The Directorate General of Hydrocarbons (DGH) has termed as “economically unviable” the new natural gas finds in the eastern offshore KG-D6 block by Mukesh Ambani owned Reliance Industries Limited (RIL) at the $4.205 per mmBtu approved price.
RIL had in December 2009, submitted to DGH an optimised development plan for four satellite gas fields around the currently producing Dhirubhai-1 and 3 gas fields in the KG-DWN-98/3, or KG-D6, block. It proposed to invest $1.529 billion in producing up to 10 million standard cubic metres per day from the four discoveries in five years’ time.
In a note submitted to the Petroleum and Natural Gas Ministry, the DGH has stated that considering the production profile, the cost estimates and project schedule as provided by operator (RIL), the project yields a negative net present value (NPV) of $239 million at the gas price of $4.2 per mmBtu.
RIL has projected first gas from the Dhirubhai-2, 6, 19 and 22 (D-2, D-6, D-19 and D-22) fields in 2016.
“If royalty is excluded from project cost and capital expenditure is phased over a period of two years before the date of first gas extraction, the project becomes marginally viable. The projected total revenue and NPV of the cash flow at a 10 per cent discount factor are $2,360 million and $33 million. The project becomes marginally economically viable,” it said. However, it added that royalty in any case has to be paid to the government.
Reliance had in 2007 proposed a price of $4.33 per mmBtu for gas from KG-D6. The government however tweaked the formula and fixed the sale price at $4.205 per mmBtu for the first five years of production.
DGH has evaluated the new finds in KG-D6 at the government-approved price and did not consider a higher rate that may be fixed in 2014, when the price comes up for review. RIL has so far made 18 gas discoveries in the KG-D6 block.
The DGH carried out techno-economic feasibility studies at a gas price of $4.2 per mmBtu and projected total revenue and NPV at a 10 per cent discount factor at $6.52 billion and negative $2.51 billion. It told RIL that the development plan needs to be optimised. RIL submitted the optimised development plan for the four satellite gas fields in end-2009.
RIL estimated 1,733 Billion Cubic Feet of in-place gas reserves in the four finds, of which 626 BCF can be produced. However, the DGH trimmed down the estimates to 1,342 BCF and 617 BCF, respectively.