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.

Energy markets have improved significantly over the past 12-15 months as a result of improved economic growth, higher demand for refined products and limited supplies of crude oil. In 2010, global oil demand grew by 3.4% (or 2.9 MMBD) to 87.9 MMBD, which is the highest growth in the last 30 years. Emerging Asia which comprises India and China, accounted for 40% of the oil demand increase. Global LNG markets also grew by 13% and are currently at 275 million tonnes per annum (MMTPA).

Crude prices increased 25% during the year wherein Brent oil prices averaged $86.7/bbl vis-a-vis $69.5/bbl in FY-10. In FY-11, the US benchmark Henry Hub gas prices averaged $4.13/MMBTU vis-a-vis $3.98/MMBTU in FY-10. Prices remained range-bound in the US due to excess drilling and lack of export infrastructure. However, Asian LNG prices remained linked to crude oil and spot prices in recent months touched $10-12/MMBTU.

It is expected that global energy consumption growth will average at around 1.7% per annum over the next two decades. Of this, non-OECD energy consumption is expected to be 68% higher by 2030, averaging 2.6% p.a. growth, and accounting for 93% of global energy growth. OECD energy consumption in 2030 is expected to be around 6% higher than today, with growth averaging at a measly 0.3% p.a. over the next two decades.

The fuel mix is changing relatively slowly, due to long asset lifetime, but gas and non-fossil fuels are gaining share at the expense of coal and crude oil. The fastest growing fuels are renewables (including biofuels) which are expected to grow at 8.2% p.a. 2010-30; among fossil fuels, gas grows the fastest (2.1% p.a.).

Non-OECD countries are likely to account for 80% of the global rise in gas consumption, with growth averaging at around 3% p.a. Demand growth is expected to be the fastest in non-OECD Asia (4.6% p.a.) and the Middle East (3.9% p.a.). It is expected that over the next two decades, China could consume about 43 BCF per day, which is comparable to that of the 47 BCF per day that EU currently consumes. The growth is expected to remain modest in OECD markets (1% p.a.), particularly in North America.

Oil continues to suffer a long run decline in market share, while gas is steadily gaining. Natural gas is projected to be the fastest growing fossil fuel globally. Production is expected to grow in every region except Europe, with Asia accounting for the world's largest production and consumption increments.

The IEA estimates that global upstream capital spending, which had fallen by 15% in 2009, has rebound in 2010 and is pegged at $ 470 billion. Global offshore capital expenditure is estimated at $ 150 billion and nearly $ 874 billion is expected to be spent over the next five years. A substantial portion of this investment will flow into deepwater. Deep-water capital expenditure is pegged at nearly $ 50 billion and deep-water production is set to double in the next five years. Currently, there are very few fields with water depths of more than 2,000 meters under development. Many of the recent discoveries have been in those water depths. The capital expenditure sanctioned in this water depth is likely to double by 2012.

The role of unconventional oil is also expected to increase significantly and will touch 10% of world oil demand by 2035.

India continues to remain amongst the fastest growing economies of the world with a projected growth of 8-9%. Consequently, India's energy needs are expected to treble by 2035 from 468 million tonnes of oil equivalent (MTOE) to nearly 1405 MTOE. India can fulfill its agenda for climate change as natural gas used to generate power has half the CO2 emissions of conventional coal power generation and near-zero sulphur emissions.

Indian gas market

In India, gas constitutes around 10% of the current energy basket compared to the global average of 24% and hence presents a vast potential for growth. The demand for natural gas in India is expected to grow at a CAGR of 10% over the next five years and could soon be a significant player in the global gas market.

On February 21, 2011, RIL and BP announced a strategic partnership between the two companies and signed the relationship framework and transactional agreements. The partnership across the full value chain comprises BP taking a 30% stake in 23 oil and gas production sharing contracts that Reliance operates in India, including the producing KG-D6 block. The partnership will aim to combine BP's deep-water exploration & development capabilities with Reliance's project management & operations expertise. The two companies will also form a joint venture (50:50) for the sourcing and marketing of gas in India and bid together for incremental opportunities in the deep-water blocks in the east coast of India.

BP will pay RIL an aggregate consideration of $ 7.2 billion, and completion adjustments, for the interests to be acquired in the 23 production-sharing contracts. Future performance payments of upto $ 1.8 billion could be paid based on exploration success that results in development of commercial discoveries. RIL will continue to be the operator under the production-sharing contracts. Completion of the transactions is subject to regulatory and the Government of India approvals.

RIL gas marketing

KG-D6 was the single largest source of domestic gas in the country for FY-11 and accounted for almost 35% of the total gas consumption in India. The gas from KG-D6 catered to demand from 57 customers in critical sectors like fertilizer, power, steel, petrochemicals and refineries. The gas from KG-D6 accounted for about 44% of the total domestic gas production paving the way for increased energy independence for the country.

RIL's E&P business: KG-D6

KG-D6 gas fields completed 730 days of 100% uptime and zero-incident production. An average daily gas production from KG-D6 block for the year was 55.9 MMSCMD with a cumulative production of 1,257 BCF since inception, of which 720 BCF was produced in the current fiscal. An average oil production for the year from the block was 21,971 barrels per day with a cumulative production of 14 MMBL of oil and condensate since inception, of which 8 MMBL of oil and 1 MMBL of condensate was produced in the current fiscal.

In the D1-D3 gas fields a total of 20 wells have been drilled, of which 18 are production wells. Of these, 2 wells have been drilled this fiscal.

6 wells in the D26 field are under production. Of these, MA-2 which was earlier a gas injection well has been converted to a production well since April 2010.

An integrated development plan for all gas discoveries in KG-D6 is being conceptualized. This will encompass existing wells and other discoveries within the block to maximize capital efficiency and to accelerate monetization.

Other domestic blocks

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

• Well W1 in the KG-V-D3 block
  
  
• Well AF1, AJ1, AT1, AN1 and AR1 in on-land CB-10 block
  

The Company has also submitted initial proposal for commerciality to DGH for review and discussion for the following blocks:

• Discovery D33 in GS-01 block
  
  
• Discoveries D39 and D41 in KG-V-D3 block
  
  
• Discovery D36 in KG-D4 block
  

RIL has submitted an integrated appraisal programme for all discoveries in Part A of CB-10 block. Further, RIL has been continuing with the appraisal activities for the other discoveries in KG-D6, KG-V-D3 and CB-10 blocks.

Panna-Mukta and Tapti fields

The Panna-Mukta fields produced 9.3 MMBL of crude oil and 52.1 BCF of natural gas in FY-11 – a decline of 31% and 25% respectively over the previous year. The lower volumes are on account of complete shutdown due to failure of the single point mooring system (SPM) and parting of anchor chains 4 and 5 to the SPM from July 20, 2010 to October 25, 2010.

Tapti fields produced 1.2 MMBL of condensate and 95.2 BCF of natural gas in FY-11 – a decline of 22% and 13% respectively over the previous year. The decrease in production was due to a natural decline in the reserves.

Drilling of 6 wells in Panna-L is expected to commence soon and oil production is expected in the later part of FY-12. Its reserves are estimated at 7.0 MMBL. The anticipated production from all 6 wells is approximately 3,000 BOPD.

CBM blocks

RIL holds 3 CBM blocks in Sohagpur (East), Sohagpur (West) and Sonhat. So far, RIL has completed the following work in the Sohagpur (East) and Sohagpur (West) blocks:

• Over 40 core holes drilled, logged and tested for gas content, permeability and coal properties
  
  
• 31 wells air drilled and tested for productivity
  
  
• 75 hydraulic fracturing jobs done
  
  
• 5 cavitation completion wells and 2 sets of in-seam horizontal wells
  

The process for acquiring land for well sites, market assessment & infrastructure for evacuation and transportation of gas has commenced.

International business

During the year, Reliance entered into one of the fastest growing opportunities emerging in the U.S. unconventional gas business through three upstream joint ventures. These joint ventures will materially increase Reliance's resources base and provide Reliance with an entirely new platform to grow its exploration and production business while simultaneously enhancing its ability to operate unconventional resource projects in the future.

RIL - Chevron

RIL, through its subsidiary, Reliance Marcellus LLC, entered into a joint venture with Atlas Energy, Inc. (now owned by Chevron Corporation) under which Reliance acquired a 40% interest in Atlas' core Marcellus shale acreage position. The acquisition cost of participating interest in the JV consisting of $ 339 million of upfront payment and an additional payment of $ 1.36 billion under a carry arrangement for 75% of Atlas's capital costs over an anticipated seven and a half year development programme. Reliance becomes a partner in approximately 300,000 net acres of undeveloped leasehold in the core area of the Marcellus shale in southwestern Pennsylvania. The acreage will support the drilling of over 3,000 wells with a net resource potential of approximately 13.3 TCFe (5.3 TCFe net to Reliance).

While Atlas will serve as the development operator for the joint venture, Reliance is expected to begin acting as development operator in certain regions in coming years as part of the joint venture. Under the framework of the joint venture, Atlas will continue acquiring leasehold in the Marcellus shale region and Reliance will have the option to acquire 40% share in all new acreage. Reliance also obtains the right of first offer with respect to potential future sales by Atlas of around 280,000 additional Appalachian acres currently controlled by Atlas.

RIL - Pioneer

RIL, through its subsidiary, Reliance Eagleford Upstream LP, entered into a joint venture with Pioneer Natural Resources Company under which Reliance acquired a 45% interest in Pioneer's core Eagle Ford shale acreage position in two separate transactions. Pioneer and Newpek LLC, Pioneer's existing partner in Eagle Ford, simultaneously conveyed 45% of their respective interests in the Eagle Ford to Reliance. Newpek owned an approximate 16% nonoperated interest in Pioneer's core Eagle Ford shale acreage. Following the transaction, Pioneer, Reliance and Newpek own 46%, 45% and 9% of the joint venture interests, respectively.

The joint venture has an approximate net working interest of 91% in 289,000 gross acres implying 263,000 net acres. Reliance paid $ 1.315 billion for its implied share of 118,000 net acres. This upstream transaction consideration included combined upfront cash payments of $ 263 million and additional $ 1.052 billion capital costs under a carry arrangement for 75% of Pioneer's and Newpek's capital costs over an anticipated four years. The joint venture's leasehold, which is largely undeveloped, is located in the core area of the Eagle Ford shale in south Texas. Low operating costs, significant liquids content (70% of the acreage lies within the condensate window) and excellent access to services in the region combine to make the Eagle Ford one of the most economically attractive unconventional resources in North America. Pioneer believes the acreage will support the drilling of over 1,750 wells with a net resource potential to the joint venture of approximately 10 TCFe (4.5 TCFe net to RIL).

The joint venture plans to increase the current drilling programme to approximately 140 wells per year within three years. Also included in the transaction is current production of 28 MMCFe/d (11 MMCFe/d net to Reliance) from five currently active horizontal wells. While Pioneer will serve as the development operator for the upstream joint venture, Reliance is expected to begin acting as development operator in certain areas in coming years as part of the joint venture. Under the framework of the joint venture, Pioneer will continue acquiring leasehold in the Eagle Ford Shale and Reliance will have the option to acquire a 45% share in all newly acquired acres.

Additionally, Reliance and Pioneer formed a midstream joint venture that will service the gathering needs of the upstream joint venture. Reliance's subsidiary, Reliance Eagleford Midstream LLC, paid $ 46 million to acquire a 49.9% membership interest in the joint venture. Pioneer and Reliance will have equal governing rights in the joint venture and Pioneer will serve as operator.

RIL - Carrizo

RIL, through its subsidiary, Reliance Marcellus II, LLC, entered into a joint venture with Carrizo Oil & Gas, Inc.

Under the transaction, Reliance acquired a 60% interest in Marcellus shale acreage in Central and Northeast Pennsylvania that was held in a 50:50 joint venture between Carrizo and ACP II Marcellus LLC, an affiliate of Avista Capital Partners. Pursuant to the transaction, Reliance acquired 100% of Avista's interest and 20% of Carrizo's interests in the joint venture. Reliance and Carrizo own 60% and 40% interests, respectively, in a newly formed joint venture between the companies. Reliance agreed to a total consideration of $ 392 million, comprising $ 340 million of initial payment and $ 52 million of drilling carry obligations. The drilling carry obligations will provide for 75% of Carrizo's share of development costs over an anticipated two year development programme.

The joint venture will have approximately 104,400 net acres of undeveloped leasehold in the core area of the Marcellus shale in central and northeast Pennsylvania, of which Reliance's 60% interest will represent approximately 62,600 net acres. This acreage is expected to support the drilling of approximately 1,000 wells over the next 10 years, with a net resource potential of about 3.4 TCFe (2.0 TCFe net to Reliance).

Conventional E&P international blocks

RIL has 13 blocks in its international conventional 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 99,145 sq. km.

Reliance Exploration & Production DMCC (REP DMCC) has farmed in Block 39 (Peru) with 10% participation interest and relinquished Block 155 (Peru) where REP DMCC had 28.30% participation interest.

During the year, the following activity was undertaken as part of the exploratory campaign:

• 2D acquisition in Yemen (Blocks 34 and 37), Oman (Block 41) and Peru (Block 39). The total 2D acquisition was 1395 LKM.
  
  
• 3D acquisition of 800 and 400 sq.km. of 3D in Colombia Borojo North and South respectively.
  
  
• Drilled 3 exploratory wells, 1 each in East Timor, Rovi and Sarta. Drilling in Timor was met with limited results.

The results following the drilling campaign in blocks Oman 18 and East Timor K have not been encouraging and accordingly, the expenditure incurred on these blocks amounting to $177 million (Rs. 807 crore) has been fully provided for in the books of REP DMCC, a wholly-owned subsidiary of RIL.