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Drilling For Answers

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Reliance Industries (RIL) and the central government are having a tug-of-war and every move is tightening the rope. On the one hand, RIL wants to deploy global oil giant BP's expert team at the Krishna-Godavari (KG) basin to revive gas production, which fell to an all-time low of 39.80 million standard cubic metres per day (mmscmd) on 15 December due to technical snags. On the other hand, the government is planning to bill the developer (RIL) for fall in production as India aims to increase the usage of natural gas with prices of crude oil spiralling.

But the government — largely the petroleum ministry and the Directorate General of Hydrocarbons (DGH) — has not approved BP's plans of becoming a partner in the production sharing contract (PSC) of 20 blocks operated by RIL. Although BP has completed payment of $7.2 billion and formed an expert team to tackle the reservoir issues, it has been waiting for almost 10 months for approval.

"Every two months DGH or the oil ministry comes up with questions on the deal. First, they wanted audited numbers of BP and that was given. Next, they found the land line and fax numbers of BP are missing. After that they suggested that the government should be included as partner along with RIL, BP and Niko Resources," says an executive close to the development.

Last month, RIL chairman Mukesh Ambani criticised the government for its slow functioning. Attending the India Economic Summit in Mumbai, he suggested that both central and state governments should move fast.

Soon after, RIL sent an arbitration notice to the oil ministry over the government's move to disallow some of the expenditure the company has incurred in the KG-D6 gas fields as punishment for falling output.

The government's move is based on the advice of the solicitor general of India. In the arbitration notice, RIL stated that the move to limit the amount of expenditure the company can recoup from its flagging KG-D6 fields is illegal and outside the PSC. According to reports DGH later recommended that the oil ministry disallow partial cost recovery of RIL in this financial year and the next. That's a whopping $1.2 billion.

As there is a contrary view that RIL intentionally keeps production low in order to fetch a higher price when gas prices are revised in 2014, the government is cautious in its move. According to the 2006 field development plan, where capital expenditure in D1 and D3 fields was hiked to $8.8 billion from $2.47 billion, RIL was meant to produce 61.88 mmscmd of gas from 22 wells by April this year and 80 mmscmd from 31 wells by 2012.  But RIL has drilled just 18 wells for production, but shut down four due to technical problems.

RIL's view is that drilling new wells will only add cost at $8-10 million per well. "We are looking for optimal utilisation of resource based on the joint study of BP and RIL," says an executive.

(This story was published in Businessworld Issue Dated 26-12-2011)