results that can be viewed by visiting: http://www.IndiaUpstream.com. b. CBM III In order to explore and produce Coalbed Methane (CBM), the Government of India announced offer of 10 blocks. Out of these, two blocks each located in the States of Andhra Pradesh, Chhattisgarh, Madhya Pradesh & Rajasthan and one block each in Jharkhand & West Bengal. Technically and financially competent foreign and Indian companies were invited to bid for exploration and production of CBM in the blocks on offer. Companies were allowed to bid for one or more blocks, singly or in association with other companies through an unincorporated or incorporated venture. Foreign/Indian companies can have up to 100% participating interest. MAIN FEATURES OF TERMS OFFERED The successful bidder would be required to enter into a contract with the Government, which will be negotiated based on the Model Contract (MC). Some of the features of the attractive terms offered by the Government are:
No signature bonus Royalty at the rate of 10% on the value of CBM in accordance with Oilfields
(Regulation and Development) Act, 1948 and the Rules framed there under payable to the relevant State Government
Additionally, ad-valorem biddable Production Level Payment (PLP), payable to the

Central Government, on every incremental production of zero point five (0.5) Million Standard Cubic Metre per Day (MMSCMD) or part thereof Freedom to market gas in domestic market at market determined prices. Fiscal stability provision in the contract No customs duty on imports required for CBM operations Provisions for assignment of Participating Interest Arbitration provisions governed by Arbitration and Conciliation Act, 1996 One time lump sum Commercial Bonus of US $ zero point three (0.3) million by foreign companies or equivalent amount in Indian Rupees by Indian companies, after declaration of commerciality of CBM. Corporate income-tax payable as per the Income-tax Act, 1961 CBM operations will enjoy tax holiday, as per Income-tax Act 1961; currently available for seven years from the date of commencement of commercial production.
The biddable terms were: Work programme commitments and Production level payments to the Government at various level of CBM production achieved. The Government received 54 bids for all 10 blocks by the bid closing date. A total 26 companies including 8 foreign companies and 18 Indian companies have bid either on their own or as consortia. All the blocks have attracted multiple bids. The foreign companies which have bid are - Arrow Energy - Australia, CDX Gas - USA, MOLOPO Australia, OMIMEX - USA, EIG USA, BP - UK, GeoPetrol - France, Coal Gas USA. The Indian companies which have bid are- ONGC, RIL, Reliance Energy Limited (REL), Essar Oil Ltd., Oil India Ltd., Shiv-Vani, Indiabulls, Great Eastern Energy Corp. Ltd. (GEECL), GAIL, Jindal Steel & Power Ltd., Jubilant Oil & Gas Pvt. Ltd., IOC, Coal India Ltd. (CIL), Adinath, GSPCL, Deep Industries, Tata Power, Reliance Natural Resources Ltd. (RNRL). CBM-III by far has been the most successful round as may be seen from the following facts: i) ii) iii) CBM-III attracted 54 bids as against the previous best of 16 bids in CBM-I. A total of 70 data packages amounting to Rs. 9.50 crore were sold as against the previous best sale of 16 data amounting to Rs. 2.09 crore under CBM-I. A total of 26 companies bid under CBM-III as compared to the previous best of 8 companies under CBM-II. Further 8 foreign companies and 18 Indian companies bid under CBM-III are the highest as compared to the CBM-II response by one foreign company and 7 Indian companies. Average no. of bids per block under CBM-III works out to 5.4 as compared to the previous best of 2.7 under CBM-I. Overseas investors have shown large interest in CBM blocks for the first time under this round (CBM-III).
iv) v)
The blocks have formally awarded and included: 2 blocks to the consortia of ARROW-GAILEIG TATA, 4 blocks for the consortia of REL-RNRL-Geopetrol, and one each to the consortia of BP Exploration (Alpha) Ltd., COALGAS-Deep Industries, COALGAS-Deep Industries-Adinath, and ARROW-GAIL-EIG.
Block Name RM-CBM2005/III BB-CBM2005/III TR-CBM2005/III MR-CBM2005/III SP(N)-CBM2005/III SR-CBM2005/III KG(E)-CBM2005/III BS(4)-CBM2005/III BS(5)-CBM2005/III GV(N)-CBM2005/III
Coal / Lignite Field Rajmahal Birbhum TatapaniRamkola Mand-Raigarh Sohagpur Singrauli Kothagudem Barmer Barmer Godavari North
State Jharkhand West Bengal Chattisgarh Chattisgarh Madhya Pradesh Madhya Pradesh Andhra Pradesh Rajasthan Rajasthan Andhra Pradesh
Company/Consortium ARROW-GAIL-EIG -TATA BP Exploration (Alpha) Ltd. ARROW-GAIL-EIG TATA ARROW-GAIL-EIG REL-RNRL-Geopetrol COALGAS-Deep Industries REL-RNRL-Geopetrol REL-RNRL-Geopetrol REL-RNRL-Geopetrol COALGAS-Deep IndustriesAdinath
Source: www.indiaupstream.com
3. Petroleum and Natural Gas Regulatory Board Act, 2006

India achieved a major policy milestone when on April 3, 2006 the much deliberated Petroleum and Natural Gas Regulatory Board Bill, 2006 finally became an Act after more than four years of toil. On March 3, 2006 the Bill to set up a regulatory board for the downstream petroleum and natural gas sector was passed by the Rajya Sabha. The Petroleum and Natural Gas Regulatory Board Bill, 2005 envisages setting up of an independent regulatory mechanism with the objective of regulating the refining, processing, storage, transportation, distribution, marketing and sale of petroleum production and natural gas. Another aspect that the board would look into is to ensure uninterrupted and adequate supply of petroleum and petroleum products and natural gas across the country. As this sector is increasingly getting deregulated, the proposed regulator will prevent exploitation of consumers and provide a mechanism for ensuring uninterrupted and adequate supply of petroleum products at fair prices, the Minister for Petroleum and Natural Gas The Bill also entails provision of retail service obligations for the retail outlets and marketing service obligations for the players in the petroleum and gas sector. The Petroleum Regulatory Board Bill, 2002 was introduced in Lok Sabha on May 6, 2002. It was then referred to the Parliamentary Standing Committee on Petroleum and Chemicals. The committee presented its report on May 8, 2003 recommending that the Bill could be passed, subject to their recommendations and observations.
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The official amendments, as proposed by the committee were introduced in Lok Sabha in December 2003. However, the Bill could not be taken up for consideration and it lapsed. The Bill was again introduced in December 2005. Some of the amendments proposed include the provision to empower the board to register entities that propose to establish storage facilities for petroleum, petroleum and natural gas beyond a certain capacity. The standing committee had also recommended that the Government should lay down separate regulations incorporating provisions essential to handling the specific problems of the gas sector. The Government has agreed to this proposal, the Minister informed the House. Appropriate provisions have been incorporated in the Bill, that specifically pertain to the gas sector, he said. These relate to affiliate code of conduct, pipeline access code, and introduction of the concept of contract carrier, marketing service obligations of city or local gas distribution entities, and methodology for fixation of transportation tariffs. Further, the Bill also proposes to have a member legislation/judicial on the Board, introduce the concept of `restrictive trade practice' instead of `profiteering', a common appellate tribunal for the electricity and petroleum sectors, deleting the exclusion of jurisdiction of the MRTP Commission or Competition Commission. It also empowers the board to register, instead of authorize, the entities seeking to market petroleum products and setting up liquefied natural gas terminals.
4. Special Committee Reports

Though several committees were formed to look at various aspects of oil and gas sector Infraline Research has picked the most prominent ones, that we will have a long term effect on the sector, for review. These are: Committee on Pricing and Taxation of Petroleum Products- Dr. C. Rangarajan February 2006 Integrated Energy Policy August 2006 Committee to formulate transparent guidelines for approving gas price/formula under PSC Contracts a. Committee on Pricing and Taxation of Petroleum Products- Dr. C. Rangarajan February 2006 With the declared objective of moving towards market determined prices for petroleum products, Government announced the dismantling of the Administered Pricing Mechanism (APM) effective 1.4.2002. However, it was decided to continue to subsidize PDS kerosene and domestic LPG on the ground that these were fuels of mass consumption largely consumed by economically weaker sections of society. The subsidy on these two products was to be continued on a flat rate basis financed from the budget and was to be phased out in three to five years. The Oil Marketing Companies (OMCs) were to adjust the retail selling prices of these products in line with international prices during this period. However, in compliance with Government directions, the OMCs did not make the necessary adjustment in prices of PDS kerosene and domestic LPG commensurately, resulting in losses on account of these two products. In October 2003, Government decided that the OMCs would make good about a third of the losses on these two products from the
surpluses generated by them on petrol and diesel while the balance losses would be shared equally by the upstream companies (ONGC/OIL/GAIL) and the OMCs. This burden sharing arrangement began to collapse in the face of unprecedented, sharp and spiraling increase in international oil prices, particularly since late 2003, combined with sharp week-to-week and even day-to-day volatility. Both the prices of crude and prices of sensitive petroleum products are close to their highest levels now ($63.23/bbl for the Indian basket of crude on 1.2.2006). The impact of this global price trend on the domestic situation has been two fold. First, the burden of subsidy on PDS kerosene and domestic LPG ballooned to unprecedented levels the current burden of subsidies is Rs.15,000 crores on account of PDS kerosene and Rs. 11,000 crores on account of domestic LPG. Second, Government took back control of price setting for petrol and diesel, and restrained the pass-through of the international prices to domestic consumers this year. The following principles informed the decisions of the Committee. i. Pricing and taxation of petroleum products should be rationalized to transmit the right price signals so as to minimize if not eliminate distortions and inefficiencies that result in misallocation of resources. Prices of petroleum products should, as far as possible, be aligned with international prices. Across the board subsidies result in inefficiencies and place an undue burden on an already strained fiscal situation. Subsidies should be minimal, targeted and restrained by a monetary ceiling. To the extent the Government decides to extend subsidies, the burden should be borne entirely and transparently in the Union Budget. The oil marketing companies should be freed from the burden of subsidy. Custom tariffs on crude and products should be rationalized so as to moderate the effective rate of protection to a level that will offset the disadvantages suffered by the domestic producers without at the same time allowing them any undue cushion. Excise tariffs should be restructured to protect the consumers from excessive volatility in prices.
ii. iii.
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An appropriate pricing regime which promotes efficiency needs to be evolved in relation to petrol and diesel on the one hand and domestic LPG and PDS kerosene on the other. However, it is the latter which is arguably more intractable because of the heavily subsidized prices to consumers. The issues of adjusting prices and targeting them appropriately become urgent in this context. Recommendations a) The committee, set up by the Government to make recommendations on the pricing and taxation of the petroleum products, made certain radical proposals such as giving oil companies the freedom to fix the prices of petrol and diesel through the trade parity pricing mechanism rather than the existing import parity pricing. b) It has also suggested reduction in Customs duties on petrol and diesel from 10 per cent to 7.5 per cent and shifting excise duty from an ad valorem levy to a specific levy.
c) While acknowledging the need to subsidise kerosene, the panel has called for the subsidy to be restricted to below poverty line families only. The committee, however, saw no merit in subsidising LPG, which is mainly used by the above poverty line segment of society. d) It has recommended an increase of Rs 75 a cylinder on cooking gas. Beyond this one-time increase in LPG prices, the committee said, it is necessary to gradually increase the price of cooking gas so that the retail price adjusts completely to the market level, eliminating the subsidy altogether. e) Trade parity prices would mean a mix of export and import parity prices. Under trade parity, pricing is lower than the import parity to the extent of freight cost and other taxes and duties. f) The current import parity pricing mechanism forces firms to pay Customs and ocean freight for the entire purchase. The committee wants that retail prices be fixed keeping in mind trade parity - with 80 per cent import parity and 20 per cent export parity weight. The relative weights are to be reviewed and updated every year. g) By suggesting reduction in Customs duty to 7.5 per cent, the panel proposes to reduce the effective protection to refiners. It has also recommended termination of the principle of freight equalisation. h) Under this model, the increase in petrol and diesel prices would be lower at Rs 1.21 per litre and Rs 1.96 per litre respectively, against the required increase in Delhi of Rs 1.67 per litre on petrol and Rs 2.65 per litre on diesel. i) The committee also said that the Government could discontinue the practice of asking upstream companies - ONGC, GAIL, and Oil India - to provide assistance, but instead collect their contribution by raising the Oil Industry Development Board cess from the current level of Rs 1,800 per tonne to Rs 4,800 per tonne. j) It has said that the Government would need to meet the balance cost of subsidy from the Budget. b. Integrated Energy Policy August 2006 Energy is a vital input into production and this means that if India is to move to the higher growth rate that is now feasible, we must ensure reliable availability of energy, particularly electric power and petroleum products, at internationally competitive prices. With that objective in mind the government constituted a committee under the chairmanship of Mr. Montek Singh Ahluwalia, Deputy Chairman of Planning Commission, Government of India. The approach of the Committee is directed to realising a cost-effective energy system. For this the following are needed: (i) Wherever possible, energy markets should be competitive. However, competition alone has been shown to have its limitations in a number of areas of the energy sector and independent regulation becomes even more critical in such instances. (ii) Pricing and resource allocations that are determined by market forces under an effective and credible regulatory oversight. (iii) Transparent and targeted subsidies. (iv) Improved efficiencies across the energy chain. (v) Policies that reflect externalities of energy consumption. (vi) Policies that rely on incentives/ disincentives to regulate market and consumer behaviour. (vii) Policies that is implementable. (viii) Management reforms that create accountability and incentives for efficiency.
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The committee made following recommendations: Ensuring Adequate Supply of Coal with Consistent Quality: Coal accounts for over 50% of Indias commercial energy consumption and about 78% of domestic coal production is dedicated to power generation. This dominance of coal in Indias energy mix is not likely to change till 2031-32. Since prices were de-controlled, the sector has become profitable primarily as a result of price increases and the rising share of open cast production. India would need to augment domestic production and encourage thermal coal imports to meet its energy needs. The Committee has concluded that along the western and southern coasts of India imported coal is more cost competitive compared to domestic coal and further, imported coal is far more cost competitive compared to imported gas at these coastal locations. Such a cost advantage of imported coal over imported gas is likely to continue for some time in the future. Addressing Concern of Resource Rich States: Both coal and hydro resources are concentrated in a few states. Increasingly states are becoming more assertive in demanding higher share of benefits that their local energy resources provide to the country as a whole. Even though these are national resources and should not be rendered uncompetitive because of such demands, it is conceivable that mechanisms can be put in place that results in resource rich states reaping more equitable benefits. Allowing resource rich States a share in the profits of the enterprise tapping such local resources through what is called a carried equity interest and further allowing the state or its residents an opportunity to invest in such projects on equal terms and appropriately revising the royalty rate etc. are possible solutions to removing hurdles in exploiting these domestic sources of primary energy. The NDC must take up this issue immediately in respect of coal and hydro resources. Over the longer term, a National Policy on Domestic Natural Resources should be formulated and enacted through the Parliament. Ensuring Availability of Gas for Power Generation: There is a total generation capacity of 12,604 MW based on gas and liquid fuels. Bulk of it is base loaded under combined cycle operation. However, gas supplies have been restricted and the overall utilisation remains at only 54.5%. A significant part of this capacity was realised under the earlier liquid fuel policy while the rest has been built based on unenforceable fuel supply agreements that would have been unbankable in any other environment. While requiring that no new gas capacity be built without firm and bankable gas supply agreements, effort should be made to allocate available domestic gas supplies to the fertiliser, petrochemicals, transport and power sectors at prices that are regulated to yield a fair return to domestic gas producers. Such a practice should be enforced till a better demand-supply balance emerges and domestic gas production achieves some of the potential that is often cited. A more competitive market can then function. Power Sector Reforms: These must focus on controlling the aggregate technical and commercial losses of the state transmission and distribution utilities. This is essential to creating a financially robust power sector in each state. Only financially healthy state power distribution utilities can sustain the growing generation and transmission of Central Power Sector PSUs and State Power Sector Utilities (SPSUs) and provide the needed comfort on payment security to attract private investment in the power sector at internationally competitive tariffs.
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Reduction in Cost of Power: In terms of purchasing power parity, power tariffs in India for industry, commerce and large households are among the highest in the world. It is important to reduce the cost of power to increase both the competitiveness of the Indian economy and also to increase consumer welfare. Rationalisation of Fuel Prices: Relative prices play the most important role in choice of technology, fuel and energy form. They are thus the most vital aspect of an Integrated Energy Policy that promotes efficient fuel choices and facilitates appropriate substitution. In a competitive set up, the marginal use value of different fuels, which are substitutes, should be equal at a given place and time so that the prices of different fuels at different places do not differ by more than the cost of transporting the fuels. The resulting inter-fuel choices will then be economically efficient. Energy Efficiency and Demand Side Management: Lowering the energy intensity of GDP growth through higher energy efficiency is important for meeting Indias energy challenge and ensuring its energy security. Lowering energy intensity through higher efficiency is equivalent to creating a virtual source of untapped domestic energy. It may be noted that a unit of energy saved by a user is greater than a unit produced, as it saves on production losses as well as transport, transmission and distribution losses. Thus a Negawatt, produced by a reduction of energy need has more value than a Megawatt generated. The Committee feels that with an aggressive pursuit of energy efficiency and conservation, it is possible to reduce Indias energy intensity by up to 25% from current levels. Efficiency can be increased in energy extraction, conversion, transportation, as well as in consumption. Further, the same level of output or service can be obtained by alternate means requiring less energy. Using Energy Abroad: In case India can access cheap natural gas overseas under longterm (25-30 years) arrangements, it should consider setting up captive fertiliser and/or gas liquefaction facilities in such countries. This would essentially augment energy availability for India. Role of Nuclear and Hydro Power: Even if India succeeds in exploiting its full hydro potential of 1,50,000 MW, the contribution of hydro energy to the energy mix will only be around 1.9-2.2%. It is clarified that hydro share in the primary energy mix comes out lower because of the way oil equivalence of hydro electricity is calculated. A hydroelectric plant converts a unit of primary energy in the form of potential energy to almost one unit of electricity. Role of Renewables: From a longer term perspective and keeping in mind the need to maximally develop domestic supply options as well as the need to diversify energy sources, renewables remain important to Indias energy sector. Subsidies for renewables may be justified on several grounds. A renewable energy source may be environmentally friendly. It may be locally available thereby making it possible to supply energy earlier than in a centralised system. Grid connected renewables could improve the quality of supply and provide system benefits by generating energy at the ends of the grid where otherwise supply would have been lax. Further, renewables may provide employment and livelihood to the
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poor. However, the subsidies should be given for a well-defined period or upto a welldefined limit. Ensuring Energy Security: Indias energy security, at its broadest level, is primarily about ensuring the continuous availability of commercial energy at competitive prices to support its economic growth and meet the lifeline energy needs of its households with safe, clean and convenient forms of energy even if that entails directed subsidies. Reducing energy requirements and increasing efficiency are two very important measures to increase energy security. The Committee, however, felt that obtaining equity oil, coal and gas abroad do not represent adequate strategies for enhancing energy security beyond diversifying supply sources. In contrast, pipelines for importing gas do enhance security of supply if the supplying country makes a major investment in the pipeline. The most critical elements of our energy security, however, remain the measures suggested herein to increase efficiency, reduce requirements and augment the domestic energy resource base. Boosting Energy Related R&D: India will find it increasingly harder to import its required quantities of commercial energy as her share of the incremental world supply of fossil fuels could rise from a low of 13% in the most energy efficient scenario to a high of 21% in the coal dominant scenario by 2031-32. This assumes that the worlds supply of fossil fuels grows by only 2% per annum till 2031-32. Research and Development (R&D) in the energy sector is critical to augment our energy resources, to meet our long-term energy needs and to promote energy efficiency. Such R&D would go a long way in raising our energy security and delivering energy independence over the long-term. R&D requires sustained and continued support over a long period of time. Household Energy Security - Electricity and Clean Fuels for All: The considerable effort spent on gathering biomass and cow-dung and then preparing them for use is not priced into the cost of such energy. These fuels create smoke and indoor air pollution, are inconvenient to use, and adversely affect the health of people, particularly women and children. Yet, given the fact that women and girls carry most of the burden of the drudgery and also bear the brunt of indoor air pollution, the urgency to meet the challenge should be high. Such steps are needed for our broader need to achieve universal primary education for girls, promote gender equality and empower women. Easy availability of a certain amount of clean energy that is required to maintain life should be considered as a basic necessity. An Enabling Environment for Competitive Efficiency: Apart from pricing policies, an environment that allows multiple players in each element of the energy value chain to compete on transparent and equal terms is essential to realising efficiency gains within the energy sector. Currently the sector is dominated by large Public Sector Companies and some sub-sectors have natural monopoly characteristics potentially offering economies of scale. Given this ground reality, independent & informed regulation becomes essential to realising competitive efficiency. Such regulation can play an important role to see that competitive markets develop and mature. c. Committee to formulate transparent guidelines for approving gas price/formula under PSC Contracts:
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As India moves from the APM gas supplies to the gas produced by private sector players a clear and transparent guidelines for pricing was required. Keeping that objective in mind the government formed a committee to look into the pricing issues and recommended the following: 9 The trend in the international market shows a growing international trade in LNG/ piped natural gas as also an increasing share of spot trading. However, in terms of pricing of natural gas, it can be seen that until gas-to-gas competition develops, its price tends to get linked to other liquid fuels. But in matured markets having gas-togas competition, pricing of natural gas is emerging out of the shadow of liquid fuels. In so far as the Indian gas market is concerned, traditionally, the gas produced by National Oil Companies (ONGC & OIL) has been sold at a controlled price linked to a basket of fuels oils. 9 However, the Committee did not go into the principles of natural gas pricing as such. The various stakeholders whose comments were invited by the Committee have dwelt at length with the subject and have given detailed suggestions on the principles of natural gas pricing. As expected, they have dealt with the subject from their respective points of view and perspectives. The Committee confined its attention to its limited mandate of valuation of natural gas for the purposes of government take in situations where arms length transaction has not been possible. The Committee, however, took note of the suggestions, etc made by the various stakeholders, which were relevant to its mandate. 9 After considerable discussions, the Committee came to the view that in all situations where a price discovery through competitive bidding is possible, there should be no need to apply any other principle for valuation of gas. 9 The Committee felt that in cases where the actual supply of gas has not yet commenced, the process of price discovery through the open market mechanism must be resorted to as provided under the PSCs. 9 Only in respect of cases where price determination through competitive bidding has not been possible for reasons conclusively beyond the control of the parties and the supply of gas has actually commenced should the question of adopting guidelines for valuation of natural gas arise. 9 At the same time, the Committee felt that once a market determined price has been discovered between the parties through a transparent competitive bidding process, there should be no need for the government to interfere with the same. 9 For such cases, where valuation of gas has necessarily to be done by the Government/ DGH, the Committee felt that it should be done based on the most recent competitively determined price in the region duly indexed to the present. 9 Needless to say that each contract has a certain set of terms and conditions applicable to it and when competitive bids are invited, they are invited along with those set of terms and conditions. Therefore, along with each competitively discovered price, there will be a market-determined contract containing a set of terms and conditions. 9 In the event of any departure from those set of terms and conditions, the applicable price would require necessary adjustments. In future, with increasing natural gas availability, there would be more such market determined prices/ contracts in different regions which would serve as reference prices/ contracts, as suggested by the Committee. 9 The Committee had extensive deliberations in respect of indexation of the most recently discovered market price in the region to the current levels. It came to the view that since each market determined contract already provides for a formula for indexation/price review on a periodic basis, the same formula may be adopted for the
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purposes of such indexation. In other words, through a competitive bidding process which also outlines various terms and conditions, what is discovered is a market determined contract and not just price. Once the price is reviewed as per the provisions of that market determined contract, it becomes the most recent market determined price in the region. If, however, some new market determined contract has been concluded, in the meantime, that would then become the reference market determined price/ contract in the region. Typically, each long-term natural gas contract has a price review clause every 5 years or more. The question arises as to what should be the reference price if the valuation is to be done in respect of any year after the effective date of reference contract but before the review becomes due. The Committee, after considering the various options in this regard, recommends that only for such interim periods, the percentage increase in the price of cheapest liquid fuel [i.e., Furnace oil (FO)] may be considered for the purposes of indexation. However, once the price has been reviewed as per the provisions of the market-determined contract that would become the reference price and not the one indexed on the basis of percentage increase in the CIF price of FO as suggested. The Committee has suggested indexation based on FO since it is not only the cheapest liquid fuel but has also shown the least price volatility in recent years. The Committee would, however, like to reiterate that whenever the actual supply of gas has not yet begun, the discovery of price and the contract through a competitive bidding process must be preferred. Only where such a course of action is conclusively beyond the control of the parties and the supply has commenced, the above approach may be adopted for the purposes of valuation of gas to determine the Government take. The Committee was conscious of the fact that the approach that it recommends should not only be logical, consistent with extant policy and, as far as possible, balance the considerations of the producers, consumers, government as well as the economy but it should also be able to act as a deterrent for any departure from the competitive bidding process. The Committee felt that if any producer has actually supplied gas to any consumer at a price, which is not determined through a competitive bidding process, the government take (royalty and profit petroleum, etc.) may be determined on the basis of the approach recommended above by the Committee and the producer should be liable for ensuring such payments. How the resultant additional burden may be shared between the producer and the consumer, it should be left to them to mutually decide. The Committee would like to clarify that the price of natural gas derived as per its recommendations would only serve as the floor. If, however, the price at which any producer has supplied gas to any consumer happens to be higher than the one arrived at by the methodology suggested by the Committee, then the higher price would be reckoned for the purposes of Government take. An ideal situation would be when the approach suggested by the Committee is not required to be used at all. If the eventuality does arise, the task of making the actual calculations based on the suggested approach may be carried out jointly by DG, DGH and Director, PPAC based on available authentic data. They would identify the most recent market determined price/ contract in the region and work out the indexation factor as suggested. Besides, they would also recommend any adjustment, etc required on account of any departures from the terms and conditions of the reference contract. Thereafter, it would be the responsibility of DGH to ensure that the producer remits the government take accordingly.
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5. Indian oil and gas majors intensify oil and gas hunt abroad
In the year 2006 Indian oil and gas majors further strengthened its international operation and diversified its portfolio, which was predominately in Middle East to new areas like Latin America. Further, India companies also joined hands with foreign companies to explorer foreign territories. The some of important ones are discussed below. ONGC Videsh Ltd. OVL-Cuba Assets ONGC Videsh Limited (OVL) signed a Production Sharing Contract on 10th September, 2006 at Havana with CUPET, the State oil Company of the Republic of Cuba for two offshore exploration Blocks N-34 and N-35 located in Exclusive Economic Zone of Cuba. The ceremony was held at Nacional Hotel, Havana and was presided over by H.E. Ms. Yadira Garcia, Minister for Basic Industries, Republic of Cuba. OVL had earlier submitted Expression of Interest for these two blocks located in the deep water of Cuba offshore and negotiated the Production Sharing Contract. Government of Cuba has the option to take 20% participating interest in these Blocks. OVL will be the operator of the Block. The Blocks are spread over an area of approximately 4300 sq. km. The blocks are located in a very favorable geological set up and are estimated to hold considerable hydrocarbon resources. Exploration period is spread in three phases over a period of six years. During the first phase of exploration, acquisition, processing and interpretation of seismic data would be carried out for identification of prospects. Earlier in May 2006, OVL had acquired 30% Participating Interest in six exploratory blocks in offshore Cuba from Repsol YPF who hold 40% Participating Interest and balance 30% Participating Interest is held by Norsk Hydro. ONGC and SINOPECs joint acquisition of producing Colombian Oil Assets A 50:50 joint venture comprising a subsidiary of ONGC Videsh Limited (ONGC-VL) and a subsidiary of Sinopec International Petroleum Exploration and Production Corporation (SIPC) has acquired Omimex de Colombia Ltd. ("Omimex) from Texas based Omimex Resources, Inc for an undisclosed sum. Omimex has oil & gas operations exclusively in Colombia, which include onshore production and exploration areas with gross proved reserves of more than 300 million barrels of oil and current production at approximately 20,000 barrels of oil per day. Omimex's assets constitute a 100% interest in the light oil Velasquez fee mineral property and a 50% interest in the Nare and Cocorna association contracts where the Colombian national oil company, Ecopetrol S.A. (Ecopetrol) holds the remaining 50%.
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OVL signs MoU with INTEVEP, Venezuela ONGC Videsh Limited (OVL) signed a Memorandum of Understanding (MoU) with INTEVEP, S.A., a subsidiary of National Oil Company of Venezuela, PDVSA for Skill Development in various aspects of exploration and production on September 11, 2006. Venezuela holds large reserves of heavy and very heavy crude. The country is looking for partners to exploit it. The program to start offshore operations from next year has already been chalked out. The related areas under MOU include: technical assistance and specialized services, joint research and development, organization of conferences, symposiums and seminars, training activities, oil and gas exploration and production, refining, gas industrialization and petrochemical, process engineering, clean fuels, automation and computing, (information technology) and intellectual property rights. ONGC completes transaction of acquisition of producing asset in Syria
A 50:50 Joint Venture Company, Bergomo Holding B.V. (to be renamed as Himalya Energy (Syria) B.V.) of ONGC Nile Ganga BV, and Furlin Investments S.A.R.L., a subsidiary of China National Petroleum Company International (CNPCI) had entered into an agreement with Petro-Canada, a Canadian oil company, on December 19, 2005 to acquire entire shares of Petro-Canadas interest in four Production sharing Contracts (PSC) namely:- Ash Sham PSC (33.33%); Dier EZ Zor(old) PSC (37.5%); Dier EZ Annex IV PSC (37.5%); Gas Utilization Agreement (36%), covering 36 producing fields in Syria. Government of Syrian Arab Republic has approved the transaction and participation of the Joint Venture Company in the upstream hydrocarbon sectors through above mentioned PSCs. Pursuant to the agreement, the transfer of shares of the German subsidiary of Petro-Canada which holds its interest in these PSCs to the Joint Venture was completed on 31st January, 2006 at Zurich, Switzerland. The purchase is retroactive to 1st July, 2005. OVLs first foray in Latin America-15% stake in Brazilian deepwater block In yet another significant acquisition abroad, OVL, formally makes its maiden entry in Latin America, with 15% stake in BC-10 deep water block, located approximately 120 km southeast of the city of Vitria in Brazil. Technical and commercial studies are underway for the development of resources in BC-10, which would be shells second operated development in Brazil, with the potential for production of around 100,000 barrels a day. Shell has exercised its pre-emption option for an additional 30% of participating interest in the Shell operated BC-10 block located offshore Brazil. Shareholdings in the partnership will stand at Shell 50%, Petrobras 35% and OVL 15% once the transaction has been finalised and approved by Brazils National Petroleum Agency. BC-10 was declared commercial in December 2005. The Declaration of Commerciality occurred after a substantial exploration and appraisal program involving 13 wells and significant engineering and technological studies. In total six discoveries were made in the block, which resulted in four development areas: Ostra, Argonauta, Abalone and Nautilus. The block is located approximately 120 km southeast of the city of Vitria, in water depths ranging from 1500 to 2000 meters. The Oil and Gas Block BC-10 is located in the Campos Basin approximately 120 kms southwest from the city of Vitoria off the coast of Brazil. The adjacent BC 60 Block to the
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west contains several large discoveries including Jabarte, Cachalote and Chimmarao. Water depths in BC-10 range from 1400 meters on the west side of the block to 2100 meters on the east side. OMEL wins two prospective oil & gas blocks in the Nigeria In July 2005, OVL signed an MOU with Mittal Investments Sarl, the investment holding arm of Mittal Steel, formed ONGC Mittal Energy Ltd. (OMEL). In its maiden venture in an international bidding round, OMEL has won two prospective oil & gas blocks in the Nigeria 2006 Mini Bid Round. In the bidding held in the port city of Lagos in Nigeria on 19th May 2006 by the Department of Petroleum Resources, Government of Nigeria, OMEL won two blocks OPL 209 and OPL 212. The bidding round, named Nigeria 2006 Mini Bid round, was aimed primarily to award the upstream oil & gas blocks to companies that had made commitment to invest in the strategic sectors in Nigeria like refineries, power, transport, rail etc. OMEL was one of the invitee companies, in light of the MOU entered between OMEL & Government of Nigeria in November 2005, envisaging downstream and strategic investment by OMEL in Nigeria. OVL was also invited by the Government though it had not committed any downstream investment separately. OMEL was granted the right of first refusal in three blocks OPLs 212, 209 & 216 and OVL was similarly given the right of first refusal in OPL 218. The technical assessment of all the 4 blocks was carried by ONGC/OVL in-house team. OVL signed MOU with PETROBRAS in oil field exploration and development The MOU encompasses strategic cooperation and participation in the exploration and production of hydrocarbon resources on-land, as well as in shallow and deepwater, areas. The MOU will facilitate opportunities for joint collaboration by these two companies in India, Brazil and third countries. In April 2006, Petrobras accommodated OVLs acquisition of 15% of the equity in Block BC10, located on the prolific Campos basin in Brazils deepwaters. Shell is the Block operator, holding a 50% participating interest, with Petrobras holding the remaining 35% interest. BC10 Block is located in approximately in 1800 m water depth, 120 km off the Brazilian coast, and hosts eight exploration and five appraisal wells drilled to date. Initial studies suggest a substantial estimated recoverable reserve of Oil and Gas over the producing life of the field. The Block is currently under development and the production is scheduled to commence in the last quarter of 2009, with OVLs equity share at peak production expected to reach approximately 1 MMPTA. BC10, OVLs first venture in South America, calls for an upfront investment of about US$410 million, including the acquisition consideration, plus an upside capex. ONGC Videsh & PetroVietnam sign production sharing contracts for blocks 127 & 128, offshore Vietnam OVL has signed the PSC with PetroVietnam for Blocks 127 & 128, offshore Vietnam in the Phu Khanh Basin. OVL shall be the operator of the block and will have a 100% participating
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interest. In the event of a commercial discovery, PetroVietnam through a wholly owned affiliate has the option of obtaining up to a 20 percent participating interest in the Blocks. Blocks 127 & 128 cover approximately 9,246 sq.km and 7,058 sq.km. area respectively and lie alongside the eastern coastline of Vietnam, northeast of Ho Chi Minh City. The exploratory phase of both the contracts is seven years, with a firm minimum work program during the first three years that includes the acquisition of new 3-D seismic data and the drilling of two exploratory wells in Block 127 and one exploratory well in Block 128. The exploratory phase is followed by two optional two-year periods during which a well has to be drilled in order to retain the acreage. Gujarat State Petroleum Corporation GSPC is to form an overseas investment arm to explore hydrocarbon exploration and production opportunities in Oman, Qatar and Syria. It has submitted bids for five oil and gas blocks of Muscat and Syria. GSPC is also planning to expand its gas distribution network over south India channelling natural gas from the Krishna-Godavari (KG) basin. It has bid for blocks along with Oilex of Australia, GAIL and the Prize Petroleum-HPCL joint venture. GSPC has decided against tapping the capital market to develop Indias largest gas find of 20 trillion cubic feet (TCF) in the KG basin. Instead, it is exploring the joint venture route with international oil majors to develop the basin, which would require funds of over Rs 15 billion. GSPC has turned its subsidiary, Fuel Management Group, into a piped natural gas distribution company GSPC Gas Company which will be distributing fuel in 20 cities across the state. Royal Dutch Shell and GSPC have signed a long-term memorandum of understanding whereunder Royal Dutch will provide 2 million tonnes of liquefied natural gas (LNG) per annum, starting 2010, to GSPC. Gujarat State Petronet Limited (GSPL) has plans to invest Rs 14.5 billion to expand the gas grid network across the state by 2007. IOC-Oil India SPV A project-specific special purpose vehicle (SPV) of the Indian Oil Corporation (IOC) and Oil India Limited (OIL), floated for overseas acquisitions and exploration, is scouting for new oil and gas blocks in Indonesia. Indonesian state-owned Pertamina will open tenders in February for exploration of 10 oil and gas blocks, as well as 40 oil and gas brownfields. The IOC-OIL combine is close to acquiring 90 per cent stake in an exploration block at Gabon in West Africa at a total cost of $1.2 billion. The Indian oil SPV won two blocks in Libya recently and is expecting production from these in five years. The SPV is close to clinching a deal for offshore Block 239 in Nigeria. The block was originally won by Canadian firm Inlaks Petroleum Resources, which was unable to pay for it. According to the conditions laid down before the bidding process, the IOCOIL SPV is the second preferred bidder and has asked the Department of Petroleum Resources (DPR) of Nigeria to allow it to exercise the option of a second preferred bidder in taking up Block 239. The two Indian PSUs will hold around 40 per cent each in the block while the remaining 20 per cent will be held by a Nigerian company a partner in the consortium. OIL will invest around $150 million in the coming fiscal year on acquisition of international oil blocks including a few in Nigeria.
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Essar Oil In Madagascar, EOL has bagged three exploration and production blocks on December 18, 2006, and an MoU will be signed soon," company sources said. EOL is the owner-operator of all the three blocks in the African nation. Reliance Industries RIL and ONGC jointly eye Iraq oil field RIL and State-run ONGC and its private competitor Reliance Industries Ltd (RIL) are in talks to jointly develop Tuba oil field in southern Iraq. ONGC and RIL are expected to hold a 30 per cent stake each in the project-specific consortium and Sonatrach would hold the remaining 40 per cent. Iraq is expected to enact an oil law that would allow the regions to negotiate oilfield contracts with foreign investors. RIL signed PSC for offshore exploration block in Timor-Leste On November 16, 2006 Minister of Natural Resources, Minerals and Energy Policy of the Government of Timor Leste, signed a Production Sharing Contract for the offshore Contract Area K in Dili, capital of Timor Leste. In January 2006, the Government of Timor Leste had invited bids for 11 offshore exploration blocks in shallow to ultra deep waters in their country. The acreage offered lies in the proven petroleum province of Australian North West Shelf and is adjacent to the Timor Sea, which is a joint petroleum development area between Timor Leste and Australia. This region contains world class discoveries like Bayu Undan (commenced production in 2004) and Greater Sunrise. The Government of Timor Leste announced the awards on May 23, 2006. Of the 11 blocks offered under the licensing round, six blocks have been awarded. In a keenly contested bid with substantial participation from international players, RIL was awarded one block. The area of the awarded block K is 2,384 Sq. Km. Reliance will have majority interest and operator-ship in the block. RIL wins blocks in Yemen On December 2, 2006 RIL won two oil exploration blocks in Yemen. Yemen awarded onshore exploration Blocks 34 and 37. Blocks 34 and 37, each measuring around 7500-sq km and located on the border with Oman, were among the seven blocks offered by Yemen in its second licensing round. RIL is likely to sign Production Sharing Contract (PSC) for Blocks 34 and 37 in 2007. The company already partners Hood Oil in producing Block 9, where the two companies hold 25 per cent each. The block currently produces 7,500 barrels of oil per day and the output will go up to 10,000 barrels this month.
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GAIL GAIL buys 30 pc stake in Myanmar Expanding its base in oil and gas exploration and production (E&P) activities, GAIL (India) Ltd has acquired stake in Block A-7 in Myanmar. GAIL, as consortium partner, along with Silver Wave Energy of Singapore, signed a production-sharing contract (PSC) with Myanmar Oil and Gas Enterprise on December 6 for the block located in Rakhine offshore area of Myanmar. GAIL would hold 30 per cent participating interest whereas the rest would be held by Silver Wave Energy. The block will be developed in phases. Under phase-1, the consortium is going to study the prospects of the block. GAIL wins onshore block in Oman On June 28,2006 GAIL signed the Exploration and Production Sharing Agreement (EPSA) with Government of Oman for Block 56 in Muscat. The consortium consisting of GAIL, Oilex Australia, Videocon, Hindustan Petroleum Corp Ltd and Bharat Petroleum Corp Ltd was awarded Block No 56 in Oman for exploration and production of hydrocarbons, a GAIL release said. GAIL, Oilex and Videocon hold 25 per cent interest each in the consortium. Oilex Australia is the operator. "The Block 56 (adjacent to producing fields) is an onshore block located in the South Oman Salt Basin area located in the eastern flank covers an area of 5,809 square kilometers and drilling is to begin in 2007. Oman had in January offered five blocks (Block 54,55,56,57 and Block 58) in the fringes of the south Oman salt Basin under competitive bidding round. The blocks 54, 55 and 56 were in the eastern flank where as block 57 and 58 are in the western flank. As per the commitment by consortium under the EPSA, the work will commence with reprocessing of existing seismic data followed by acquisition of 2D and 3D seismic in last quarter of 2006, depending on availability of seismic contractors. Drilling activity in the block is expected to start some time in the first half of 2007. Indian Oil Corporation IOCL-Oman foray On December 16, 2006 state-owned OIL-IOCL combine and GSPC won five onshore oil blocks in Yemen. Oil India and its government-appointed partner for overseas exploration, IndianOil, won Blocks 82 and 83 in the third round of auction. The two state-owned companies have 15 per cent stake each in the consortia led by Medco Energy with 45 per cent stake. Kuwait Energy Co has the remaining 25 per cent stake. A total of 14 blocks were on offer in the third round.
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Blocks 82 and 83 are located near an oil-producing field operated by Canadas Nexen in the southeastern Hadhramount province of Yemen. Block 82 measures 1,853 square kilometers, while Block 83 is spread over an area of 364 sq km. Gujarat government-run GSPC won three out of four blocks it had bid. GSPC, which is the operator with 45 per cent stake, and its partners Jubilant Enpro (30 per cent) and Alkor Petrol (25 per cent) won blocks 19, 28 and 57, sources said. Block 19 and 28 lie in the producing Marib and Masila basins, while Block 57 lies on the border with Saudi Arabia. GSPC lost out Block 84 to Norways DNO. Reliance Industries had won two blocks, 34 and 37, in the second round of auction. Hood Oil of Yemen is RILs local partner in the two blocks. Blocks 34 and 37, each measuring around 7,500-sq km and located on the border with Oman, were among the seven blocks offered by Yemen in its second licensing round. IndianOil set for Indonesia retail foray On November 14, 2006 IndianOil planed to set up retail outlets there through a wholly owned subsidiary. This will be the third IndianOil venture for marketing of petroleum products overseas. The company release said they are also eying a stake in the petrochemical company PT Tuban Petrochem (Tuban Petro). The Indonesian government owns 70% stake in the petrochemical company. Besides auto fuels, the Indonesian venture will retail lubricants. IOCL and OIL jointly picked up equity stakes in oil blocks in Gabon and Nigeria IOC and its government-nominated exploration partner Oil India Ltd (OIL) jointly picked up equity stakes in oil blocks in Nigeria and Gabon. In Nigeria, the two companies will buy into an oil block by picking up a stake in Suntera Nigeria, which is the Nigerian subsidiary of Russian oil and gas firm Suntera Resources Ltd. The strategic deal will enable the two Indian companies to own 17.5 per cent each in the block. Each company will have to shell out about $11 million for the stake. Nigerian company Summit Oil is the licensor for the block. A senior OIL official confirmed that the production sharing agreement had already been signed. The final agreement is yet to be inked, the official said. In Gabon, IOC and OIL have picked up 45 per cent stake each in an onshore oil block from Singapore company Marvis. Each partner will put in $36.5 million for the stake. Marvis had signed a production-sharing contract for the Shakti block - which has estimated oil reserves of 588 million barrels - with the government of Gabon last November. The total exploration and development investment 3,700 sq km block is estimated at be close to $1.3 billion.
6. Major Oil and Gas Discoveries in 2006

All gas & oil discoveries made so far under the Product Sharing Contract regime are monitored with respect to time frame provided in respective PSCs. Therefore, the brief status of gas and oil finds of blocks of Reliance, GSPC and ONGC is given below:
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i.
Reliance (R1L) fields: Dhirubhai 1 and 3
The exploration block KG-DWN-98/3 was awarded to the consortium of Reliance Industries Ltd. and Niko Resources Ltd. during NELP I round. The first exploratory well D6-A-1 resulted in a major gas discovery in May, 2002 (named as Dhirubhai-1). The operator in this block has reported 12 more discoveries as on date. The discoveries (Dhirubhai-1 & 3) were notified on 29th October, 2002. The initial development plan of Dhirubhai 1 and 3 discoveries has been approved by the Management Committee on 5.11.2004. The corresponding development area comprises 339 Sq. Kms. which represents 4.5% of the block area. The DGH approved Original Gas in Place (OGIP) at 5.5 TCF. The development plan of Dhirubhai 1 & 3 envisages drilling of 34 development wells in two phases, installation of sub-sea templates and wellheads, gas transport line and shallow water gas compressor and onshore processing facility. Complete status of the development plan :

Wells required: 34 (all sub sea). Drilling of 2 development wells has been completed. Ran to start drilling of rest of the wells from April, 2007. Procurement of long lead items, Subsea well head, X-Mas tree, Subsea templates: LOA issued & work awarded before schedule. Construction of Jelly and onshore terminal is in progress. Dredging activity for filling at onshore site raising to +4.2m is in progress. Technical problem anticipated : NIL Envisaged plateau rate of production: 40 MMSCMD Plateau period : 10 years Date of availability of First Gas: June, 2008.
For the remaining discoveries in block D-6, appraisal work are in progress and are within the schedule provided in the Production Sharing Contract (PSC). ii. Gujarat State Petroleum Corporation (GSPC) field
The well KG#8 drilling by GSPC in the shallow water block KG-OSN-2001/3 (NELP-III) in Krishna Godawari offshore flowed gas during production testing. The well has been drilled down to a depth of 5061 m at water depth of 60m. Two more tests were carried out in layer EFR-A and ERF-Ba in perforation intervals 4825-4993m and 4629-4660m respectively. In the first test initially gas flowed to surface but on account of sand ingression problem, test became inconclusive. During 2nd test, no flow observed on account of low permeability of formation damage. The operator GSPC intimated the discovery of natural gas in KG# 8 well, under Article 10.1 of PSC to GOI on 1.7.05. A potential gas discovery report was submitted to DGH by the operator on 14.10.05 based on analysis of available data. As per that report, the original gas in place (OGIP) for the five identified layers considering the Lowest Known Gas (LKG) is estimated to be of the order of 912 BCF to 3611 BCF when considered at Max. Closure.
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Current status in the block
The block is under extended Phase-I of exploration. As per the PSC, Committed Minimum Work Programme (MWP) is to drill 14 wells during phase-I period of exploration. KG#8 was third well 4th well KG#17 has been drilled up the depth of 5601m and is currently under production testing. Earlier drilled two wells i.e. KG#1 and KG#11 were dry and abandoned. The Appraisal Plan of the discovery of KG#8 is yet to be submitted by the operator. No reserve or production can be realistically estimated until the completion of appraisal of the discovery. ONGC
iii.

ONGC is currently developing G-1 & G-15 discovery in KG basin. Earlier, ONGC had indicated that gas production of about 1.5 MMSCD was expected to commence from Mid-2006. However, now ONGC has indicated that due to slippage in implementation of development plan, the production of gas is expected in March, 2007. The estimated gas production from the above two fields is about 2.1 MMSCMD for a period of 7 years.
iv. Reliance Industries discovers huge oil reserves in its gas-rich D6 block in Krishna Godavari basin off the east coast: December 18, 2006 Reliance Industries Ltd discovered huge oil reserves in its gas-rich D6 block in Krishna Godavari basin off the east coast."The MA-2 well has encountered the thickest hydrocarbon column discovered to date in D6," Niko Resources said in a release. Niko Resources has 10 per cent interest in the block KG-DWN-98/3, also known as D6. Reliance is the operator of the block with 90 per cent interest. "MA-2 reached a target depth of 3581 metres and penetrated a gross hydrocarbon column of 194 metres consisting of 170 metres of gas/condensate and 24 metres of oil in the Cretaceous section," the release said. MA-2 is located approximately 2-km from the previous MA-1 oil discovery well. The MA-1 well in June 2006 reached a total depth of 3783 metres and hit 26 metres of net oil pay and 72 metres of net gas pay. Reliance has till date made about a dozen gas discoveries in D6 and put combined reserves in the block at around 50 Trillion cubic feet (TCF). MA-2 is the second oil discovery on D6 after MA-1. Niko said the Deepwater Frontier drilling rig has moved to drill development wells for the Dhirubhai gas development project. An addendum to the Field development plan for the Dhirubhai 1 and 3 gas fields has been approved and provides for the gas production rate to be increased to 2.8 billion cubic feet per day with a corresponding phase-1 field development costs of $5.2 billion.
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Commencement of production is scheduled for mid 2008. The approved field development plan of Dhirubhai 1 and 3 provides flexibility in the critical portions of the facilities to facilitate gas production to 4.2 BCF per day in future as and when additional reserves are added. This work included the acquisition of an additional 7600 sq km of 3-D seismic, drilling and testing of additional exploratory wells, drilling and extensive coring of two development wells in the development area, along with various detailed technical studies by international consultants. As a result, the hydrocarbon potential has increased significantly.
7. RIL up the ante on KG Basin production and ONGC find huge reserves
The biggest of them all was the news that shook the oil and gas industry was the news of RIL doubling its out in KG Basin. Reliance Industries Ltd (RIL) today announced that it would invest $5.2 billion (Rs 23,293 crore) to double the output from its productive D6 block in the Krishna Godavari (KG) basin to 80 million standard cubic meters per day (MMSCMD). The company said that it has filed an amendment to the initial development plan for the deepwater block KG-D6 with the Director-General of Hydrocarbons (DGH) for approval. RIL had earlier proposed investment of $2.47 billion to produce 40 MMSCMD for 7.5 years from discoveries Dhirubhai 1 and 3 (in the D6 block) out of a total 34 wells. As per estimates, the country's current gas production was 32.2 billion cubic m (BCM) in 2005-06. ONGC's crude oil (26 mt) and natural gas production (little more than 23 BCM) account for 78 per cent of the country's production. Despite the increase in production rate, the RIL project is on schedule for first gas by the second half of 2008-09, a company statement said. The project is the first deepwater gas development project in India and, on commissioning, would be among the largest and most complex deepwater gas production systems in the world. It will be completed in about six years from the first discovery, making it among the fastest deepwater gas developments in the world. According to industry sources, the increase in the company's investment in the D6 block would be accounted for mainly due to an almost 250 per cent jump in rig chartering rates. Subsequent to the approval of the initial approved development plan for Dhirubhai 1 and 3 gas fields, a lot of exploratory work has been done in the block to assess the overall hydrocarbon potential and the recoverable reserves in these fields. This includes acquisition of additional 3D seismic data, drilling of additional exploratory wells as a result of 13 discoveries and extensive coring of two development wells. RIL has also obtained independent assessment of 2P reserves for the Dhirubhai 1 and 3 gas discoveries at 11.3 trillion cubic feet, almost double the earlier estimates. "In view of the significantly higher hydrocarbon potential and large projected deficit of gas demand, RIL has sought approval for the following: increase in production rate from 40 MMSCMD to 80 MMSCMD and enhanced facilities for production, collection, evacuation and handling of gas, both onshore and offshore," the company statement said.
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Of the total discoveries RIL has made from the 15 wells drilled in the deep-sea block KG-D6, only the first four - Dhirubhai 1, 2, 3 and 6 - have been declared commercial. The discoveries declared commercial would be developed in the first phase. The deepwater block was awarded to RIL and NIKO Resources Ltd of Calgary, Canada under the first round of New Exploration Licensing Policy round. RIL, as operator of the block, holds 90 per cent of the participating interest, and NIKO the rest. The ONGC find huge reserves State-run Oil and Natural Gas Corporation has made a huge gas find in the Krishna Godavari Basin with initial estimates suggesting reserves of about 21 trillion cubic feet, and also struck a big gas field in Mahanadi Basin off Orissa coast. ONGC, which had previously discovered 2-3 TCF of gas reserves in about half-a-dozen wells in the Krishna Godavari Basin block KG-DWN-98/2, struck a 28 meter net gas pay zone when deep sea drill ship Belford Dolphin reached 5,300 meters depth at well UD-1, 55-km from the coast. Separately, ONGC has struck an estimated 3-4 TCF of gas in Block MN-OSN-2000/2 in water depths of about 1200 mts, sources said. They said ONGC has also found 15-20 million barrels of oil reserves in an Assam block. Corporate News and Views
8. Reliance Petroleum IPO

Mukesh Ambani group company Reliance Petroleum (RPL), may not have found much favour with investors during its nearly eight-month stay on the bourses, but the company has found mention in a list of the world's 15 biggest IPOs in 2006. Reliance Petroleum made its debut on the Indian stock market in May of this year following a much-hyped initial public offer (IPO) that is oversubscribed by more than 50 times and generated total proceeds of about Rs 8,200 crore ($1.83 billion) for the company. RPL's public issue has emerged as the world's 13th biggest IPO in 2006, and is the only Indian entry in the list of top-20 IPOs, according to the data compiled by global research major Ernst & Young (E&Y) and financial information providers Dealogic and Thomson Financial. While the stock debuted at a sharp premium of 70 per cent over the IPO price of Rs 60 a share on May 11, it has pared nearly the entire premium and is trading near its offer price over the past few months. After listing at Rs 102 per share, RPL shares have remained below Rs 70 a share since the end of May and closed at Rs 63.05 a share on Friday last week. Still, the hugely succesfull IPO has earned the company a place with China's Industrial & Commercial Bank of China (ICBC), which has emerged as the biggest IPO with total proceeds of about $22 billion in Hong Kong. There are as many as seven Asian companies that figure in the top 20 list, while six IPOs is from the emerging markets, the data compiled by E&Y, Dealogic and Thomson Financial shows. The IPO from a Chinese bank -- Bank of China -- raised $1.19 billion in Hong Kong and earned the second slot in the biggest ever IPO list.
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Along with China's Daqin Railway Co (ranked 12th with proceeds of $1.88 billion), there are three Chinese companies in the top-20 list, while there are four companies from the UK and two from the US. However, ICBC's, IPO size is nearly 12 times of the total proceeds raised by the only Indian entity in the list. The market analysts believe although there is not much near-term upside potential in the share price, RPL can give good returns in the long term as the company's new refinery in Jamnagar will commence production only in December 2008. The new 5,80,000 barrels per day refinery, which is being built at an estimated cost of Rs 27,000 crore ( $ 6 billion), is expected to earn better margin than its parent company Reliance Industries' existing refinery in Jamnagar. RIL, owns a 75 per cent stake in RPL, while US based energy giant Chevron Corp has acquired a 5 per cent stake as a copromoter in the company with an option to raise this stake by another 24 per cent. Earlier in October, the company signed a deal with a consortium of 14 international banks for a loan of $ 2 billion to finance its Jamnagar refinery. This is part of the $ 3.5 billion debt that the company is planning to pick up for the refinery. The loan of $ 2 billion is 33 per cent higher than the originally planned $1.5 billion loan, while the rest of the loan is expected to be mobilised in 2007.
9. Hazira LNG terminal connection with HVJ / DUPL systems

The HVJ and Hazira have finally interconnected after several delays. A brief status of Hazira LNG terminal connection with HVJ / DUPL systems is as follows: i. ii. The hydro-test of the entire 30", 7.5 km pipeline section from GAIL Hazira Compressor Station to the Hot-tap point at Mora completed on October 3, 2006. The section has been pressurized with dry air as per the requirement of ASME code and the pipeline system was made ready for hot-tapping work since Oct 3, 2006. However, the Hot Tapping Work could not take place due to some problem with Hazira LNG Pvt. Ltd. The Hot Tapping activities however started on Oct 25, 2006 and completed in first week of November after meeting all the requirements. The pre-commissioning / commission safety checks to be undertaken by a team of OISD and GAIL officials approved the project and the pipeline is now being charged with gas.
iii. iv.
10. RIL-RNRL pricing war

In a new twist to the ongoing war between the two Ambani brothers on the issue of gas price, the Government did not agree with the Mukesh Ambani led Reliance Industries Ltd (RIL's) proposed valuation formula for gas sales to Reliance Natural Resources Ltd (RNRL) belonging to Anil Ambani Group. The Petroleum Ministry in a statement issued said that it did not agree to the formula on the ground that it has not been derived on the basis of competitive arms length sale pricing for similar sales under similar conditions in the region from where the gas is procured.
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"It may be noted that the transaction between RIL and RNRL is part of their de-merger agreement and therefore does not meet the production sharing contract (PSC) criteria of arms length sales. The prevailing domestic gas price from fields operated by Joint Venture/private companies commands a significantly higher price than the proposal of RIL," the Ministry said. This move may affect the proposed 7,480 MW Dadri power project of Anil Ambani Group. The proposal of RIL regarding the gas price formula for sale of gas to RNRL for D-6 block in KG Basin had been submitted to the Government as per the requirement under the production sharing contract. RIL is selling gas from its Panna/Mukta and Tapti fields at $4.75 per million British thermal unit (mBtu). The proposed price of $2.34 per mBtu by RIL for sale to RNRL was significantly lower than the prevailing market price, the Petroleum Ministry said. "The Government has now examined the proposal in the light of the provisions, in particular Article 21.6 of the PSC, which provides the principles for valuation of natural gas for the purposes of the contract. The Government as a party to the contract is concerned with the formula or basis on which the gas under the PSC is to be valued for the purposes of computing cost recovery linked to the valuation of cost petroleum, the profit share of the parties including the Government and the royalty," the statement said. The Petroleum Ministry held that, ideally, any price discovery should be the result of an open and transparent competitive bidding process that allows fair and equal opportunity to all gas consumers to participate in the price discovery. The same procedure has already been followed by companies including RIL in the Panna-Mukta and Tapti product sharing contracts, it said. The Ministry has not received so far any proposal for approval of the formula or basis for valuation of gas for sale to NTPC from the same fields. Hence the question of a Government decision on this does not arise at this stage, the statement clarified.
11. Links of Sub-Committee Reports 2006

Gas Pricing Committee Report for NELP http://petroleum.nic.in/reportgas.pdf Report of The Committee to Formulate Transparent Guidelines for approving Gas Price Formula / Basis for giving Government approval under the PSCs (November 2006) http://www.infraline.com/ong/default.asp?URL1=/ong/NaturalGas/Pricing/ReportGasP ricingFormulae-Nov06.asp&idCategory=4932 Exert Committee Report on Integrated Energy Policy (August 2006) http://www.infraline.com/ong/default.asp?URL1=/ong/topical/IntegratedEnergyPolicyA ug06-ONG.asp&idCategory=4417
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Draft Report of the Working Group on Fertilizer Industry for the Eleventh Plan (200708 to 2012-13) http://www.infraline.com/ong/default.asp?URL1=/ong/NaturalGas/EndUse/DraftRepWo rkGroupFertilizIndus11Plan.asp&idCategory=5004 Draft Report of the Working Group on Petroleum and Natural Gas Sector for the XI Plan (2007-12) http://www.infraline.com/ong/default.asp?URL1=/ong/topical/draftreportXIPlan.asp Report on Marketing Cost of Petrol & Diesel - By Ministry of Finance (November 2006) http://www.infraline.com/ong/default.asp?URL1=/ong/topical/reports/MoFRepMktgCos tPetDiesel-Nov06.asp&idCategory=4935
Draft Sub Group Report on Exploration & Production for the Eleventh Plan (October 2006) http://www.infraline.com/ong/default.asp?URL1=/ong/topical/DraftSubGroupRepEnP1 1PlanOct06.asp&idCategory=4540 Draft Report of the Sub-Group on Refining (August 2006) http://www.infraline.com/ong/default.asp?URL1=/ong/topical/DraftRepSubGroupRefini ngAug06.asp&idCategory=4402 Report of Sub-committee on Feedstock Availability and Pricing http://www.infraline.com/ong/default.asp?URL1=/ong/StandCommRep/StandCommRe pIndex.asp&idCategory=2003
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Infralines Paper on Momentous Year for the Oil & Gas Sector: Year 2006 Roundup

Year 2006 Roundup:

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2. NELP VI and CBM II Rounds

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Additionally, ad-valorem biddable Production Level Payment (PLP), payable to the

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3. Petroleum and Natural Gas Regulatory Board Act, 2006

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4. Special Committee Reports

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6. Major Oil and Gas Discoveries in 2006

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Reliance (R1L) fields: Dhirubhai 1 and 3

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Current status in the block

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8. Reliance Petroleum IPO

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9. Hazira LNG terminal connection with HVJ / DUPL systems

10. RIL-RNRL pricing war

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11. Links of Sub-Committee Reports 2006

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