Sashi Mukundan, Region President and Head of Country, India, BP Group, says that partner, Reliance Industries, is not suppressing production from the field.

Multi-national oil major, BP, has invested $7.2 billion in Reliance Industries’ oil blocks, including the controversial KG Basin fields. In this interview done in the backdrop of the raging controversy over pricing of gas, Sashi Mukundan, Region President and Head of Country, India, BP Group, says that partner, Reliance Industries, is not suppressing production from the field. He argues that the field is more complex than originally assumed, and, therefore, the recoverable reserves had to be downsized to 3 trillion cubic feet (tcf) from the 10 tcf that was initially estimated. Mr. Mukundan is confident that his company’s big investment in Reliance’s fields will not go bad. Excerpts from the interview, parts of which were done by email:

There has been a raging controversy over drop in output from the KG D6 block. Different opinions are expressed including holding back of production in anticipation of a price increase. What is the truth?

At the outset, let me assure you that RIL is operating the field as a prudent and responsible operator. This is completely in line with global standards of optimising hydrocarbon recovery. RIL is currently producing volumes at a rate which will keep the field going until additional projects are put into place. These rates reflect the remaining volume to be recovered and the challenges of deepwater operations. Speculation that production was being held back is completely unfounded and ill-informed. By the same logic, how would you describe discoveries which are yet to be approved or developed for years and projects which now have a price advantage due to delayed/inefficient completion? Is this also collusion to hoard oil and gas?

On the allegations that RIL did not drill all the wells as per the amended Field development plan, I would like to state that D1-D3 fields have so far produced over 2 TCF of reserves and has another 1TCF plus left to produce. With the downward revision of reserves by 7 TCF, international prudent development practices would not support drilling additional wells as it does not make technical or commercial sense. BP fully agrees with the operating practices of RIL. It would result in inefficient spend and potential accusations of increased cost recovery.

P. Gopalakrishnan, the one-man committee appointed by Director General of Hydrocarbons, has blamed the fall in output on the failure to drill an adequate number of wells as per the Approved Development Plan (ADP). Do you accept this assessment?

International prudent development practices do not support drilling additional wells as the existing wells will exploit the main gas bearing intervals. Drilling the remaining 11 wells to comply with the last Approved Development Plan would result in an inefficient spend of over $2 billion with no economic benefit. The plan is to produce the remaining D1D3 reserves efficiently by performing work-overs, installing compression while continually looking for additional opportunities in the field. The pre-production assessments made by the operator were certified by an international consultant and reviewed and endorsed by the government to be around 10 tcf. Facilities to produce this quantum of gas were designed and necessary approvals were given by the government.

As production commenced, it became evident that the field was more complex than originally envisioned, and detailed technical assessment shows that around 3 tcf of gas can be ultimately recovered from D1D3. This is not the first field ever to face such a revision. There are examples across the globe and in India of this.

If the explanations around reduced reserves and dwindling production are indeed true, how does this bode for BP’s $7.2 billion investment?

This was and continues to be a great investment for BP. We see three very clear sources of value for BP. First, from the substantial medium-term opportunities for developing the already discovered gas; second from finding new oil and gas across different blocks; and third from establishing our gas marketing joint venture.

KG-D6 is one of the blocks we acquired a working interest in. Further, D1D3 and MA are only the two currently producing fields in KG-D6.

The decline in the two producing fields in KG-D6 is consistent with our judgment at the time of entering into the alliance. There are several discoveries in the KG-D6 block, which are in various phases of approval for development.

This year we have had major discoveries in KG-D6 and Cauvery blocks. We are working together to define and implement an integrated development plan for KG-D6 block, including currently producing fields, already discovered fields and potential future discoveries.

How do you see India’s gas potential? What do you suppose went wrong with D1-D3 and when do you hope to revive it in future?

The estimated gas volume pre-production was too large. As the field produced it became apparent that the in-place volume was smaller. An initial over-estimate of volumes is by no means unheard of in the oil and gas industry. RIL is now aggressively progressing activities to arrest the decline in D1-D3 following Government approvals that were on hold for three years. We are hopeful that the field will continue to produce until compression is installed in early 2015. At that point we anticipate incremental production from the field. The current production could have been 50-75 per cent more than today’s levels had timely approvals been received. There are over a dozen discoveries in the KG D6 block totaling about 2.5 TCF of resources that await various approvals. If these had been approved for development in a timely manner, the first would have commenced production around 2014 adding to/sustaining the gas supply from KG D6. Unfortunately, that has not happened and now the earliest development of these fields has been pushed to 2017 or even 2018 – at a huge cost to the nation.

As the CEO of the Indian operations of one of the world’s largest Oil & Gas companies’, what do you see as India’s Gas potential?

Indian sedimentary basins are sparsely explored. Estimates made by the DGH, International Energy Agency, US Geological Survey and the US Department of Energy indicate that there are over 300 TCF or $4 trillion of yet-to-find natural gas resources to be discovered in India. Even if only a third of these estimates come true or 100 TCF of natural gas is discovered and produced, over $1.3 trillion worth of energy imports can be avoided over the next two decades. A recent study carried out by a renowned think-tank, IHS-CERA, has indicated that at prices equivalent to imported LNG prices, 90 TCF of gas can be economically produced. This increased domestic production can provide $450 billion in revenue to the government and attract over $600 billion in investments and create associated skilled jobs.

The NELP policy has seen its ups and downs –what ails India’s oil and gas sector?

Of the 254 NELP Production Sharing Contracts (PSC) signed since 2000, only 3 are producing. Interestingly, all these three currently suffer from regulatory logjam. Development of over 10 TCF discovered resources which could provide roughly 80-100mmscmd of production today awaits approvals for production. Unfortunately, in the last few years, administrative focus and decision making has moved away from enabling activities. The focus is now on protecting notional government revenue. This focus is stifling activity and as a result very few activities to bring on new production are getting through. There were over 200 decisions pending at the end of 2012. Once the government has picked a competent operator for a block, they should be worried about are -- the contractor completing the agreed work programme; blocks being progressed to development or relinquished on time; resource potential range of discoveries being assessed based on industry standards and production maximised and no fraudulent activities. Similarly, providing fiscal stability and contractual sanctity is very important as sanctity of contracts and fiscal terms has been repeatedly challenged; whether it is the tax holiday or the freedom to price and market gas as per terms of the PSC. There is a need to bring back the clarity on natural gas pricing by following the PSC terms. Given most oil and gas investments relate to a 20-30 year production profile, clarity of a pricing structure is critical before evaluating and approving any investment.

Talking of the recent gas price hike, what was the rationale behind the demand to review prices now?

Oil and gas projects take a long time to develop and then produce for multiple decades. To make investment decisions, we need clarity on the pricing and economics of the project. On the East Coast, deep water construction activities can only take place during the December to April weather window. It hence takes 3-4 years after an investment decision to procure, construct and install facilities and for a field to start production. Investment decisions made today will yield additional production only from 2017. The PSC allows for the contractor to discover an arms-length market-determined price for gas produced. The intent is to ensure value is maximised for all partners, including the government. Gas price for our current production was agreed and fixed till April 2014. With a lack of clarity on arms-length prices beyond that period and in the absence of freedom to discover such price, it becomes difficult for RIL or BP to sanction investments to develop the 4-5 TCF of discovered resources.

Will raising gas prices have an adverse impact on the economy?

I must clearly dispel this false notion that higher domestic gas prices will have an adverse impact on the economy. If domestic gas is allowed to be priced at market levels, a lion’s share of profits from increased revenues will go to the government in addition to the earnings from royalty and taxes. As per the IHS-CERA study, an average 30 per cent of all revenue generated will go to the government as profit share, taxes and royalty. Another 40 per cent will be invested in facilities and infrastructure and close to 15-20 per cent on operating costs. Further, more risk capital will be invested into exploration by experienced players. In the absence of market prices, limited investments will happens and more energy imports will be needed– with all benefits going to the exporting country. Would the Indian economy be better off importing LNG or producing the same gas domestically and hence earning from share of profit petroleum, royalty and taxes? Additionally the multiplier effect on the Indian economy of domestic multi-billion dollar projects is immeasurably huge. One should bear in mind that the alternative to higher domestic gas price is not domestic gas at lower price. It is actually, no domestic gas and more imports.

Why are big multinational companies not making investments or participating in NELP rounds?

BP was the first and only international energy major to make a very significant commitment to the upstream oil and gas sector in India as we believe in the hydrocarbon potential of India. Our investment to date is the single largest FDI into India. Within two years of our presence, together with partners, we have had two major discoveries in the KG and Cauvery basins. We are working with our partner to develop the 4-5 TCF of existing discovered resources. All of this despite of the fact that we have seen the sanctity of contracts challenged multiple times and day-to-day approvals stuck for years, grinding business to a standstill. Indian E&P companies too have found it easier to grow business abroad rather than in India. It is the above-ground factors that have severely hobbled investments. We are now seeing the effects of this come home with the energy import bill at $186 billion and the currency depreciating with flight of capital away from India. I think these facts have been understood by the government and corrective actions are being finally taken.

There has been a talk that hike in gas prices will benefit RIL hugely. Could you throw light on what the factual situation is?

Nearly 80-85 per cent of domestic gas produced in India comes from government companies like ONGC and OIL. RIL and BP through the KG D6 production account for about 10-15 per cent of the gas supplied. Any move towards pricing domestic gas at market levels will benefit the PSUs and the country more. Unfortunately, with the delays, none of our new projects will start production before 2017. More production will reduce imports, increase investment and provide employment. We will be able to attract experienced international companies to explore and invest in India. Government will gain through an increased share of profits, royalties and taxes. Customers will benefit from an increased and sustainable gas supply.

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