The Great Gas discovery : Reliance's opetration in KG basin

The first ever on-site look at RIL’s operations in the KG basin

If there are any vestiges left of the undivided Reliance group, one is the 18-seater Bombardier-DHA named after Dhirubhai Hirachand Ambani, founder of India’s largest private sector company — the Rs 1,46,328 crore-Reliance Industries (RIL). Names of his five grand children — Isha, Akash, Jaianmol, Harianant and Jaianshul — are printed at the entrance of the aircraft. Eight years after Dhirubhai’s death, and despite the bitter ongoing dispute between brothers Mukesh and Anil, names of Anil’s sons Jaianmol and Jaianshul remain on the aircraft owned by Mukesh Ambani-led RIL. It ferries RIL employees, and sometimes Mukesh himself, between Mumbai and Rajahmundry in Andhra Pradesh, to the KG D6 gas fields.

Mukesh Ambani’s RIL and Anil Ambani’s Reliance Natural Resources (RNRL) are embroiled in a court battle over the price at which gas will be supplied by the former to the latter from the 7,645 sq. km rectangular block called D6 in the Krishna-Godavari (KG) basin off the coast of Andhra Pradesh. It had the world’s biggest gas find of 2002 with recoverable reserves of 15 trillion cubic feet (TCF). Almost exactly a year since production began at the 16-odd wells in KG D6 on 2 April 2009, the battle is drawing to a close with the Supreme Court expected to announce its judgement before the Chief Justice of India, K.G. Balakrishnan, retires on 11 May.

In fiscal 2009-10, KG D6 produced 60 mmscmd of  the 115 mmscmd of gas India produced indigenously, but the story of the development of India’s largest gas reservoir remains untold. Weeks before the first anniversary of production, deputy photo editor Sanjay Sakaria and I are on board the DHA to get a first-hand experience of the project that tested even Reliance’s celebrated project execution skills.

An uncanny sense of Dhirubhai’s presence envelopes us as we enter the aircraft. A smiling portrait looks benignly at the passengers. The interiors are also decorated with paintings of the Gods the Ambani family worship.

From Dhirubhai To Dhirubhai-1

When touring Reliance facilities, you can never be far from Dhirubhai. From an aircraft named after Dhirubhai to a ship named Dhirubhai-1 will take slightly over two hours including a 30-minute ride on a chopper (not named Dhirubhai). The Mumbai-Rajahmundry leg is a 95-minute flight. The aircraft is only half occupied by senior engineers and technicians. As we land at Rajahmundry, we are advised to mind our time. The tiny airport does not have night landing and takeoff facilities. We are also advised to put on specially toughened skid-free shoes before embarking on the next leg of the journey. The 12-seater Bell Copter 412 waiting at the single-strip airport to ferry us to the production facilities in the block is one of the two RIL employees use for trips offshore.

The KG D6 block has three producing fields — gas reservoirs D1 and D3 and an oil reservoir called D26. Sixteen of the 18 wells in the three fields produce hydrocarbons through a complex and elaborate system of underwater hydraulics and valves, supply pipelines and power and optic fibre-lines (see ‘RIL’s KG Basin Operations’). Above the waters, there are just three landmarks — a ship that stores and off-loads crude to tankers on high seas, a control room on a platform in the middle of the sea where all gas production congregates, and the onshore terminal to which the platform supplies the gas via sub-sea pipelines for processing.

Given the scale, KG D6 has special significance for RIL chairman Mukesh Ambani. It is his most ambitious mega project since Jamnagar’s greenfield refinery, and it promises to be a cash cow. RIL’s retail venture may have expanded very fast but continues to be a cash guzzler. In contrast, at 60 million metric standard cubic metres per day (mmscmd) of gas production currently (being sold to 48 customers as per the gas allocation policy of the government of India), D6 may have already added $3.2 billion to RIL’s estimated topline of $45-50 billion in 2009-10. In 2010-11, when production peaks at 80 mmscmd, it will add $4.4 billion.

Deepak Mahurkar, associate director of consulting firm PricewaterhouseCoopers (PwC) believes KG D6’s impact on the bottom line is higher than the 9-10 per cent it has on the topline. Says Abhinav Goel, director of Fitch Ratings India: “KG D6’s earnings before interest, taxes, depreciation and amortisation (EBITDA) in 2009-10 was about Rs 7,000 crore. Next year, it will be about Rs 16,000 crore based on peak production. If they lose the case, it will be Rs 4,000 crore short.”

RIL’s executive director, and oil and gas business head, P.M.S. Prasad refuses to talk margins. However, a 2008 report by Goldman Sachs estimated that RIL’s internal rate of return (IRR) from the fields at 33 per cent would be the second-highest in the world among the top 190 projects surveyed.

Oil and gas contributed just Rs 3,530 crore to the company’s topline in the third quarter against Rs 48,000 crore by refining and Rs 14,756 crore by petrochemicals, the segment’s EBIT of Rs 1,477 crore was higher than refining’s Rs 1,379 crore. Effectively, D6 contributed nearly one-third to RIL’s EBIT.

Analysts are betting heavily on RIL’s upstream business providing much of its future growth in the oil and gas segment. Morgan Stanley, for instance, attributes about Rs 745 per share of the target price of Rs 1,322 to its exploration and production (E&P) business. “Now that upstream is also earning, the company is throwing so much cash that they don’t know what to do with it. So we are seeing bids such as (the one for) LyondellBasell,” says Goel. Analysts suggest that if RIL continues with its 52 per cent success rate in exploration against a global average of 35 per cent, soon its profits from E&P will surpass profits from all other businesses. And in less than a decade, E&P revenues could be higher than revenues from all other businesses.

This is because RIL has a total of 41 discoveries in 29 blocks covering 305,000 sq. km under India’s New Exploration Licensing Policy (NELP) programmes (14 other blocks were surrendered in 2007). Another 14 blocks cover 100,000 sq. km internationally. About 80 per cent of these, including the KG basin ones, are in deep waters. It is actively drilling in six blocks. “By the third quarter of this year, we will be able to work on many more,” says Prasad.

Among the international blocks, RIL is producing from a block in Yemen but is unable to ramp up due to local problems. Two other blocks are going through seismic studies. In other international blocks, except in Oman, the hydrocarbon found has not been commercially viable. Those in northern Iraq, Colombia, Peru, Australia and Timor will see drilling phase in 2011. RIL has also announced a joint-venture with Atlas Energy of the US, which owns gas resources of 13.3 trillion cubic feet equivalent.

For the immediate future, Phase II of the D1 and D3 development plans submitted to the director-general of hydrocarbons alone has 32 more wells that could begin production between 2013 and 2016. It also has satellite gas discoveries towards south-east of the block. RIL has already reported six gas discoveries at 100 metres depth in the Mahanadi basin block NEC 25 where wells will be drilled in 2013-14. More reservoirs have been spotted here at 400 metres. It has also struck gas in the Cauvery basin block off Tamil Nadu. But the big expectation is from KG D6’s neighbouring block D9 where wells will be drilled later this year. “Some of the prospects of D6 extend to D9,” says Prasad.

In The Eye Of A Storm

Besides the fight between the brothers, the KG D6 is in the midst of a storm. Comptroller and Auditor General (CAG) of India is investigating the field development expenses on allegations that RIL inflated costs. Prasad says, “It is not an investigation; it is an audit.” While the original estimate was $2.5 billion for 40 mmscmd of gas, RIL doubled it to 80 mmscmd at a capex of $5.2 billion. An addendum to the plan added $3.6 billion in Phase II to sustain production, taking the total cost to $8.8 billion over 9-10 years (about $5.2 billion has been invested).

“The government wanted to audit 2006-07 again with CAG. Though this is not as per the production sharing contract, we are agreeing as a one-time exception... for the sake of transparency,” explains Prasad. “Let them find out. These are baseless allegations.”

‘350 DAYS OF 100% UPTIME’ 

Reliance Industries chairman Mukesh Ambani was initially loathe to discuss the disputed KG D6 block because it is sub judice. After much persuasion, he consented to give his views on a few topics by email.

On KG D6 project: The tremendous spirit, tenacity and ability of the team of over 2,000 technical, operational and managerial personnel to overcome the most challenging frontiers is truly commendable. The team created an entire production system 8,000 ft under the sea. We have completed over 350 days of gas production with 100 per cent uptime, once again demonstrating Reliance’s strength of meticulous planning and flawless commissioning and execution.

On energy security: The hydrocarbon production from KG basin vindicates the faith of our founder-chairman Dhirubhai Ambani in India’s endowment of hydrocarbon resources. After nearly three decades, a major offshore development went on-stream. The production here will reverberate with his resolve to find oil and gas in India. The production has already had a profound impact, and marks a major milestone in India’s march towards energy security.

On use of natural gas: Natural gas from KG basin is already transforming the energy scenario in the country. India has the opportunity to use this 21st century fuel and leapfrog to the use of clean energy and protect our environment. I look forward to the days when lakhs of household kitchens, millions of vehicles and distributed power units are powered by gas. India’s hydrocarbon resources should be utilised for large sections of our people and we should strive to create value in the lives of urban and rural India.

RIL says the cost bloated because of the sharp rise in demand for equipment, services and people in the upstream industry when its fields were under development (2005-08). Prasad says that while in 2003-04 the company was hiring the ultra deep water drilling rig at $225,000 per day, charges today are over $1 million per day. Higher steel prices doubled the cost of fabricated sub-sea equipment.

“The industry witnessed an increase in cost due to an increase in the cost of rigs, manpower costs and steel prices. RIL’s cost escalation is justified,” says Deepak Pareek, an analyst at Angel Broking.

Production On Float

On board the chopper with special earmuffs on, knowing dumb charades come in handy while communicating with fellow passengers. But I realise that when flying offshore, absorbing the breathtaking serenity of the ocean is a better idea.

Looking out for our next destination, it is time for some lessons in oceanology. A change of colour in the sea signifies  change in depth. Where the colour turns from green to blue, the sea bed drops from around 100 metres to over 400 metres and then again to about 1,200 metres, the depth at which most of the KG D6 production is taking place. Depths beyond 400 metres are called deep sea. Humans can, at best, dive up to 100 metres with scuba gear. That is what makes deep sea E&P as challenging as space exploration. “Once you are out there, you cannot do anything about it,” says Naresh Narang, RIL’s senior vice-president, development projects.

At the end of the 30-minute ride, we hover around a bright orange ship — Dhirubhai-1. The 290 metre-long, 51 metre-wide vessel built at the Jurong Shipyard in Singapore is a modified crude oil tanker. In oil and gas jargon, it is an FPSO (floating production, storage and offloading) vessel. These vessels can separate oil from gas, eliminating the need to transport the crude onshore for processing. Though Dhirubhai-1 is India’s first FPSO, such ships have been used by the industry since 1977 when Shell built the Shell Castellon in Spain.

LEGAL WRANGLE

India’s biggest gas find has been embroiled in a controversy ever since Reliance Industries (RIL) committed to supplying 28 mmscmd of gas from KG D6 at a price of $2.34 per mmBtu for 17 years to Reliance Natural Resources (RNRL) under the Ambani family separation agreement in 2005. The supplies would be 40 mmscmd if RIL’s contract to supply 12 mmscmd to NTPC did not materialise.

RNRL has also claimed rights over any future gas discoveries in the KG D6. However, in 2007, the government of India fixed the price of $4.2 per mmbtu. RNRL approached the Bombay High Court to restrain RIL from selling 28 mmscmd of gas to a third party. But the court allowed the sale of gas for five years as per the gas allocation policy of the government, subject to its final order.

RIL currently supplies 60 mmscmd of gas to 48 clients at $4.20 per mmBtu. In its verdict, however, the Bombay High Court ordered RIL to supply gas to RNRL as per the 2005 pact. The high court order was challenged by RIL in the Supreme Court, which has concluded the hearings from both sides and is expected to deliver its verdict any time now.

Currently stationed 45 km offshore, right above the oil reservoir D26, Dhirubhai-1 is connected to the field below through umbilicals and pipelines called risers. While oil from the wells is pumped up and stored in the vessel, gas is sent to the onshore processing terminal. In order to keep the umbilicals and risers from snapping, Dhirubhai-1 does a 360 degree excursion round the clock over the reservoir. As the 1.3 million barrels-tank in the hull fills up to 1 million barrels, crude tankers from buyer Mangalore Refinery arrive to offload crude.

Over 80 people of 11 nationalities are deployed at the FPSO, says the ship’s captain, Nikolaos Messinis, a Norwegian, who represents the management firm Aker Borgestad Operations that manages the ship. The reception area (also the inhabitants’ recreation point) sports a large LCD screen and refreshments. But the DTH connection plays truant as the vessel rolls around in rough weather. In the event of a typhoon, Dhirubhai-1 can disconnect from the fields and move to sheltered waters. (It has not happened yet). “The FPSO can last 15 years without the need for dry docking,” says Pramod Sapra, the FPSO manager.

A VSAT hooks up the FPSO with Aker’s Norway headquarters, RIL’s control room at Navi Mumbai and the onshore terminal at Gadimoga, any of which can log on to the 18-odd cameras on board for a real-time assessment of critical areas in the vessel.

Another 20-minute chopper ride from the FPSO takes us to the helideck of what is the nub of gas production. It is India’s most significant platform on the high seas, producing 60-63 mmscmd of gas. (India’s total domestic gas production is 80-85 mmscmd currently). It has not hit its peak capacity of 80 mmscmd because the GAIL’s HBJ pipeline, which will evacuate the gas, will be able to expand capacity only by October 2010. “We have tested all our equipment for peak production,” says Singh.

The five-deck facility weighs 17,000 tonnes and stands 100 metres above waters while its foundation goes 120 metres into the sea bed. In the second deck control room, ultrasonic meters feed real-time gas production data from the 16 producing wells on the sea bed to the NEC monitors through optic fibre cables. As against the target of 60.50 mmscmd, production shows 61.64 mmscmd at 2.45 p.m. The living quarters for 25, a recreation room on the deck below and a full-fledged cafeteria manned by Radha-krishna Food Services are just some sops to overcome the monotony of working on high seas. Employees get 14 days’ compensatory off for every 14 days on the platform.

The CRP has two 24-inch carbon steel pipelines pumping gas from the 18 wells. Another pipeline comes from the FPSO. Given that the D1 and D3 fields are provisioned for 32 more wells, each costing $50-90 million, the CRP can accommodate three more pipelines as and when the new wells begin production.

The platform’s significance to the nation requires round the clock patrolling within 500 metres by a security boat. Both the platform and the boat have a hotline to the Coast Guard and the Indian Navy. Even the FPSO is guarded by two security boats that circle it constantly.

But what is most critical to gas production at KG D6 sits at the edge of the continental shelf. The DWPLEM (deep water pipeline end manifold) at about 400 metre depth beyond the CRP is really the factory at the sea bed. It is the key link between the CRP and the wells, routing the production from the reservoir.

On-Shore Terminal

Another 20-minute chopper ride brings us to India’s first private heliport at the processing centre of the KG D6 block at Gadimoga on the Andhra coast. At one end of what is called the “onshore terminal” is the landfall point where three white pipelines bring in gas from the CRP. At the far end is the yellow 48-inch East-West Pipeline running 1,400 km from Gadimoga to Bharuch in Gujarat. In between lies the processing centre that cleans the gas of rubble, water and mono-ethylene glycol (MEG) before pumping it into the East-West pipeline. “Broadly, the way crude and gas are produced are established technologies. KG D6, however, had many firsts,” says Mahurkar of PwC. For instance, unlike ONGC which processes  gas at each offshore terminal, RIL transports for processing it to a large terminal on land.

RIL’s head of operations for KG D6 Prem Verma, who landed at Gadimoga over seven years ago to set up the facility, explains how it works. “We are lucky. The gas is 99.6 per cent pure methane. Reservoir produces some water. It cannot be supplied to the trunk line because it corrodes the line. So the gas has to be passed through a dehydration system and a MEG system,” he says. Methane’s high inflammability means that even the cars in the premises have to have contraptions in the exhaust. “Those are mufflers; in case there is a spark. You cannot take chances in a gas terminal,” says Verma. Cigarettes and lighters are at the top of the production terminal’s banned list, which includes mobile phones as well.

Challenging RIL

Every text book on hydrocarbons will tell you that deposits happen in the deltas. But geologists were near convinced that India’s eastern offshore — despite being home to ancient deltas such as Ganga, Brahmaputra, Mahanadi and the Krishna and Godavari — had no hydrocarbons. But when RIL’s E&P team bid and won the KG D6 block in NELP-I, it relied on the books, not geologists.

CHALLENGES AND SOLUTIONS

CHALLENGE 1 : Cyclones and storms right through the year allow only four months of construction window

HOW IT WAS OVERCOME: Interface management team set up to coordinate 200 consultants and contractors and fabricators in 12 countries on a real-time basis

CHALLENGE 2: Though only two fields (D1 and D3) are producing, project has to account for future expansion

HOW IT WAS OVERCOME: India’s first FPSO (floating production, storage and offloading) vessel deployed. A control and riser platform (CRP) conceptualised as an offshore control room for production and flexibility

CHALLENGE 3: Three 24-inch trunk lines from CRP to land at the onshore terminal. But a reserve forest on the way posed environmental issues

HOW IT WAS OVERCOME: Line length extended by about 20 km to travel under the river bed up to the onshore terminal

CHALLENGE 4: Site for onshore terminal near delta of Godavari river prone to flooding due to proximity to sea

HOW IT WAS OVERCOME: Analysed 100 years of weather data. Dredged 5.7 million tonnes of sand from the river to raise the level of the 200-acre site by 4.5 metres

CHALLENGE 5: Sea bed temperature of 5 degrees Celsius unfit for operation by humans

HOW IT WAS OVERCOME: Deployed robots called remote operating vehicles (ROVs) to set up the “factory” at 1,200 metres depth

“Krishna and Godavari were two mighty rivers we thought will go towards the deep waters in geologic past,” says Rabi Bastia, the head of the exploration team. Based on the two-dimensional data, the team found some geo bodies that looked different from non-hydrocarbon bearing areas. It then went for three-dimensional surveys, which confirmed some geo-bodies towards the deeper waters in the block. “You can have whatever image, but unless ‘Professor bit’ (the drilling instrument) drills and finds oil, it is of no use. So ‘Professor bit’ drilled the first well (D1) in 2002 and the rest is history,” says Bastia.

Globally, deep sea development takes 7-10 years from discovery to production. KG D6 produced its first oil in six years and six months. “(It) is undoubtedly among the fastest deep sea developments in the world,” says PwC’s Mahurkar. Here’s how.

While Bastia and his team were analysing their seismic finds, RIL’s president of development Subhash Varma had already put Narang in charge of the field development group to suggest different scenarios for production in case oil was found at the block.

By the time Bastia confirmed the find, the development group already had 70-80 different options. The choice of FPSO, CRP and onshore terminal was based on some strategic decisions. One, since this was RIL’s first deep water experience, the team would only accept proven technologies rather than experiment with a new one. Second, it had to choose the technologies that provided the greatest flexibility in terms of adding new fields, wells and supply lines. Third, it had to be cost-effective.

To start with, Narang and his team quizzed deep sea operators and contractors to glean their learnings from projects. “We did not want to repeat the mistakes they made. Everything had to be right the first time,” says Narang. At various points, the team held a technology parade between the world’s best technology firms for choosing specific solutions. For instance, one of the biggest challenges was controlling loose sand production to enhance the life of wellhead equipment. RIL sought competitive studies from the world’s best technology firms, including Schlumberger and Halliburton, for the best solution.

Also, with nearly half of India depending on gas from KG D6, the production had to be highly reliable because contractual penalties would be punishing. “We planned to be available at least 98 per cent of the time,” says Varma. At the CRP, for instance, the company has one redundant umbilical as a backup for the first. If both fail, it has a line-of-sight microwave link from the platform to the shore, which can run the CRP’s generator to power sub-sea systems.

The biggest challenge, however, was not the equipment but the personnel — the interface between 200-odd contractors, suppliers, fabricators and consultants operating in different time zones had to be managed to avoid delays. If the FPSO was being built in Singapore, sub-sea structures were being fabricated in Malaysia, Europe was making umbilicals and controls, and parts of the CRP were being built at Dubai and in the US. When everything came together, 89 vessels were operating in the block at one point. Narang’s team worked closely with project management consultants Bechtel to form a 24/7 group whose only job was to resolve interface related issues. “This project tested our project management methodologies, techniques, skills and people’s abilities,” admits Varma.

Building the onshore terminal had its own challenges. The site at the mouth of the river was prone to flooding. Verma, head of operations for KG D6, and his team analysed 100 years of weather data to arrive at the highest water level ever reached at the site — 3.75 metres. To be on the safe side, the team decided to raise the level of the 200-acre site by 4.5 metres with 5.7 million tonnes of sand dredged from the river.

Next, he had to decide on the route the three pipelines from the CRP would take to the onshore terminal — would it cut through a reserve forest or take a longer route via the river section of the Godavari. The team decided to avoid the eco-sensitive areas and follow the river route.

For their support to the project, the people of Yanam, a village on the shore nearby, have extracted a deal out of RIL. The company will build a replica of the Eiffel tower, one third its original size of 324 metres, so that Yanam can develop the shore as a tourist destination. With a little more cooperation from the villagers, RIL may be able to fulfil Mukesh’s desire of laying an air strip at Gadimoga.

But until then, RIL staffers will continue taking what would be our final 20-minute chopper ride back to Rajahmundry airport in the race against the setting sun. FYI: DHA did take off before sundown that evening.

Source: www.businessworld.in

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