ONGC to invest $5 billion to take out hydrocarbon from KG block

By: | Published: March 29, 2016 1:47 AM

The country’s flagship explorer ONGC on Monday unveiled plans to invest $5.076 billion to drill oil and gas from a part of its much-touted deepwater block KG-DWN...

ONGC chairman and managing director Dinesh K Sarraf said the firm’s board has given the go-ahead on the investment plan to take out hydrocarbon from cluster-II area of the KG-DWN-98/2 block in the east coast. ONGC chairman and managing director Dinesh K Sarraf said the firm’s board has given the go-ahead on the investment plan to take out hydrocarbon from cluster-II area of the KG-DWN-98/2 block in the east coast.

The country’s flagship explorer ONGC on Monday unveiled plans to invest $5.076 billion to drill oil and gas from a part of its much-touted deepwater block KG-DWN-98/2 in the prolific Krishna-Godavari (KG) Basin.

ONGC chairman and managing director Dinesh K Sarraf said the firm’s board has given the go-ahead on the investment plan to take out hydrocarbon from cluster-II area of the KG-DWN-98/2 block in the east coast. The block is divided into three clusters and the explorer is currently taking up the development of cluster-II, which is further divided into IIA and IIB. ONGC has alleged that Reliance Industries, which operates the neighbouring block KG-D6, has drilled out gas from the cluster-I area. At present, the PSU explorer is not taking up development of cluster I and III.

The first gas from the block is expected by June 2019, while crude oil production is likely to commence by March 2020.

It would take three years to achieve peak production, which is expected to be maintained for another five to six years.

During peak output, the area is expected to produce 77,305 barrels per day of crude oil and 16.29 million metric standard cubic metres per day of gas.

The IIA area has crude oil reserves of 94.26 million tonnes and 21.75 billion cubic metres (bcm) of natural gas. On the other hand, the IIB area is rich in gas with reserves of 12.75 bcm. ONGC plans to drill total 35 wells, comprising 15 for pumping out crude oil, 8 for gas and 11 for water injection.

When asked about the risk of investing in a low-price scenario, Sarraf said that the project reaches a ‘threshold rate of return’. Also, the cost of oilfields’ services and equipment have dropped and prices are likely to go up in the future.

Brent crude futures were up 25 cents at $40.69 per barrel on Monday. Last week, the contract fell 76 cents, or nearly 2%, in its first decline in five weeks.

A K Srinivasan, director (finance), ONGC, said that in order to achieve a post-tax return of 15% on the KG Basin investment, the explorer would require a crude oil price of $51 a barrel and natural gas price of $6.5 per million British thermal units. The government recently allowed marketing and pricing freedom for drilling out natural gas from difficult areas. The ONGC block qualifies to claim the benefit, though the caveat is that there is a ceiling price for natural gas based on a matrix of alternative fuels.

Srinivasan is confident that the project would be viable below the ceiling price for natural gas. The project is expected to boost ONGC’s top line by $846 million in the first year of production, while profit after tax would be a negative $593 million in that year. In three years, the KG Basin project would generate revenues to the tune of $1.896 billion, which would add $585 million to the explorer’s profit after tax.

Sarraf said that it is yet to be finalised if the entire project would be funded by internal accruals or whether there would be some borrowing. Currently, ONGC is a debt-free company on a standalone basis and is expected to report a cash balance of Rs 11,500 crore by March 30.

In order to evacuate hydrocarbon, ONGC would set up floating production, storage and offloading platform, about 430 km of sub-sea pipelines of various sizes from 6 to 22 inches, about 151 km umbilical and 10 manifolds, riser base manifolds and an onshore gas handling terminal.

Gr3

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