ulti-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 completely in line with global standards of optimising hydrocarbon recovery. RIL is now 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 deep-water operations.

Speculation that production was being held back is completely unfounded, and ill-informed.

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?

Indian sedimentary basins are sparsely explored. Estimates made by the DGH, International Energy Agency, U.S. Geological Survey and the U.S. 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.  

What then ails India’s oil and gas sector?

Of the 254 NELP (New Exploration Licensing Policy) production-sharing contracts (PSC) signed since 2000, only three are producing. Interestingly, all these three at present suffer from regulatory logjam.  Development of over 10 tcf discovered resources which could provide roughly 80-100 million metric standard cubic metres per day (mmscmd) of production today awaits approvals for production. Unfortunately, in the last few years, administrative focus and decision-making have 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 what 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.