This is KG-D6, the deepwater block in the Bay of Bengal, which has the potential of reducing India’s fuel import bill by 20% or Rs 55,000 crore. Seven years ago, in 2002, Reliance made the largest gas discovery here. This gas field can produce 550,000 barrels of oil equivalent or nearly 40% of India’s current oil and gas production. Spread across 330 square kilometres, the reservoir of KG-D6 is located 2 kilometres below seabed, which is another 1.2 kilometres below sea-level, far too deep for humans to access.
So, almost straight out of a sci-fi movie, high precision operations are carried out by robots. A single mistake, as simple as that of a screw or a valve being ill-fitted, can result in a loss of billions of dollars. While Reliance has won kudos from the world’s E&P industry, the commissioning production in six and a half years from the time of discovery versus the average of nine years and at a cost that is the third lowest in the world.
Not too many people know, this platform was actually preassembled in Morgan City in Louisiana and Dubai before being installed here. With no in-house expertise, Reliance had to go in search of global talent. Soon 200 consultants from 12 locations around the world were on board for engineering, procurement and construction. Almost 18,000 expats have worked at the KG-D6. None of this comes cheap. Neither do the 85 marine construction vessels, and 4 deepwater rigs that were deployed by Reliance.
For instance, this rig costs USD 1 million a day and USD 1 billion over five years. Reliance says it realised the capex would have to be hiked and that too at a time when commodity prices were spiralling. Anil Ambani has publicly questioned Reliance’s capex claims and has even asked the Prime Minister’s Office to order an audit by the Comptroller and Auditor General of India or the CAG.
So, as I make my way to the floating production storage oil vessel where oil is collected before being shipped out, I talked to PMS Prasad about the charge of inflating the capex.
Prasad: Our drilling costs have gone up by 300-400%. But that’s not the only thing, even the engineering services costs, per man hour costs have gone up USD 100-200 or even more. So the engineering man hours and some of the installation crew, we pay them USD 2,000 to 2,500 a day and this was not the kind of rates that were being paid in 2003-04 that is simply because the world didn’t have enough experienced people to do this kind of work. So people were scarce and we had to attract them to come here by incentivising them and by paying higher salaries.
In addition, all the installation vessels, there are very few installation contractors in the world of the quality that we needed and we have employed some of the best. On this field we had Allseas, we had Technip, we had Helix. These are some of the best installation contractors in the world. Technip is from France, Allseas is from Netherlands and Helix is from the US, and to get them to work here and considering the weather vagaries and the downtime that we have had because of the weather.
Q: Didn’t you factor all that in 2003?
A: We didn’t know much about this in 2003 and unfortunately just one year after the discovery we didn’t know much and we could not foresee a kind of increase that was going to happen. In 2003, we thought drilling rig and services per day would cost maybe USD 225,000 to USD 250,000 a day. But in reality when we ended up paying a million dollars a day, we were shocked. The same thing the peak of the commodity cycle that happened between 2005 and 2008, still prices went up and everything went up, steel prices, installation expert costs, engineering costs, installation spread costs and the fact that the steel costs went up by about 100%. So, we were kind of caught in this upward spiral.
So, the costs were not under our control and I think this was a universal phenomenon. Why only talk about Reliance. Look at the other comparable field costs. Everybody had to go through the same price spiral. But even today, though the commodity prices have somewhat softened, but the services cost we still pay USD 1 million a day for drilling rates. They have not come down.
Q: You made the largest gas discovery back in 2002. You have constructed this engineering marvel. But do you think that since the commissioning, how do you feel about the fact that it has been a little hijacked by the entire controversy? Has that overshadowed the engineering marvel?
A: In fact if there is any regret, that is really my regret. We think that we have built a great asset and as you rightly said it is an engineering feat and something that the country and the E&P industry in the country should be proud of. It has added so much value. Unfortunately, it is this avoidable controversy that kind of overtook all the glory and the shine off. I am really unhappy about this because this is not the right level or the right kind of recognition that all the Indian professionals that having worked very hard and created something like this, they don’t get recognised. I am not happy about it, but that is the way life is.
So, I do believe that once the controversy blows over one way or the other that there will be recognition and I am happy that atleast people like you are coming and seeing this. This way atleast there is an opportunity for us to showcase this to a much larger audience who otherwise would not know about this. The fact that we have doubled the production of the gas in the country goes unnoticed because of the media controversy.
Q: So, how much are you producing today?
A: Right now about 36-37 million cubic metres. We had started production on April 1 and we are about 4 months into production. Check any other comparable field start-ups, in four months I am sure they would not have reached the near 50% capacity that we have managed. We are very happy about the smooth ramp-up in production. This is something that speaks for the quality of the engineering and equipment and the installation that has been done.
This is the onshore terminal, built on part of the 200 acres belonging to Reliance. It is here in this giant facility that the gas is separated from its impurities. This is the central control room or the nerve centre of the KG-D6. Since everything is automated, only 250 people are required at any given time to manage all offshore and onshore operations.
Gas production at KG-D6 commenced in April this year. After traveling through all the major facilities I felt the time was right to ask Prasad when production would be ramped up from the current 37 mmscmd to the 80 mmscmd. After all, another allegation made by Anil Ambani is that Reliance is hoarding gas and creating an artificial scarcity.
Q: When are you going to hit that 80?
A: We are ready to produce more than 60 million and we are waiting for the government to give us more linkages to customers. Right now, they have given us linkages up to 40 million. We have signed all agreements with National Thermal Power Corporation (NTPC). We are also almost delivering gas to people except one or two customers like Essar and Gail who will be taking gas probably next week. Dabhol, Ratnagiri Gas and Power Pvt (RGPPL) would start taking gas from October 1. But otherwise we are almost there at 40 million. So, now we are eagerly waiting for the new EGoM to be formed so that the government can give us more linkages.
Q: Is the government giving you a timeframe? Do you lose money if you do not ramp up?
A: We do, a lot. The Rs 35,000-36,000 crore that we have invested is Reliance’s money. It is Reliance’s shareholders money, the money that Reliance borrowed from the banks and if we are not able to earn revenues from these investments, it is a loss of present value.
Q: One of the allegations that you are purposely not ramping up production, you are holding gas, you are artificially creating a scarcity, what are your thoughts on that?
A: I can only laugh because no-one after having invested this much money would want to not produce. For the next five years, the gas price is fixed. So, how does it help me? Secondly, I have to repay my debt, so how does it help me not to get the revenues today. The only reason that we are not able to produce more is because of the procedural delays in forming in new EGoM and then giving us more allocations.
Q: Because of what the government is not being able to fastrack, you are not able to ramp up the capacity?
A: Absolutely. So in a light of view, it is the government which decides to hold the gas not Reliance.
Q: The other thing which has gone against you in the recent few months has been the clarification that has come that now seven year income tax holiday does not stand, what does that mean for you? What kind of a big hit you will take?
A: It is a big hit because in the production sharing contracts and also in other supporting documentation, it is very clearly mentioned that both oil and gas are eligible for tax holiday. We can give a new definition to the mineral oil just for the sake of 80IB and then say, this doesn’t include gas. But I think it is unfair and we have been made a promise based on which we all took so much risk and then put in these big investments and then when the investments are about to fructify, saying that the gas is not entitled to a tax holiday, I think is a bit unfair.
Q: Can you give us a broad range, what could it mean for Reliance Industries?
A: It would be of the order of a couple of billion dollars over seven years, but I need to re-check the numbers. You are a financial channel, so you love to have the numbers but I hate to give out numbers because these are very sensitive information.
Q: But if you don’t get that income tax holiday, would you consider arbitration? What would be the next step?
A: Yes, arbitration is the last resort but right now the government has said that since this matter is subjudice, let the courts decide. So, we will wait for the courts to decide in some of the pending issues. But if that decision doesn’t come through, then we do have to look at other means including arbitration.
Q: Are they inviting you for partnership overseas, for new projects?
A: I can only say that if there is an opportunity it has to be good for both. So I am sure some of them may want to partner us here and equally we may want to partner them but then that is a different discussion. Right now, we are just focusing on getting the production.
Q: Is there anything on the table?
A: I cannot talk about this now. It is not that there is anything on the table. Opportunities do come all the time but then they need to be good for both. What is not good today may be good tomorrow or what was not good yesterday may be good today.
Q: After commissioning the - if you are looking to sell stake in six of your overseas blocks, which I understand is part of the regular farming out of stake and things like that but not looking to expand also at the same time?
A: The upstream industry typically people hold – it is a very rare thing that we have done here holding 90% participating interest. Typically they are all around 30-40-50%. So in our overseas blocks that is what we are trying to do. We are trying to reduce our exposure and be under industry guidelines of around 30-50%. As far as the Indian blocks are concerned, we will look at that opportunity at the right time but at this point of time, we are focusing on stabilizing the operations and increasing the production and the reaching the 60 and maybe some time later 80 million cubic meters.
Q: While you are stabilizing these operations, it also happens to coincide with the first phase of NELP VIII. Does NELP VIII excite you?
A: NELP VIII is a good opportunity but at the same time, I have to look at my portfolio. How much of risk appetite that I have. When you look at a portfolio of all your properties and assets, how many oil explorations, how many discoveries you have that need to go into development and how many producing properties. You need to have a fair balance between the producing properties, between the discoveries that need to be developed and the rank exploration purpose. We already have a lot of exploration properties. So our portfolio today is biased towards exploration, so we need to get more discoveries and discoveries into production.
Q: We might not see you bidding at NELP-VIII?
A: No, not that way. We will selectively in NELP-VII. I am waiting for the assessment from my geoscientists. Once they give their assessment, we will look at it how does this fit into our portfolio in terms of the risk exposure that we are willing to take and then make that decision. But I have never said that we will not bid for NELP-VIII. We will certainly look at the NELP-VIII properties.
http://www.moneycontrol.com/news/business/exclusive-ril-speaks-outthe-gas-war_413881-3.html
_____________________________________________________________________________
So, almost straight out of a sci-fi movie, high precision operations are carried out by robots. A single mistake, as simple as that of a screw or a valve being ill-fitted, can result in a loss of billions of dollars. While Reliance has won kudos from the world’s E&P industry, the commissioning production in six and a half years from the time of discovery versus the average of nine years and at a cost that is the third lowest in the world.
Not too many people know, this platform was actually preassembled in Morgan City in Louisiana and Dubai before being installed here. With no in-house expertise, Reliance had to go in search of global talent. Soon 200 consultants from 12 locations around the world were on board for engineering, procurement and construction. Almost 18,000 expats have worked at the KG-D6. None of this comes cheap. Neither do the 85 marine construction vessels, and 4 deepwater rigs that were deployed by Reliance.
For instance, this rig costs USD 1 million a day and USD 1 billion over five years. Reliance says it realised the capex would have to be hiked and that too at a time when commodity prices were spiralling. Anil Ambani has publicly questioned Reliance’s capex claims and has even asked the Prime Minister’s Office to order an audit by the Comptroller and Auditor General of India or the CAG.
So, as I make my way to the floating production storage oil vessel where oil is collected before being shipped out, I talked to PMS Prasad about the charge of inflating the capex.
Prasad: Our drilling costs have gone up by 300-400%. But that’s not the only thing, even the engineering services costs, per man hour costs have gone up USD 100-200 or even more. So the engineering man hours and some of the installation crew, we pay them USD 2,000 to 2,500 a day and this was not the kind of rates that were being paid in 2003-04 that is simply because the world didn’t have enough experienced people to do this kind of work. So people were scarce and we had to attract them to come here by incentivising them and by paying higher salaries.
In addition, all the installation vessels, there are very few installation contractors in the world of the quality that we needed and we have employed some of the best. On this field we had Allseas, we had Technip, we had Helix. These are some of the best installation contractors in the world. Technip is from France, Allseas is from Netherlands and Helix is from the US, and to get them to work here and considering the weather vagaries and the downtime that we have had because of the weather.
Q: Didn’t you factor all that in 2003?
A: We didn’t know much about this in 2003 and unfortunately just one year after the discovery we didn’t know much and we could not foresee a kind of increase that was going to happen. In 2003, we thought drilling rig and services per day would cost maybe USD 225,000 to USD 250,000 a day. But in reality when we ended up paying a million dollars a day, we were shocked. The same thing the peak of the commodity cycle that happened between 2005 and 2008, still prices went up and everything went up, steel prices, installation expert costs, engineering costs, installation spread costs and the fact that the steel costs went up by about 100%. So, we were kind of caught in this upward spiral.
So, the costs were not under our control and I think this was a universal phenomenon. Why only talk about Reliance. Look at the other comparable field costs. Everybody had to go through the same price spiral. But even today, though the commodity prices have somewhat softened, but the services cost we still pay USD 1 million a day for drilling rates. They have not come down.
Q: You made the largest gas discovery back in 2002. You have constructed this engineering marvel. But do you think that since the commissioning, how do you feel about the fact that it has been a little hijacked by the entire controversy? Has that overshadowed the engineering marvel?
A: In fact if there is any regret, that is really my regret. We think that we have built a great asset and as you rightly said it is an engineering feat and something that the country and the E&P industry in the country should be proud of. It has added so much value. Unfortunately, it is this avoidable controversy that kind of overtook all the glory and the shine off. I am really unhappy about this because this is not the right level or the right kind of recognition that all the Indian professionals that having worked very hard and created something like this, they don’t get recognised. I am not happy about it, but that is the way life is.
So, I do believe that once the controversy blows over one way or the other that there will be recognition and I am happy that atleast people like you are coming and seeing this. This way atleast there is an opportunity for us to showcase this to a much larger audience who otherwise would not know about this. The fact that we have doubled the production of the gas in the country goes unnoticed because of the media controversy.
Q: So, how much are you producing today?
A: Right now about 36-37 million cubic metres. We had started production on April 1 and we are about 4 months into production. Check any other comparable field start-ups, in four months I am sure they would not have reached the near 50% capacity that we have managed. We are very happy about the smooth ramp-up in production. This is something that speaks for the quality of the engineering and equipment and the installation that has been done.
This is the onshore terminal, built on part of the 200 acres belonging to Reliance. It is here in this giant facility that the gas is separated from its impurities. This is the central control room or the nerve centre of the KG-D6. Since everything is automated, only 250 people are required at any given time to manage all offshore and onshore operations.
Gas production at KG-D6 commenced in April this year. After traveling through all the major facilities I felt the time was right to ask Prasad when production would be ramped up from the current 37 mmscmd to the 80 mmscmd. After all, another allegation made by Anil Ambani is that Reliance is hoarding gas and creating an artificial scarcity.
Q: When are you going to hit that 80?
A: We are ready to produce more than 60 million and we are waiting for the government to give us more linkages to customers. Right now, they have given us linkages up to 40 million. We have signed all agreements with National Thermal Power Corporation (NTPC). We are also almost delivering gas to people except one or two customers like Essar and Gail who will be taking gas probably next week. Dabhol, Ratnagiri Gas and Power Pvt (RGPPL) would start taking gas from October 1. But otherwise we are almost there at 40 million. So, now we are eagerly waiting for the new EGoM to be formed so that the government can give us more linkages.
Q: Is the government giving you a timeframe? Do you lose money if you do not ramp up?
A: We do, a lot. The Rs 35,000-36,000 crore that we have invested is Reliance’s money. It is Reliance’s shareholders money, the money that Reliance borrowed from the banks and if we are not able to earn revenues from these investments, it is a loss of present value.
Q: One of the allegations that you are purposely not ramping up production, you are holding gas, you are artificially creating a scarcity, what are your thoughts on that?
A: I can only laugh because no-one after having invested this much money would want to not produce. For the next five years, the gas price is fixed. So, how does it help me? Secondly, I have to repay my debt, so how does it help me not to get the revenues today. The only reason that we are not able to produce more is because of the procedural delays in forming in new EGoM and then giving us more allocations.
Q: Because of what the government is not being able to fastrack, you are not able to ramp up the capacity?
A: Absolutely. So in a light of view, it is the government which decides to hold the gas not Reliance.
Q: The other thing which has gone against you in the recent few months has been the clarification that has come that now seven year income tax holiday does not stand, what does that mean for you? What kind of a big hit you will take?
A: It is a big hit because in the production sharing contracts and also in other supporting documentation, it is very clearly mentioned that both oil and gas are eligible for tax holiday. We can give a new definition to the mineral oil just for the sake of 80IB and then say, this doesn’t include gas. But I think it is unfair and we have been made a promise based on which we all took so much risk and then put in these big investments and then when the investments are about to fructify, saying that the gas is not entitled to a tax holiday, I think is a bit unfair.
Q: Can you give us a broad range, what could it mean for Reliance Industries?
A: It would be of the order of a couple of billion dollars over seven years, but I need to re-check the numbers. You are a financial channel, so you love to have the numbers but I hate to give out numbers because these are very sensitive information.
Q: But if you don’t get that income tax holiday, would you consider arbitration? What would be the next step?
A: Yes, arbitration is the last resort but right now the government has said that since this matter is subjudice, let the courts decide. So, we will wait for the courts to decide in some of the pending issues. But if that decision doesn’t come through, then we do have to look at other means including arbitration.
Q: Are they inviting you for partnership overseas, for new projects?
A: I can only say that if there is an opportunity it has to be good for both. So I am sure some of them may want to partner us here and equally we may want to partner them but then that is a different discussion. Right now, we are just focusing on getting the production.
Q: Is there anything on the table?
A: I cannot talk about this now. It is not that there is anything on the table. Opportunities do come all the time but then they need to be good for both. What is not good today may be good tomorrow or what was not good yesterday may be good today.
Q: After commissioning the - if you are looking to sell stake in six of your overseas blocks, which I understand is part of the regular farming out of stake and things like that but not looking to expand also at the same time?
A: The upstream industry typically people hold – it is a very rare thing that we have done here holding 90% participating interest. Typically they are all around 30-40-50%. So in our overseas blocks that is what we are trying to do. We are trying to reduce our exposure and be under industry guidelines of around 30-50%. As far as the Indian blocks are concerned, we will look at that opportunity at the right time but at this point of time, we are focusing on stabilizing the operations and increasing the production and the reaching the 60 and maybe some time later 80 million cubic meters.
Q: While you are stabilizing these operations, it also happens to coincide with the first phase of NELP VIII. Does NELP VIII excite you?
A: NELP VIII is a good opportunity but at the same time, I have to look at my portfolio. How much of risk appetite that I have. When you look at a portfolio of all your properties and assets, how many oil explorations, how many discoveries you have that need to go into development and how many producing properties. You need to have a fair balance between the producing properties, between the discoveries that need to be developed and the rank exploration purpose. We already have a lot of exploration properties. So our portfolio today is biased towards exploration, so we need to get more discoveries and discoveries into production.
Q: We might not see you bidding at NELP-VIII?
A: No, not that way. We will selectively in NELP-VII. I am waiting for the assessment from my geoscientists. Once they give their assessment, we will look at it how does this fit into our portfolio in terms of the risk exposure that we are willing to take and then make that decision. But I have never said that we will not bid for NELP-VIII. We will certainly look at the NELP-VIII properties.
http://www.moneycontrol.com/news/business/exclusive-ril-speaks-outthe-gas-war_413881-3.html
_____________________________________________________________________________
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