The government has removed a key regulatory hurdle that virtually prevented the start of production in a dozen natural gas discoveries, a move that would allow ONGC and Reliance Industries, the country’s two largest hydrocarbon producers, to try and monetise an estimated 90 billion cubic metres (bcm) of gas.
While these gas reserves at the current market price of domestic gas — $4.66 per million British thermal units on a gross calorific value basis — are worth more than R1 lakh crore, the firms have been given three options regarding the regulatory requirement of conducting drill stem tests (DSTs) at the discovery sites. Practically giving relief to the companies from the Directorate General of Hydrocarbon’s (DGH) diktat that DST is mandatory for commencement of production, the Cabinet Committee on Economic Affairs (CCEA) on Wednesday allowed the developers not to perform the expensive DST, but at their own risk, implying that any obligations arising out of a shortfall in production would have to be borne by them.
The CCEA said if the developers opt to do the DST, then the only 50% of the recovery of the cost of the test that runs into millions of dollars would be allowed, subject to a cap of $15 million. Of course, the two firms, which have six discoveries each stuck over the dispute with DGH, can relinquish these discoveries, mostly located in the Krishna-Godavari (KG) Basin. “If the contractor does not opt for any one of these options suggested above within 60 days of the CCEA approval, then the area encompassing these discoveries shall automatically be relinquished,” the government said.
This will “settle the long-pending issue with regard to 12 discoveries in five blocks pertaining to ONGC and RIL but will also establish a clear policy for the future”, the government said. The policy relaxation will also bring transparency and uniformity in decision-making, obviating the current case-by-case approach, it added.
On December 18, 2014, FE reported that the Cabinet would take a call on policy on test requirements for oil and gas finds.
The DGH had turned down three out of 14 discoveries submitted by ONGC in its KG Basin blocks — KG-DWN-98/2 and G4 — because the PSU explorer did not conduct the DST. In 2010, RIL too faced a problem when its three gas discoveries (D29, D30 and D31) in its KG-D6 block were not given the go-ahead by the DGH on the grounds of the firm not doing the DST.
Former director general of hydrocarbons RN Choubey strictly followed the production-sharing contract (PSC) and said that flow of hydrocarbon to the surface is mandatory to recognise a discovery. This meant DST needed to be done before start of production. Since the DGH view was put on record, the government could reverse it only with the approval of the Cabinet.
PSU explorer ONGC argued that the guidelines issued by DGH in 2007 did not make DST mandatory for smaller discoveries. Out of the three discoveries not recognised by the regulator for want of DST report, one is at a depth of 3,000 metres, while other two are smaller finds. Moreover, in order to conduct DST, a deep-water rig needs to be hired for at least 20-25 days. The daily rent for a deep-water rig is almost $1 million. Non-recognition of three discoveries would have meant ONGC not able to monetise about 1.5 trillion cubic feet of gas.
Earlier, the parliamentary standing committee on petroleum and natural gas had expressed serious concerns over exploratory activities not taking place due to lack of clearances and disputes over interpretation of contracts.