Indian oil industry doubling efforts to attract international interest

More exploration work is underway at the Bombay High Field offshore India.

W. K. Sharma, Executive Director of ONGC (Oil & Natural Gas Commission) was interviewed recently by Offshore's Contributing Editor for India, S. M. Singh Gandhi. Gandhi is also the Publisher of Oil Asia, the highest circulated energy sector publication in India.

Offshore: How does ONGC serve the E&P sector?

Sharma: ONGC is the number one E&P company in India with more than four decades of experience in oil and gas exploration and production. In these years, ONGC has absorbed the latest technology in every E&P activity. In the 1970s, the company placed Bombay High oil field into production within 18 months of discovery, which is a record in the industry here. Apart from oil and gas pro duction from conventional methods, ONGC has successfully implemented new technologies like horizontal drilling, subsea completion, extended reach drilling, use of lightweight platforms, and production from marginal fields.

ONGC recently contracted for drilling in Bangladesh where ONGC is drilling onshore wells for Bangladesh Gas Field Company and Sylhelt Gas Field. ONGC also contracted with National Drilling Services Company for the drilling of two wells in Oman, and drilling is in progress. ONGC is ready to offer contracts in areas such as well stimulation, logging seismic data acquisition, seismic data processing, and low cost production.

The seven Research Institutes of ONGC which have developed capabilities in the area of exploration, reservoir management, drilling, ocean engineering, oil and gas production, and safety management have formed a consortium - ONGC Institutes Integrated Service (OIS), and are jointly offering services to all upstream companies operating in India and have participated in bidding for similar service abroad. Thus, ONGC, as an E&P company, has the capacity to render service in any part of the world.

The Indian Government has approved a new exploration licensing policy. Could you elaborate on its advantages for overseas investment?

Sharma: The new exploration licensing policy, which the government has approved, has many advantages. This policy will neither restrict the mandatory state participation through ONGC/OIL, nor will there be any carried interest of the State. It will also encourage ONGC and OIL to compete for petroleum exploration licenses (PEL) on a competitive basis, instead of the existing system of granting PELs on a nomination basis. At the same time, ONGC and OIL will also get some fiscal and contract terms as available to private companies. It will also provide benefits such as:

• Freedom to contractors for marketing crude oil and gas in the domestic market. Royalty payments are at the rate of 12.5% for the onshore areas and 10% for offshore areas.
• To encourage exploration in deepwater and frontier areas, royalty will be charged at half the prevailing rate for normal offshore areas, and for deepwater areas beyond 400 meter bathymetry for the first seven years after commencement of commercial production.

The Indian government has dismantled the administrative prices mechanism. What impact will it have on oil companies ?

Sharma: The cost-plus formula for fixation of prices for petroleum products has been dismantled. The prices of crude oil are linked to the weighted average of FOB cost of actual imports, with partial parity linked to a basket of fuel oils in an international market dated 1 October 1997, with partial parity up to March 2000. The prices of other control products such as LPG, NGL, and SSKO are based onimport parity. However, as the international prices of crude oil are lower today, there is not much impact of these revised prices on the national oil companies. After a transition period of 3-4 years, the oil companies will benefit from the market-driven prices and improve their revenue, which can be plowed back into exploration. Therefore, this policy will prove beneficial in the long run.

Recently, a 3D seismic survey was conducted at Bombay High. Will it eventually help increase production from the field?

Sharma: For the first time, ONGC conducted a 3D seismic survey on the Bombay High field. Acquisition of 3D seismic for the entire field has been completed, and processing and interpretation of this survey has been done, along with a final report. Reservoir experts are examining the report and will suggest an action plan shortly.

Additionally, ONGC engaged Gaffine Cline and Associates (GCA) for a period of two years for overall reservoir management of the Bombay High Field. GCA, in association with ONGC, is trying to address the technical problems associated with surface and subsurface activities. GCA and ONGC are trying to sustain the current rate of production and economize on production costs by introducing new technologies and cost-cutting methods.

What progress has ONGC made in deepwater? What are the prospects?

Sharma: ONGC has formulated a deepwater drilling program, which we consider a very promising frontier area for oil exploration. With this objective, ONGC has upgraded one of its drillships, the Sagar Vijay. The capability of the rig has been increased to drill in a maximum water depth of 900 meters.

Before commencing the deepwater drilling program, ONGC had drilled wells in water depths to 170 meters. Now, ONGC is drilling the second deepwater well in the Krishna Godavari Basin. Further plans will be formulated, after analyzing the results of the current well.

Simultaneously, ONGC is exploring the possibility of entering into a joint venture agreement with multinational companies to explore in deepwater. The JV operation would explore in ONGC-held deepwater blocks as well as bid for new blocks announced by the government under the NELP (new exploration licensing policy).

What role can Petronet LNG play in India, taking into consideration the significance and future utility of liquefied natural gas?

Sharma: The emergence of natural gas as a clean energy source has opened a new chapter in gas production, particularly in the form of LNG. India has entered the LNG business to meet domestic energy requirements in the coming decade. The government has approved the formation of a joint venture company called Petronet LNG with ONGC, GAIL, IOC, and BPCI, which together hold 50% of the equity. The balance will be offered to institutional investors. The JV is exploring the possibility of setting up LNG import terminals at Dahej in Gujarat, Cochin in Kerala, Ennore in Tamil Naclu, and Mangalore in Karnataka.

In short, the prime objective of Petronet LNG is to import LNG and supply to various consumers at very competitive prices. The availability of this fuel in different parts of India will promote the growth of industry. Petronet LNG will also provide more terminals at competitive prices in the future.

Given the fact that global oil prices collapsed last year, and could do so again, does it make sense for ONGC to grab opportunities abroad?

Sharma: ONGC is participating in oil and gas exploration projects in a number of countries such as Vietnam and Kazakhstan. The company, along with BP and Statoil, has discovered gas in commercial quantities in Vietnam. For the first time, ONGC has participated with an Indian company, Reliance Industries, in the development of a discovery outside India - in Iraq. In addition, ONGC is pursuing exploration acreage in Iraq independently.

The fall in global petroleum oil prices last year accentuated the costs of exploration. Smaller players (in a low-price environment) might not be able to sustain the pressure or operational costs. We have to make use of such opportunities in the future and expand operations abroad. This should provide us with equity oil in the long run.

In view of the recent equity swap between ONGC and IOC, what are the policy objectives of ONGC in the coming years?

Sharma: ONGC and IOC recently entered into an equity swap plan, which is a synergy of upstream and downstream companies that compliment one another's activities. This plan could provide the necessary impetus for diversification abroad and compete as an integrated energy company. Thus, an equity swap between ONGC and IOC will be beneficial to both the companies.

Do you consider the new international business environment good for the entire oil industry?

Sharma: In the early 1980s and 1990s, discovery and production of more oil and gas was the main objective of any oil company. However, availability of crude oil at lower prices internationally, and dwindling reserves all over the world, forced oil companies to be more cost conscious. Strategic alliances between different companies for mutual benefit, production from small and marginal fields, additional recovery from existing fields, and introduction of new cost cutting technology, are the buzz words of E&P companies everywhere in the world. Therefore, the future lies with participation by operator managements jointly in projects. Today, the philosophy of an E&P company is "dollar or barrel," that is, to earn dollars or barrels of oil, is one and the same.

What is the impact of this new cooperation?

Sharma: Joint participation of domestic and foreign companies in E&P projects will improve technology, reduce costs, enhance managerial efficiency, induce better reservoir management, and provide for additional reserve accretion. India's upstream industry should take advantage of low-cost services available internationally and intensify exploration. At the same time, India's oil industry should concentrate on cost cutting technology in different areas and reduce production costs.

Today, the location of natural resources, the availability of technologies, and the availability of investment need not be at one place. The growth of information technologies has made it possible to pursue any project in any part of the world. The hot industries of today are brainpower industries. Each can be located in any part of the world. The new business environment, though very competitive, will help the petroleum industry in the long run.

What impact will entry of the international oil majors have on India's domestic sector?

Sharma: The entry of the international oil majors will prove beneficial to India's oil industry. They will help in the transfer of technical know-how and help to update technology. We can only gain by allowing fruitful relationships to develop. Also, it will be a good trust-building measure.

Editor's note: Since the interview, the G-1AA well in the Krishna Godavari Basin has become the first deepwater discovery off India. The well was drilled to a TD of 2,516 m and flowed 3,600 b/d of oil and 1.4 MMcf/d of gas. Delineation and testing are underway.