$6.5-bn worth oil waits as govt sits on Cairn PSC

Written by Promit Mukherjee | Pranav Nambiar | New Delhi | Updated: Jan 16 2014, 06:51am hrs
CairnCairn has sought from the oil ministry an extension of the Ravva block PSC.
Hydrocarbon resources to the tune of 65 million barrels of oil equivalent (mboe) are at stake as the government remains undecided on whether or not to extend Cairn Indias production-sharing contract (PSC) on the east coast Ravva block beyond the expiry date of 2019. If valued based on crude oil terms at a price of $100 per barrel, these resources could be valued at around $6.5 billion.

Put differently, the government's dilly-dallying would mean that Cairn's investments of close to $1 billion will be at risk, sources close to the development said.

There are eight oil and gas prospects with contingent resources of 65 mboe that Cairn might not be incentivised to develop if the PSC is not extended. These are present in the high temperature-high pressure (HTHP) zones and require about $110-120 million per field to develop, said a source.

Cairn has sought from the oil ministry an extension of the Ravva block PSC for a further 10 years or till the economic life of the field lasts. The Ravva block has good potential to produce beyond 2019 through enhanced oil recovery (EOR) schemes, said the source.

Current production from the block is close to 30,000 barrels of oil per day (bopd), down from the peak production of 50,000 bopd in 1999. Similarly, Cairn has sought an extension of the PSC term for its oil-rich Barmer fields scheduled to end in 2020.

An inter-ministerial committee led by SC Khuntia, additional secretary and financial adviser in the oil ministry, is currently working on a policy on PSC extensions.

Apart from Ravva, there are about a dozen PSCs from different operators of 25 years' contract tenure that are slated to expire between 2019 and 2025, creating a lot of uncertainty for the operators (ONGC, BG and Reliance Industries, apart from Cairn) and stymieing their investment plans, even as in many cases they are confident of the potential of the reserves and want to tap into them.

The Ravva contract was signed in 1994 when Cairn took over the operatorship of the block from ONGC.

The Ravva block has produced more than 257 million barrels (mbbl) of crude oil and sold 324 billion cubic feet (bcf) of gas, more than double its initial estimates, achieving a recovery factor of around 47%.

The block is currently in its fifth phase of drilling and can produce a further 23 mboe by 2019 when the contract expires.

The company will soon submit a field develop plan (FDP) to the Directorate General of Hydrocarbons (DGH) to monetise a further 4.3 mbbl of crude oil and 17.7 bcf of gas found in four pools of the block.

If Cairn goes ahead with developing the additional 65 mboe of resources, this would be part of its sixth phase of drilling.

Up to March 31, 2013, Cairn had invested about $1.42 billion on the block and the governments share of earnings stands at 72% (including royalty, tax, etc). In the July-September quarter, the block produced 29,151 barrels of oil equivalent per day, recording a 3% quarter-on-quarter growth with 15 oil wells, 4 gas wells and 9 water injection wells. In Ravva, the monetisation strategy consists of drilling a deep exploration prospect, evaluation of other deep prospects, development of contingent resources and an infill drilling campaign based on 4D seismic data, among others

The DGH has recommended to the oil ministry that PSCs expiring in the next few years be extended by 10 years or till the economic life of the field is over.

The extension, the regulator recommended, should come with a rider that the companies contribute a 5 percentage points higher share of profit petroleum to the government from revenues earned on the fields for which the leases are extended beyond the original contract date.

The profit to be shared with the government differs based on the investment multiple. If the multiple is less than 1.5, for instance, the government's share of profit petroleum is 15% at present, and the DGH has proposed that this be raised to 20%.

The PSCs slated to expire between 2019 and 2025 include Cairn India's prolific Barmer fields in Rajasthan and the Panna Mukta Tapti fields held by ONGC, BG and RIL, expiring in

2020 and 2019, respectively. Some of the other operators seeking extension include HOEC for its Asjol field expiring on 2021, Oilex for the Cambay field expiring in 2020, Selan for the Indora and Lohar fields, both expiring in 2020, and Niko for its Hazira field, which has a 2019 due date.