Growth through Energy Security for India

India imports about two-thirds of its crude oil requirement. Exploration and production of oil and gas is critical for India's energy security and economic growth. Reliance's oil and gas exploration and production business is therefore inexorably linked with the national imperative. Exploration and production, the initial link in the energy and materials value chain, remains a major growth area and Reliance envisions evolving as a global energy major.

Over the years the E&P industry has registered significant growth, primarily due to spiraling crude oil and gas prices. With growing competition and ever growing demand for energy, especially from developing countries, the focus is on energy security.

RIL began gas production within six and a half years of gas discovery, in comparison to the world average of 9-10 years for similar deepwater production facilities. Continuous gas production for about a year, with 100% uptime, once again demonstrates the Company’s flawless commissioning and execution capabilities.

Key highlights of the KG-D6 project were as follows:

• World’s largest gas discovery in 2002
  
  
• Among the world’s largest and most complex deepwater gas production facility in the world
  
  
• Tie Back of 60 kms
  
  
• Transforming India’s energy landscape
  
  
• Capacity of 550,000 Barrels of Oil Equivalent Per Day (BOEPD)
  
  
• Equivalent of 40% of India’s current oil and gas production and has the potential to more than double India’s gas production
  
  
• Among the fastest deepwater field development projects
  
  
• Among the lowest Finding & Development (F&D) cost per BOE for similar deepwater projects
  
  
• Global-scale project management; simultaneous execution in 20 locations
  
  
• Among the largest marine construction spread
  
  
• Equipment weighing 125,000 Metric Tonnes (MT) installed offshore
  
  
• 500 line kms of pipelines and umbilicals installed
  
  

Presently, RIL is producing approximately 60 Million Metric Standard Cubic Meters Per Day (MMSCMD) of gas which is being supplied to several priority sectors identified by the Government of India under its gas utilisation policy.

Since production commenced in April 2009, the field has produced over 14.5 billion cubic metres of gas, contributing significantly to the country’s critical industrial sectors.

RIL is enhancing India’s energy landscape. Production from the Dhirubhai 1 and 3 discoveries of the KG-D6 block is likely to result in a quantum leap towards achieving India’s energy security as it has the potential to account for 40% of the country’s current hydrocarbon production. The gas supply from the KG-D6 facility has already impacted various aspects of the country’s economy including:

• The Index of Industrial Production (IIP) has acknowledged the significant contribution of production from KG-D6 in the double digit growth registered by the mining sector.
  
  
• With increased availability of gas, production of indigenous fertilisers has increased and the cost of production reduced, thereby resulting in savings of about Rs. 4,000 crore p.a. in Government subsidies.
  
  
• There has been a significant improvement of 30% in gas-based power generation in the country during
  the year.
  
  
• Production of natural gas from KG-D6 has also reduced the dependence on more expensive liquid fuels that were being used in the steel, refining and petrochemicals sectors.
  

Within a month of emerging as the largest producer of natural gas in the country, RIL announced a successful assessment of the design capacity of the KG-D6 deepwater gas production facilities in December 2009. A flow rate of 80 MMSCM was achieved through the KG-D6 facilities and delivered to the East-West pipeline.

The economic crisis left an impact on the oil and gas industry globally. The economic downturn that followed resulted in unprecedented demand destruction. The industry is on a path of recovery due to fiscal measures announced by various governments. The major deepwater basins of the world namely the East coast of India, Gulf of Mexico, Africa and Brazil continue to witness huge levels of activity and investment.

The structural theme for investment in the sector remains valid. The world’s insatiable need for reliable and affordable energy continues to grow unabated. This calls for substantial investments, access to resources and newer technologies to unlock resources from challenging locations. The International Energy Agency (IEA), in its World Energy Outlook 2009, estimates that by the year 2030, global energy demand is expected to increase by 49% from its current level. Oil and natural gas are expected to remain primary energy sources and are expected to meet 51% of the global demand. Natural gas, a low-carbon, lowpolluting green fuel-that flows from RIL’s blocks, is creating unprecedented value for the Company’s shareholders and benefiting India. Increasing concern for climate change augurs well for natural gas as it is an environmentally benign fuel with carbon emissions far
lower than other fossil fuels.

IEA estimates that the world requires investments to the tune of $ 11 trillion in the oil and gas sector over the next 20 years implying an annual investment of over $ 500 billion.

FY 2009-10 was a year of steady growth. Oil prices rose from an average of $ 46/barrel (bbl) in January 2009 to touch $ 75/bbl in December 2009. Average WTI prices remained at $ 70/bbl vis-à-vis $86/bbl for the previous year. Henry Hub natural gas price averaged at $ 4/Million Metric British Thermal Unit (MMBTU) for FY 2009-10 as against an average of $ 7.87/MMBTU in FY 2008-09.

The year 2009 also saw the global oil demand slip to 84.93 MBPD, a decrease of 1.5% over 2008. IEA forecasts that the global oil demand is set to increase by 1.67 MBPD or 2.0% to 86.60 MBPD in 2010.

Global Natural Gas Market Growing

Globally, natural gas constitutes 24% of the energy basket while in India it accounts for a mere 9%. The low share of gas in India’s energy consumption is attributed to limited availability and nascent infrastructure. Gas accounts for 35% of the energy mix in the former Soviet Union and Europe, 26% in USA, 17% in Japan and 15% in Korea.

The share of gas in the energy mix is expected to increase to nearly 23% in 2031-32 mainly due to the increasing demand from the industrial sector, power sector, gas distribution in cities and opportunities in the gas-to-liquids business.

Sizeable investments globally over the last few years in developing the natural gas business and related logistical capabilities have resulted in increased availability of gas in key markets. As in the case of crude oil, the natural gas industry is beginning to see the advent of short term, medium term and long term contracts reflecting increased ransportation capabilities and price fungibility. Regional variations in prices are driven primarily out of differentiated transportation costs.

Energy Landscape in India Set for Change

The Indian economy has been growing steadily in the range of 8-9% in the recent past (6.7% in FY 2008-09) and is expected to maintain its status as one of the fastest growing economies in the world with long term GDP growth estimated to be around 9%. Driven by strong economic growth, energy consumption in India has been growing at a CAGR of around 5.3% over the last two decades.

India’s per capita energy consumption is 383 Kg of Oil Equivalent (KGOE) as against the world average of 1,737 KGOE, which indicates a significant potential for growth in the demand for energy. As per the Integrated Energy Policy of the Planning Commission, Government of India, India’s energy need is expected to grow four-fold from 433 Million Tonnes of Oil Equivalent (MTOE) to around 1,856 MTOE by 2032. However, India depends largely on imports with over 75% of oil and 16% of gas consumption being imported.

The East coast of India covers a vast stretch of sedimentary area of about 2 million sq. kms. The coast has been divided into three major geological provinces viz. the Mahanadi basin, the Krishna-Godavari basin and the Cauvery-Palar basin.

RIL has more than 25 blocks in the East coast of India with exploration at different stages of maturity. Several discoveries have taken place in all the three basins and a large number of prospects have been identified for drilling. With drilling success ratio of 54%, RIL’s drilling campaign is to target these basins.

Gas production from KG-D6 was started in a record time of six and a half years. The production from this block is expected to provide a quantum leap in energy security to the country. The Krishna-Godavari basin find has been one of the most important development catalyst to various sectors like power, fertilisers, petrochemicals, refineries, gas distribution in cities, etc thereby ensuring energy and food security for the country.

The natural gas sector in the country is evolving and becoming competitive due to the Government’s proactive regulatory approach with respect to policies in upstream, midstream and downstream. This has led to enhanced investments by various players and the emergence of competitive markets.

RIL’s E&P Business : KG-D6

KG-D6 completed 365 days of 100% uptime and zeroincident production. Gas production from KG-D6 has ramped up to 60 MMSCMD in a short span of 9 months from commencement. Current production of about 60 MMSCMD is from 16 wells. The design capacity of the KG-D6 deepwater gas production facilities were assessed and achieved a flow rate of 80 MMSCM. During FY 2009-10, total gas production was 14,397 MMSCM.

Six wells from the D26 oil field in the block are under production. Gas produced from the D26 field was exported to the Onshore Terminal (OT) in the months of November 2009, December 2009 and February 2010.

Oil production from the D26 field now exceeds 35,000 barrels per day. During the FY 2009-10, total oil production from this field was 4.04 million barrels.

The facility has undergone extensive quality assurance and quality control audits with the support of international experts like Det Norske Veritas (DNV), Ward Associates and Shell Global Solutions. The pipeline network was put through nitrogen helium tests for leak tests and pressure points. More than 1,000 punch points were addressed within six months, eliminating risk factors. Fatigue tests were also carried out on installed infrastructure to ensure their ability to support the planned 25-year lifespan of the field. The entire development was put through stringent quality checks in compliance with the applicable standards, and organisational and project policies. DNV has carried out certification and verification of all works. DNV reviewed and verified engineering, fabrication and installation of all offshore facilities. DNV also carried out the Hazard Identification and Hazard and Operational Study through the different stages of the project. Other independent surveyors have included Lloyd’s Register and Moody’s International. Extensive and intensive checks were done on all equipment, which included Factory Acceptance Test, Extended Factory Acceptance Test, Systems Integrity Test and Site Acceptance Test prior to installation. Multiple levels of inspection were undertaken by manufacturer’s Quality Control (QC) team, RIL’s QC team and third party QC teams to ensure nothing was left to chance.

For the purpose of gas marketing, GSPAs have been executed with more than 50 customers in the fertiliser, power, city gas distribution, steel, LPG, refinery and petrochemical sectors.

As part of appraisal activities of 4 discoveries in the southern part of the KG-D6 block, RIL successfully drilled 4 appraisal wells in FY 2009-10. The commerciality of these discoveries has been submitted.

In the KG-D6 block, further to the submission of the development plan in 2008 for the 9 satellite gas discoveries, an optimised development plan for prioritising 4 satellite gas discoveries was submitted to the Directorate General
of Hydrocarbons (DGH) in December 2009.

An integrated development plan for all gas discoveries in the block KG-D6 is being conceptualised to maximise
capital efficiency and accelerate monetisation.

Other Domestic Blocks

The Company made four discoveries during the year which are as follows:

• Well R1 in the KG-V-D3 block
  
  
• Well AA1, BF1 and AH1 in on-land CB-10 block

The Company has also submitted a proposal for commerciality for the following:

• Discoveries D28, D37 and D38 in KG-III-5 block
  
  
• Discovery D35 in CY-D5 block
  
  
• Discoveries D32 and D40 in NEC-25 block
  
  
• For discoveries D20, D30, D31, D34 in KG-D6 block

RIL has successfully drilled 4 appraisal wells in the southern and deeper parts of the NEC-25 block. Results of these are being incorporated to generate an integrated development plan for all discoveries to maximise capital efficiency. Appraisal activities are currently underway in KG-D4, CY-D5, KG-III-5, KG-III-6, KG-V-D3 and GS-01 blocks.

During the FY 2009-10, two deepwater blocks of NELP-V round namely KK-V-D1 and KK-V-D2 were relinquished due to their poor prospectivity. Currently, RIL’s portfolio consists of 29 exploration blocks. Also, RIL holds 30% interest in PMT fields. Total domestic oil and gas exploration and production acreage amounts to 290,633 sq. kms.

Panna-Mukta and Tapti Fields

The development of the Panna-K (PK) area has been completed. Current production from PK wells is around 5,000 Barrels of Oil Per Day (BOPD) and around 10 Million Metric Standard Cubic Feet Per Day (MMSCFD) gas.

The South West Panna (SWP) development project was approved in February 2008 with projected 2P reserves of around 4.7 Million Barrels of Oil (MMBO) from about 42 MMBO in-place reserve. New 3D survey indicated a significant reduction in 2P reserves at 1.76 MMBO from about 11 MMBO in-place. The Government has approved abandoning the project. Separately, it has approved installing the SWP jacket and deck with minor modifications at Panna L (PL) to advance production by around 12 months and improve the final hydrocarbon recovery from PL.

The development plan of the PL area has been approved by the DGH in June 2009 for completion in 2011.However, with the Government approving the installation of SWP facilities at PL, the project is now expected to be completed in 2010. Initial anticipated total production from PL is approximately 4,000 BOPD from 6 wells.

To arrest the declining gas production in Tapti, 3 infill wells (2 in South Tapti and 1 in Mid Tapti) have been approved for drilling in Q3/Q4 FY 2009-10 by the Management Committee. MTA-6 well has been already drilled and is currently producing around 35-40 MMSCFD gas. STA-7 well has also been drilled and is currently producing 35 MMSCFD of gas. The STC well is currently being drilled and post the drilling of this well, gas production from Tapti is expected to be ramped up from the current level of around 315 MMSCFD to around 330 MMSCFD. A development plan for Mukta (MB area) is being planned to be submitted to the Government of India for approval after the results of a pre-drilled well to be drilled in 2010-11 are reviewed.

Panna-Mukta fields produced 1.8 million tonnes of crude oil and 1,965 MMSCM of natural gas in FY 2009-10, registering a growth of 9% and 18% respectively over the previous year. Higher volumes in the first half are due to full production as compared to lower production registered in the same period last year on account of downtime due to repairs (PPA Hot Oil Heater).

Tapti fields produced 187,000 tonnes of condensate and 3,102 MMSCM of natural gas for FY 2009-10, a decrease of 31% and 26% respectively as compared to the previous year. The decrease in production was due to a natural decline in the reserves.

CBM Blocks

The development plan for Sohagpur CBM blocks has been approved by the Government and development activities have been planned to commence in FY 2010-11 by drilling and completion of additional wells. Prolonged production testing was undertaken in the wells drilled in Sohagpur CBM blocks with favourable results. The plan for 2010– 11 is to monetise the production capability from the present as well as the proposed wells.

During the year, two CBM blocks BS-1 and BS-2 were relinquished. With this, RIL currently holds a total of 3 CBM blocks.

International Business

In April 2010, RIL entered into a joint venture with the USA based Atlas Energy, Inc. (Atlas) under which RIL acquired 40% interest in Atlas’ core Marcellus Shale acreage position. RIL has become a partner in approximately 300,000 net acres of undeveloped leasehold in the core area of the Marcellus Shale region in southwestern Pennsylvania for an acquisition cost of $ 339 million and an additional $ 1.36 billion capital costs under a carry arrangement for 75% of Atlas’s capital costs over an anticipated seven and a half year development
programme.

Low operating costs and proximity to USA northeast gas markets combine to make the Marcellus Shale region one of the most economically attractive, unconventional natural gas resources play in North America. The acreage will support the drilling of over 3,000 wells with a resource potential of approximately 13.3 Trillion Cubic Feet equivalent (TCFe). While Atlas will serve as the development operator for the joint venture, RIL is expected to become a development operator in certain regions in the coming years in the JV.

Atlas will continue acquiring leasehold in the Marcellus Shale region and RIL will have the option to acquire 40% share in all new acreages. RIL also obtained the right of first offer with respect to potential future sales by Atlas of around 280,000 additional Appalachian acres currently controlled by Atlas (not included in the present joint venture). The RIL-Atlas joint venture has the potential to become one of the largest prime acreage holders in the Marcellus Shale region.

This joint venture will materially increase RIL’s resource base and provide an entirely new platform from which to grow its exploration and production business while simultaneously enhancing its ability to operate unconventional projects in the future.

Additionally, RIL has farmed out 20% PI in the blocks Borojo North and Borojo South in Colombia; and 30% PI in block 18 and 25% PI in block 41 in Oman. The Regional Government of Kurdistan has assigned third party participating interest of 20% each in blocks Rovi and Sarta to M/s OVM; the assigned agreement is yet to be signed by RIL. RIL now has 13 blocks in its international E&P portfolio including 2 in Peru, 3 in Yemen (1 producing and 2 exploratory), 2 each in Oman, Kurdistan and Colombia, 1 each in East Timor and Australia; amounting to a total acreage of over 93,500 sq. kms.