DGH stymies RILs gas plans off Orissa

Written by Pranav Nambiar | New Delhi | Updated: Aug 29 2013, 08:52am hrs
Upstream oil and gas regulator Directorate General of Hydrocarbons (DGH) has made it all but impossible for Reliance Industries (RIL) to produce natural gas from its two discoveries (D-32 and D-40) in block NEC-25, off the Orissa coast. Even as RIL and the regulator were exchanging views on the latters direction to the company to conduct the drill stem tests (DSTs) to validate estimates of gas reserves, the regulator has now refused to allow RIL to conduct the DST saying its exploration period has come to an end. Surprised by the DGH decision, the company plans to approach the petroleum ministry for a resolution.

Till the DST is completed, RIL cannot apply to the DGH for a declaration of commerciality (DOC), without which it cannot commence development.

The NEC-25 blocks was awarded to RIL in the NELP 1 round in 1998.

As per the integrated block development plan for the four discoveries (D-32, D-40, D-9 and D-10) submitted by RIL in March this year, the company was to make an investment of $3.5 billion and proposed a phased manner of development.

RIL officials have told the DGH that there have been many instances in the past where DOCs have been approved by the DGH without DSTs.

But with the DGH insisting on DSTs, the company has slated that it is ready to undertake the tests now.

NEC-25 is a NELP 1 block and the exploration phase of the block has been completed. There is no question of extending the exploration period to conduct the DSTs, a DGH official said. DSTs are vital to understand the flow rate of gas and, therefore, helps the DGH assess the commercial viability of the field.

RIL has made discoveries in about seven wells in the D-32 and D-40 fields, which are said to hold estimated reserves of 1 trillion cubic feet (tcf).

The company has so far invested about $300 million for exploring various fields in the NEC-25 area and was expecting to find a further 1 tcf of gas reserves from the D-32 and D-40 fields. The IBDP includes the two southern discoveries (J-series) for which commerciality was declared last year. During 2012-13, the key pre-development activity such as conceptual engineering was completed in order to facilitate the finalisation of development plan.

The DGH official said that is not logical for conducting DSTs at this stage as the costs would be at least 100 times higher. If the DST was conducted while the discovery was made, it would not have cost much. Now it will lead to substantially higher additional costs as will have to bring back the rigs to conduct the DST, the official said.

Under the current production-sharing contract regime, which follows a cost-recovery mechanism, exploration companies are first allowed to recover the capital and operating expenditure from oil and gas revenues before sharing profits with the government. RIL operates NEC-25 with a 60% working interest; BP holds 30% and the remaining 10% is held by Niko Resources.

This is not the first time that the DGH has rejected the DOC on grounds of failure to conduct DSTs within the stipulated time. DGH had earlier this year also rejected the DOC of three RIL discoveries in the KG-D6 block (D-29, 30 and 31) on similar grounds of not undertaking separate DSTs.