The Hindu : Front Page : KG basin gas block under review

Online edition of India's National Newspaper
Monday, Aug 27, 2007
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Front Page

KG basin gas block under review

Sandeep Joshi

Escalating expenditure plan being reviewed
Experts’ fear higher
gas pricing

NEW DELHI: After instructions from Petroleum and Natural Gas Minister Murli Deora, the Directorate-General of Hydrocarbons (DGH) has decided to review the proposed $8.8 billion investment of Reliance Industries in developing D6 gas block in the Krishna-Godavari (KG) basin. It has not only appointed eminent consultant and reservoir engineer P. Gopalakrishnan for quick financial evaluation of phase-I, but also started the process of shortlisting an internationally reputed engineering consultant company for detailed review of the development plan.

The move comes after questions were raised about the escalating expenditure on the development plan of D6 that has been revised by Reliance from $2.5 billion in 2004 to $5.2 billion and then to $8.8 billion, which experts feared could lead to the company demanding higher price for natural gas at a later stage. This prompted Mr. Deora to ask the Petroleum and Natural Gas Secretary as well as the Director-General of DGH to come clean on the issue.

In his letter to Petroleum and Natural Gas Secretary M.S. Srinivasan, DGH Director- General V.K. Sibal said a two-pronged strategy was being followed to get the project cost validated and reviewed. Dr. Gopalakrishnan has been engaged to look into the reasons for the rise in phase-I capital expenditure from $2.47 billion to $5.2 billion and an additional $3.6 billion proposed for phase-II beginning 2010. He is likely to submit his report by September 15, 2007.

“Simultaneously, under a long term strategy, efforts are being made to engage an internationally reputed engineering consultant company for detailed review of the development plan,” the letter states, adding that the work would be awarded shortly. The DGH has shortlisted six global consultants for the job.

In his letter, Mr. Sibal further clarifies that the approval for an investment of $8.8 billion was limited only to establish the techno-economic feasibility of producing gas from D-1 and 3 fields in KG-D6.

However, the company is reimbursed the cost from gas sales based on the actual independently audited expenditure and not on the approved field development plan.

The global practice is that the development cost estimates are revised suitably when there is escalation in price levies or change in production capacity, he adds.

Initially the $2.47 billion plan was approved in 2004 to produce 5.3 trillion cubic feet (tcf) of gas at a peak production rate of 40 metric million standard cubic metres a day (mmscmd).

However, the block was later found to hold higher potential and the development plan was revised to 10.02 tcf of gas at a peak rate of 80 mmscmd.

“The contractors’ estimate of the revised investment is higher due to the increase in number of wells and production and pipeline facilities to produce a higher volume of gas and also due to the increase in price levels in the global market for exploration and production operations.”

Mr. Sibal says the cost per barrel of D6 block is estimated to be very competitive when compared to international companies and other discoveries in the country. “The per barrel finding cost of KG-D6 is estimated at $5.69, compared to $10.61 for PY-1 (in Cauvery basin), $34.21 for CN-ON-3 (in Cambay basin) and $5.74 for Rajasthan block. The cost of British Petroleum in 2005 was $5.79.”

On the issue of “gold plating,” Mr. Sibal says the idea was misplaced and coined out of sheer ignorance of business economics. Inflating the expenditure does not benefit anybody, neither the companies nor the Government.

Every additional rupee of wasteful investment eats into the profit of the companies. The amount of $8.8 billion is not the cost recoverable amount, he adds.

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