DGH for Cairn PSC extension only after firm declares Barmer potential

Written by Siddhartha P Saikia | New Delhi | Updated: Jul 31 2014, 05:34am hrs
Oil regulator Directorate General of Hydrocarbons (DGH) told the petroleum ministry that a decision on extension of the production sharing contract (PSC) for Cairn Indias Barmer block in Rajasthan should be taken only after the explorer submits its final proposal for gas production from the acreage.

The PSC is set to expire on May 14, 2020.

Cairn India submitted its application for contract extension to the petroleum ministry on April 5, 2013, citing the economic life of the field beyond 2020.

The DGH is of the view that Barmer is primarily oil-producing and hence the contract can be extended only for five years. In case substantial gas production is established in the block, the PSC could be extended for 10 years from the current end date of the PSC, the regulator feels.

The DGH has said that we should wait for the explorer to submit the declaration of commerciality (DoC) of the gas finds. Then, we would decide on the extension of the PSC. Currently, there are indication of just 1 trillion cubic feet (tcf) of gas potential, which is not enough to categorise the acreage as gas producing asset, a senior petroleum ministry official told FE.

In addition, the ministry is of the view that if the PSC is extended, Cairn India would have to offer higher share of profit petroleum to the exchequer. But, the government is not in favour of increasing ONGCs stake (partner of Cairn India) in the field, the official added.

According to the Article 2.1 of the Rajasthan PSC ...provided that in the event of commercial production of natural gas, which is expected to continue beyond the end of the term of the contract, the contract shall be extended for such period up to but not exceeding thirty five (35) years from the effective date, as may be mutually agreed between the permit the contractor to maximise the production of natural gas in accordance with good petroleum industry practice. If the production of crude oil or natural gas is expected to continue beyond the end of the relevant period referred to above, the parties may agree to extend this contract for a further period upon such terms as may be mutually agreed.

With the PSCs impending expiry date, the potential economically-recoverable reserves require consideration. Typically, countries allow for PSC extension based on the remaining economic life of the fields. For instance, in the case of Egypt, Indonesia and Nigeria, the extended tenure of 15 to 20 years is based on the specific field assessment. In light of this, the current Indian norm of 5 to 10 years extension based on associated or non-associated gas appears to be conservative, say industry watchers.

Cairn India has identified that the Raageshwari Deep Gas field has significantly higher gas resources. It believes that through additional infrastructure, it can quickly ramp-up production. In addition, Cairn Indias on-going exploration programme around the field is yielding positive results. Initial assessments indicate a significantly large resource base.

The period of extension should be the period of the economic life of the field/development area. Contractor should determine the economic life of the field. If there is any disagreement, the economic life of the field should be as determined by an independent sole expert, said a senior executive with a private exploration company.

The current Indian norm of 5-10 years extension based on associated or non-associated gas production under the pre-NELP PSCs is not aligned with the best practice of extension to the economic life of a field. The current Indian norm is not aligned with the observed global best practice, the executive added.

Cairn India holds 70% stake in the block, while public sector player ONGC has remaining 30% stake in the prolific Barmer block. The Rajasthan block is the only onshore block in India which is producing highest volumes of crude oil and which is remitting highest profit petroleum to the government of India. In FY14, the block produced 66.3 million barrels of oil equivalent (mboe). It also achieved a milestone production of 200,000 boepd.