Oil companies to gain more from extended drilling time

Written by Pranav Nambiar | New Delhi | Updated: Dec 27 2013, 06:02am hrs
Oil companiesAn inter-ministerial committee led by the oil ministry is currently working on a policy on PSC extensions.
In a move that may enable oil and gas exploration companies like Cairn India, Reliance Industries (RIL) and Oil and Natural Gas Corporation (ONGC) to recover hydrocarbons from producing fields to the fullest extent, the Directorate General of Hydrocarbons (DGH) has recommended to the oil ministry that production-sharing contracts (PSCs) expiring in the next few years be extended by 10 years or till the economic life of the field is over.

There are about a dozen PSCs of 25 years that are slated to expire between 2019 and 2025, creating a lot of uncertainty for these operators and stymieing their investment plans, even as in most cases they are confident of the potential of the reserves and want to tap into them.

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%.

An inter-ministerial committee led by the oil ministry is currently working on a policy on PSC extensions.

Countries like Denmark, Egypt and Indonesia allow for PSC extensions of greater than 10 years. Others like Turkmenistan and Azerbaijan offer up to 10-year extensions, while the Philippines and Poland offer up to five-year extensions.

The DGH on December 12 wrote to SC Khuntia, additional secretary and financial adviser in the oil ministry, who is heading the panel looking to draft a policy on PSC extension, on the matter.

The committee, which has representation from the law ministry, DGH and Planning Commission, was set up after oil and gas producers, worried about the prospect of their lease agreements expiring prematurely, lined up before the government seeking an extension of PSCs.

In all, over 10 PSCs are set to expire between 2019 and 2025, including Cairn India's prolific Barmer fields in Rajasthan and the Panna Mukta Tapti (PMT) fields held by ONGC, BG and RIL, expiring in 2020 and 2019, respectively. Some of the other operators seeking extension include HOEC's Asjol field expiring on 2021, Oilex's Cambay field expiring in 2020, Selan's Indora and Lohar fields both expiring in 2020 and Niko's Hazira field, which has a 2019 due date.

Operators believe that the fields hold the promise of producing hydrocarbons much beyond the expiry of their PSC tenure. Also, clarity on the economic life of the field is important to make future investment plans, which can run into billions of dollars.

As a global practice, extensions of contracts are typically granted for varying periods of time up to 25 years and certain conditions are attached to these contracts. However, in most cases, these conditions do not amount to a significant contract renegotiation, said an operator.

In the case of Cairn, after it invests $3 billion in its Rajasthan field, the company hopes to be able to recover 1.5 billion barrels of oil. Right now, of the 7.3 billion barrels of oil in place, the company estimates it can recover 1 billion barrels. As per the plan, if the company is able to raise production from 175,000 barrels per day (bpd) today to 300,000, this means the company can recover 100 million barrels a year. In other words, to recover the 1.5 billion barrels it potentially can it has recovered 100 million barrels already it needs another 14 years.

Another medium-sized block in which Cairn is seeking a PSC extension includes a field in Ravva where the lease runs out in 2019. Oil production from Ravva averaged around 22,600 barrels of oil equivalent per day (boepd) in the July-September quarter. The company has also completed a 4-D seismic study at its Ravva to identify pockets of oil deposits that have been bypassed.

An industry expert said that while the extension of PSCs is welcome, the higher share of profit petroleum with the government is a clear dampener. Globally operators are incentivised to produce from mature fields. The government should at least retain the same share of profit petroleum if it cannot reduce it, the expert said.

The PMT fields operated by ONGC-RIL-BG are on a decline with the Panna Mukta fields producing 3.6 million barrels of crude oil and 33.8 billion cubic feet (bcf) of natural gas in the first half of FY14, a fall of 17% in the case of crude oil and 6% in the case of natural gas on a year-on-year basis. Tapti produced 0.14 million barrels of condensate and 14.9 bcf of natural gas in the first half of FY14 a decline of 53% and 42%, respectively on an annual basis.

Some of the DGH's other suggestions are that the contractor must submit the application for extension to the oil ministry two to five years in advance of the expiry. It should also submit a revised field development plan (FDP) for the proposed extension period to exploit the remaining reserves. The contractors must also demonstrate the availability of balance recoverable reserves through a third-party audit.

Also, the contractors should have cumulatively drilled at least 70% of the development wells of the FDP approved by the management committee or achieved the committed production as on date with reference to the FDP. The area for which the extension is sought should have a mining lease and at least one or more fields in the area applied for extension should be on commercial production on the date of application.