With much of the drilling to be done in deep-water blocks, senior RIL officials say the costs are high and add that it is risky to make additional spends till there is more certainty on gas pricing. To find substantial gas reserves, deep-water drilling is the only option, an RIL official said. RILs apprehensions stem from the fact that the formula for arriving at the price of gas, as proposed by the Rangarajan Committee, will not result in a market-related price. The committee has suggested a formula that takes into account the average of the imported price of LNG into India and the weighted average benchmark prices in North America, Europe and Japan. RIL officials say it costs R700 crore to develop one deep-water well.
Cairn India Indias biggest private sector crude oil explorer and ONGC are, however, keen to participate. P Elango, CEO, Cairn India said: For us, the policy has been conducive and we will keenly look at the NELP X round. Sudhir Vasudeva, chairman, ONGC, is confident that the government will resolve any issues relating to policy uncertainty. It is not mandatory for us to participate in NELP and we will do so only if the blocks on offer have good prospects, Vasudeva told FE.
Going by current price trends, globally, the Rangarajan formula would throw up a price of $8.4 mmBtu (million metric British thermal units). However, RIL believes a market-linked price should be arrived at by the producer floating tenders and calling for bids. RIL is non-committal on whether whether a price of $8.4 mmBtu would be remunerative enough for it to invest.
Analysts estimate a minimum price of $10 mmBtu might be needed to ensure an assured internal rate of return (IRR) of 30%. A presentation by IHS CERA, a US-based independent energy research firm, says 91 trillion cubic feet (tcf) of reserves remain unexplored across12 main sedimentary basins in India. Of this, 53 tcf is in deep-water and ultra deep-water, 85% of which can only be viable at over $10 per mmBtu.
How much participation there will be in NELP X from overseas players is hard to gauge. Foreign explorers were absent in NELP IX while NELP VIII saw Cairn, BG and BHP Billiton putting in bids. Foreign players have been bidding for blocks in India since NELP II although they skipped NELP III.
Under NELP X, the government is expected to auction 86 hydrocarbon-bearing acreages; 58 have received clearances environment and clearances. On a visit to Mumbai last month to woo foreign explorers, petroleum minister M Veerappa Moily conceded several of them had raised some short term concerns which he said would be addressed in two months. Petroleum secretary Vivek Rae had indicated that investors were apprehensive about the stability of the terms of production sharing contracts (PSC). Moreover, explorers, Rae said, had requested that gas be classified as a mineral oil in order that it attracted the same levies as crude oil. Explorers also want that the PSC should be based on the cost recovery model rather than the government-proposed revenue sharing model.
NELP IX, which took place in 2010, saw 34 blocks being auctioned of which 14 blocks were awarded. Ever since NELP I, in 1999, a total of 360 blocks deep water, shallow and on-land have been auctioned while 249 were awarded. While DGH data shows 196 of these as being operational, 53 have been relinquished and only 13 blocks are currently producing under joint ventures or run by a private company.