Deep-water wells warrant higher expenditure
Shallow-water well spend is 4.5x less than that of deep-water spend. RIL’s KG D6 is India’s first deepwater project. Being new entrant and relatively less experienced, RIL handled the project with great ease and kept the expenditure low than world standard.
Commodity prices increased manifold since 2000
RIL had to face huge supply chain shortages and cost escalation along the supply chain. Since 2000 and till November 2008 the cost of various upstream inputs have risen by varying degrees which resulted in final project cost of the gas find almost doubling from the initial estimates.
Source: World Steel Dyamics, CERA estimates, Company Annual Reports
Manifold jump in rig day rates due to supply tightness
A natural outcome of the firm supply and growing demand is the increase in prices of rig charter rates. The world average jack-up day rate index has increased 2–3x in the last three years. The increase in the day rate index for floaters has been even larger. The semisubmersible day rate index has increased more than 3–4 times while semi-submersible day rate index has increased more than 7x. Moreover the average contract length for rigs had increased for past 4 years, suggesting that demand was fairly strong.
Workforce Shortages
In addition to the rising input costs, global shortage of manpower is also marring the sector. As per ASSOCHAM, the Indian upstream sector faces workforce shortages to the extent of 30% against its total requirement. Looking at the current demand supply scenario of trained manpower for professional services in oil & gas sector by 2012, the manpower requirement would double. Workforce Shortages has resulted into inordinate delays of development schedule, with projects cost exceeding about 30% in last 3 to 4 years for most of the companies operating in Indian E&P sector.
Weather play truant as well
The deepwater environment is harsh for operations. Operating in India‘s East Coast typically involves handling swells and cyclones with the weather window in the East Coast being very limited and operations are only possible for 4-5 months. Under these conditions RIL achieving the lowest Finding and Development Costs and developing the field in the shortest possible time frame amongst the 60 odd deepwater projects around the world is a considerable achievement.
RIL still most competitive:
Reliance Industries Ltd (RIL) made its famous gas discovery in KG D-6 block in 2002, which was awarded to it during the first round of NELP. Initial Development Plan estimated 2P reserves of 5.32 trillion cubic feet (tcf), which can produce 40 million standard cubic metre per day (mmscmd) of gas at the peak production level and required $2.47 billion for development of the field. However, reserves estimates doubled to 11.3 tcf over next three-years, with peak production of 80 mmscmd. Revised development estimates witnessed capex rising to $5.32 billion while it estimated additional investment of $3.6 billion, thus taking the total cost close to $ 8.8 billion.
The Goldman Sachs Report on Global Finding & Development Costs 2008 clearly states that the out of 32 deep water projects developed in the world, D6 ranks amongst the lowest in terms of costs and amongst the fastest in terms of time from discovery to production.
KG D-6 among one of the fastest deepwater development project
RIL has developed the most competitive structure for E&P among its global peers, primarily by leveraging its engineering excellence and project management skills. Typically deepwater projects of KG D6 magnitude have long lead times and get completed in 9-10 years. However, RIL has completed the project in 7 years time.
KG D-6 per unit cost amongst lowest in the world
RIL’s finding and development costs are also the lowest in the world. RIL costs were about $5/bbl while the average costs are $10.2/bbl. This is on the backdrop of escalated cost of seismic costs which have risen over 200%, drilling and services 100-200% and field development equipment and services which have risen over 100-200% since 2002
KG-D6 block is itself evolving
Reliance’s current development projects in the KG-D6 block have explored into 5% of the block’s area so far. Niko Resources (10% partner) indicates that as many as 40 additional prospects have been mapped. The promise of KG-D6 is also evident from the progressive resource upgrades in the block over the past four years. Reliance will also step up its oil and gas exploration efforts and even if the total cost of project increases, it will ultimately lead to energy security for the country since the money is well spent.
KG D-6 cost rise comparable to Cairn’s development estimates
Cairn’s capex estimates to develop its Rajasthan field increased 2.5x within three-years time as compared to its initial planned expenditure. Comparatively, RIL’s cost estimates have risen over a period of seven years. As compare to Cairn, RIL has been able to contain rise in cost within limits.
Summing up
The US$5.2bn Phase I development is now nearly complete, RIL will spend another US$3.6bn over the next 2-3 years to keep plateau production at 80mmscmd by drilling and integrating 28 more producer wells. While the development cost is high, this is reasonable in the context of deepwater developments given the significant well drilling, completion and equipment costs.
Though the input cost in E&P exploration risen RIL has faced the difficulties quite well with E&P expertise remaining key to sustaining the value of the RIL E&P portfolio. Edelweiss expects RIL gas supply will positively impact Indian economy with savings of USD 9.7 bn and from lower fuel/feedstock cost and improvement in India’s trade balance by USD 16.8 bn through lower net imports.
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