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.
High commodity prices and robust
demand for oil and gas resulted in the E&P
industry experiencing a record year. IPE Brent
prices averaged at $ 82.8 /bbl during FY 2007-08
as against an average of $ 64.2 /bbl in FY 2006-07.
Henry Hub natural gas price averaged at $ 7.4
/MMBTU for FY 2007- 08. One of the major events
in the industry was crude oil prices crossing
an all time high of $ 100 /bbl. The energy demand
was driven by secular global growth. Supply chain
pressures also led to price escalations. In another
significant development, spot Liquefied Natural
Gas (LNG) prices breached its oil price parity
in the Asian LNG markets.
The International Energy Agency
forecasts the global demand for oil to grow by
1.5% to 87.2 million BPD in 2008. The previous
year 2007 saw an increase in global oil demand
to 86.0 million BPD, resulting in an increase
of 1.3% over 2006.
High commodity prices and robust
growth have ensured strong profitability and cash
flows for E&P companies. They have encouraged
significant investments across the global energy
value chain, resulting in severe pressure in the
supply chain. The cost of exploration and development
has increased sharply with the cost of drilling
rigs, seismic services, engineering, fabrication
and installation costs contributing to the increase.
This trend is likely to continue in the medium
term.
Rising challenges
in the E&P sector
The capital expenditure in the
E&P industry is estimated to be upwards of
$ 300 billion per annum. Operators are increasingly
looking at opportunities in the deep waters of
the Gulf of Mexico, West Africa, Latin America
and in the Asia Pacific Region.
Deep water exploration is a fast
emerging frontier for oil and gas as the era of
‘easy’ oil seems to have come to an
end. The overall cost inflation in upstream projects
in deepwater areas has increased by more than
100% since 2002. Cost of steel has increased by
100% since 2002 while in sub-sea and EPC contracts
price inflation is also around 100%. PIRA estimates
that since 2002, finding & development costs
have increased from $ 8/ bbl to $ 15/ bbl in 2006,
an increase of 90%. CERA estimates that capex
inflation has risen from a base of 100 to touch
198 in the third quarter of 2007.
Shortage of rigs is hampering
exploration efforts worldwide. The high day rates
of operating the rigs are driven by demand/supply
fundamentals and rise in the cost of manpower,
services and raw materials. Demand for 6th generation
drill-ships capable of drilling in harsher environments
far exceeds the availability. Consequently, contracting
rigs is a big challenge for operators and due
to this shortage, rig utilisation rates are expected
to remain high. Shipyards constructing deepwater
rigs are fully booked and the lead time for a
new build is between 3-4 years.
Recent oil and gas discoveries
are in deep waters, oil sands, shales, arctic
and unconventional geographies. These discoveries
are in much harsher terrains and in new frontiers.
In addition, availability of manpower, services
and equipment is limited. Evacuation and transportation
logistics of resources are also becoming more
challenging. All these factors are resulting in
project cost escalation and delays.
About 88% of world’s proven oil reserves
of 1,148 billion barrels are under the control
of national oil companies (NOCs) with no equity
participation by international oil companies (IOCs)
in them. IOCs in the western part of the world
now control less than 10% of the world’s
oil and gas resource base.
In spite of these challenges,
profitability of E&P companies has been strong
in recent times, driven largely by record oil
prices. During the past five years, oil prices
have increased from an average of $ 25 /bbl in
2002 to $ 72 / bbl in 2007, an increase of 188%.
More recently, oil prices have moved to as high
as $ 120 /bbl. Henry Hub gas prices have also
increased from $ 3.34 /MMBTU in 2002 to the average
price of $ 7.4 /MMBTU in 2007.
Development of a
global natural gas market continues
Gas accounts for 34% of the energy
basket in the Former Soviet Union region and in
Europe, 24% in USA, 15% in Japan and 14% in Korea.
The world average is 24%. In India, gas accounts
for just 8% of the energy basket constrained by
limited availability of gas and nascent transmission
and distribution infrastructure.
The share of gas in the global
energy mix is set to increase primarily driven
by the power sector, industrial sector, city gas
distribution and gas-to-liquid opportunities.
Gas is preferred because of its cost competitiveness
and environmental advantages over other fossil
fuels. Gas is also more convenient to use vis-à-vis
other fossil fuels.
Accelerating global demand, increasing
import dependency, and the build-out of LNG infrastructure
are supporting price discovery. Industry expectations
suggest continued strength in global GDP over
the long-term driven by developing economies of
Asia and the Middle East and a 40% increase in
LNG liquefaction capacity over the coming 3 years
addressing 11% of global demand by 2010.
Powerful trends are supporting
demand growth and prices in both the developed
and developing nations. In 2007-08, Henry Hub
Prices averaged $ 7.4 / MMBTU. In Europe, the
NBP prices averaged 40 pence per therm which is
the equivalent of around $ 8 /MMBTU. The Asian
LNG prices were $ 9.5 /MMBTU based on average
for prices in Japan and Korea. Long term contracts
signed by China for LNG are at around $ 10 /MMBTU
(FOB). These contracts are for 2-3 MMTPA and the
first sale is expected to commence in the year
2013-14.
In the developed world, natural
gas is the only near-term generation option to
bridge the energy gap. A similar trend is clear
in Asia and Australia. In the developing world,
rapid economic growth is fueling energy demand
in all its forms. Natural gas has been a niche
fuel, not easily available due to infrastructure
constraints and domestic productive capacity.
However, the price of alternative fuels (particularly
crude products) is supporting a re-evaluation
of energy source, which in many cases favors natural
gas. While nuclear and renewable remain the long
term “green” solutions of choice,
natural gas will remain the primary near-term
alternative to meet the demand for growth in generation
in developed and developing economies.
Natural Gas in India
The landscape of the Indian
natural gas market is set to witness significant
change. Natural gas currently accounts for around
8% of the total energy mix in India as against
the global average of 24%. However, with increased
availability and spurt in transmission and distribution
infrastructure, the share of natural gas in the
energy mix is set to rise. For 2007-08, gas production
is expected to be 88 MMSCMD and LNG consumption
is estimated at 33 MMSCMD.
The major demand centers, excepting
the north-eastern market which is not connected
to the transmission network of the rest of India,
have been considered for making demand projections.
The un-met demand for natural gas is estimated
to increase from about 113 MMSCMD (FY 2007-08)
to 396 MMSCMD by the year 2022. The following
factors are expected to drive the increased consumption
of natural gas in India:
- Macro-economic factors
- Growth of end-user segments
- Cost of gas vis-à-vis alternate liquid
fuels
- Regulation and policy making
- Environmental concerns
- New uses of natural gas (for example, co-generation)
Reliance’s E&P portfolio
Reliance with its subsidiaries is India’s
largest exploration acreage holder in the private
sector with a portfolio comprising the following:
- 30% interest in Panna-Mukta and Tapti (PMT)
fields
- 33 exploration blocks awarded under the NELP
and Pre-NELP licensing rounds
- 5 coal bed methane (CBM) blocks
- Exploration interests in Yemen, Oman, East
Timor, Kurdistan (Iraq), Colombia and Australia
Reliance’s ambition is to be a global energy
major with a significantly diversified upstream
portfolio. The Company’s focus on training
people, processes and technology is expected to
help in strengthening its commitment towards exploration,
development and production activities.
Performance of PMT
The Tapti expansion project called
“New Revised Plan of Development”
was carried with the objective of development
of Mid Tapti field and expansion of Central Processing/Compression/
Export capacity. This included a new Compression
and Processing Platform (TCPP), a Second Tapti
Flare Platforms (STFP), a new 9 slot well head
platform (MTA), intra-field flow lines and an
export pipeline. On completion of this project,
additional production from Tapti has stabilized
at 6 MMSCMD of gas and 4,500 BOPD of condensate.
The development plans of South
West Panna (SWP) and Panna K (PK) fields have
been approved and the Engineering, Procurement,
Installation and Commissioning Contracts (EPIC)
are in progress. Production from SWP and PK fields
is expected in 2009.
The Panna-Mukta fields produced
1,910,000 tonnes of crude oil and 2,030 MMSCM
of natural gas, reflecting a growth of 9% and
22% respectively. The Tapti field produced 3,365
MMSCM of gas and 232,000 tonnes of condensate,
reflecting a growth of 51% and 82% respectively.
Successes in exploration
It was another very successful
year of exploration for Reliance. The Company
surpassed its previous record and had 9 offshore
discoveries of which seven were gas discoveries,
one an oil discovery and another one contained
both oil and gas. The discoveries were across
four offshore basins viz. Mahanadi, Krishna, Cauvery
and Gujarat-Saurashtra. With these, the inventory
of discovered blocks stands at 37 reflecting a
success ratio of 63 %.
Three gas discoveries were made
in the Krishna basin in deep water (KG-D6-R1,
KG-V-D3-A1 & B1). Two more gas discoveries
were made in the Krishna basin in shallow water
(KG-III-05-P1 & J1). A deep water discovery
was made in the Cauvery basin (CY-D5-A1) yielding
both oil and gas. An oil discovery was made in
the deep waters of the prolific Krishna basin
(KG-D4-MD1). One gas discovery each was made in
the shallow waters of the Gujarat- Saurashtra
basin (GS-01-B1) and Mahanadi basin (NEC-25-J1).
In order to assess their commerciality, appraisal
process is underway.
Development plan for Sohagpur
coal bed methane blocks (East and West) was approved
by the DGH.
Reliance’s
strategic perspective on E&P
Deepwater projects typically
face many technical challenges. It is essential
that these challenges are assessed, mitigated,
and managed throughout project execution by selecting
appropriate field development plans, risk management,
and modifying project implementation methods.
Some of the most critical activities
involved in developing deepwater block are selection
and design of concept, mitigation of reservoir
uncertainties, well completions, flow-lines and
risers, mitigation of flow control and assurance
risk, processing and support transportation and
storage facilities.
Reliance’s development
strategy is focused on use of best practices and
application of proven technology.
Developments in KG-D6
(D1 and D3):
The development of discoveries
Dhirubhai-1 and Dhirubhai-3 in the KG-D6 block
are on schedule for production of first gas during
second half of FY 2008-09. Milestones achieved
are:
Drilling and Well Completions
17 wells were drilled during
the year. Hardware required for the purpose of
wells completion has been delivered and well completion
is under progress.
Off Shore: Sub-sea
Sub-sea hardware has been received.
Installation barges and support vessels have been
mobilized and are operational. Installation work
is in advanced stages of completion.
Off Shore Installation
Off shore equipment has been
delivered. Installation of the jacket, deck and
living quarters for the Control-cum-Riser Platform
(CRP) has been completed. Hookup and pre-commissioning
activities have commenced. Installation of the
sub-sea is progressing in full swing and vessels
have been mobilized for off-shore installation
purposes.
On Shore Terminal (OT)
Major equipment and packages
have been delivered at the site. Civil works are
almost completed with around 80% of structural
work also complete. Installation of major equipment
and packages has also been completed. Consequently,
the infrastructure facilities at the OT are in
operation. Construction of buildings in the infrastructure
area is in advanced stage of completion.
Development Plans
During the year, Reliance submitted
the development plan for Dhirubhai - 26 cretaceous
oil discovery (MA) in KG-D6 and it has since been
approved.
MA field is a fast track development
project. This will be the first Floating Production
Storage & Off-take (FPSO) project in India
located at depth ranging from 1,100 meters to
1,400 meters. Facilities on board the FPSO include
process plant, gas compression facilities, power
generation facilities and offloading. Major sub-sea
hardware fabrication has already been completed
and shipped to the site. Installation of sub-sea
hardware has commenced as per schedule. Mooring
lines, buoy and gas injection umbilical have been
installed. Installation of production risers has
commenced.
The development plan for the
NEC-25 block has been submitted to the DGH for
its approval.
International blocks
The international business comprises
11 blocks with acreage of about 80,000 square
kilometers - 3 in Yemen (1 producing and 2 exploratory),
2 each in Oman, Kurdistan and Colombia, 1 each
in East Timor and Australia.
The average production at the
Yemen Block 9 was 4,500 BOPD. There was a discovery
of oil in the exploratory well Malik - 1. The
size of the discovery is yet to be ascertained.
Processing and interpretation
of recently acquired 2D and 3D has been completed
in the Oman Block 18. Processing and interpretation
of data is in progress. An inventory of drillable
locations is being finalized. Preparatory activities
like setting up a shore base are currently underway
with an objective to drill an exploratory well
subject to the availability of a suitable exploratory
rig.
Reliance has further expanded
its international footprint in exploration business:
- Executed two Production Sharing Contracts
(PSC), with the Kurdistan Regional Government
(KRG). These
PSC’s cover petroleum exploration activities
in the ‘Rovi’ and ‘Sarta’
blocks in the Kurdistan region of Iraq.
- Signed Production Sharing Agreement (PSA)
for an offshore block no. 41 in Oman deep water.
The block measures over 20,000 square kilometers.
The new block is adjacent to Reliance’s
earlier block which was acquired in 2005.
- Signed Production Sharing Agreements (PSA)
for two on land blocks in Yemen. The exploration
blocks 34 and 37 are located in Jeza basin of
eastern Yemen. Reliance holds 70% participating
interest in both these blocks.
- Signed contracts for two offshore blocks,
Borojo North and Borojo South, in Colombia.
The contracts envisage exploration of two blocks
located in the Pacific Ocean, west of Colombia
in water depths reaching up to 1,500 meters.
The size of each block is approximately 4,000
square kilometers.
- Acquired an exploration permit for an offshore
block WA 405 P in Australia.
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