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.