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Finally, some Reliance clarity on K-G reservoir output riddle

Company indicates estimates of reserves needed to be cut

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If the substantially differing estimates of gas reserves from the joint venture partners in the (K-G) basin off the east coast have been puzzling oil industry watchers, there is now some official confirmation.

Ltd (RIL), operator of the country’s premier deep water gas acreage, has for the first time said it sees a 10-15 percentage point downward revision in its ‘2P’ (proven plus probable) reserves there. This, it says, is due to “reservoir complexity”. Typically, experts say, 2P estimates have a 50 per cent strike rate.

RIL, reporting its fourth quarter and annual results on Friday, told analysts it might restate the K-G basin reserves. Five analysts Business Standard spoke to confirmed that. “RIL has for the first time admitted of sorts that they did go wrong as far as the understanding of the geology at the K-G basin is concerned. They also provided an asset by asset play as far as their other E&P (exploration & production) portfolios are concerned,” said an analyst who was present at the meeting.

An RIL spokesperson declined to comment on the matter, saying details would be made available in the company’s annual report. So far, RIL’s 2P reserves have been estimated at 11.3 trillion cubic feet (tcf). But a senior official from the government’s directorate general of hydrocarbons said it had revised the reserves to 10.3 tcf.

In oil industry terminology, 1P accounts for proven reserves, 2P are those proven plus probable and 3P accounts for proven, probable and even possible reserves. 1P reserves are also called P90 (i.e. having 90 per cent certainty of being produced).

“During the course of presentation to analysts, company CFO said reserves in the basin could be 10-15 percentage points lower, leading to restatement of reserves. RIL admitted there were concerns they and BP (RIL's new joint venture partner) were together looking at,” said the vice-president, research, at a Mumbai-based brokerage firm.

This admission by RIL is in sync with what its partners have been saying. It comes just over a month after two of RIL’s partners, BP and Niko Resources, suggested reserves in the country’s largest gas fields would be less than estimated earlier.

The direction RIL gave during the presentation was similar to what its partners have said so far. “The numbers Niko has talked about earlier are steep and we do not think the reserve depletion could be that much,” said another senior analyst tracking the company. “Going by what RIL said, a 10-15 per cent downward revision from an estimate of around 10 tcf could mean its reserves are 9-8.5 tcf.”

THE GAS MATHS
Different estimates by K-G basin partners
  RIL BP Niko
Reserve estimate (in trillion cubic feet) 8.5 (2P)* 1.4 (1P)* 6.8 (1P)*
Stated in Q4 FY12 
analyst meet 
CY11 
annual report
FY11 annual  
reserves filing
*1P: Proven reserves ; *2P: proven plus probable

BP and Niko both follow the US and North American regulatory or listing norms of their stock exchanges. Therefore, they only state 1P reserves or proven reserves. In India, companies usually base their calculations on 2P or proven plus probable estimates. BP complies with the US Securities and Exchange Commission (SEC) regulatory guidelines while reporting probable reserves and Niko says it is governed by North American laws and has to get its reserves verified by an independent third party.

Recently, BP in its calendar 2011 annual report stated it accounted for just 0.3 tcf of proven reserves (1P) for its 30 per cent stake in KG-D6, implying gross 1P reserves in KG-D6, including the government’s share, was barely 1.4 tcf. In August 2011, BP acquired 30 per cent participating interest in RIL’s 23 oil and gas blocks, including the giant KG-D6 gas fields, for $7.2 billion.

Niko, a Canadian exploration company which has had 10 per cent stake in KG-D6 for the past 12 years, has also revised its estimate downward. In March this year, the company said it expected a drop in reserves at the Dhirubhai-1 and 3 gas fields. Only a month before, Niko reported a quarterly loss on lower production from the D6 block. "Declines are expected to continue until workovers are completed and/or additional wells are tied in," it had said, adding D6 gas production in December averaged approximately 38.79 million standard cubic metres per day (mscmd) for the entire block. Last year, it had in its annual information form of 2011 significantly reduced, by 20 per cent, its 2P oil and gas reserve estimate in India. It said the same reserves had been evaluated by an independent expert firm, Ryder Scott. In its 2010-11 reserves filing, Niko had estimated only 6.8 tcf gross 1P reserves.

Under SEC classification, “proven” 1P reserves are those claimed to have a reasonable certainty (normally at least 90 per cent confidence) of being recoverable under existing economic and political conditions, with existing technology. However, RIL does not follow the SEC norms while reporting these, as it is not listed in the US. “In India, there is no law or strict definition like the one provided by SEC. It’s still an evolving sector. But typically in India, 2P recoverable estimates (proven and probable, which has a 50 per cent strike rate) are used by the industry,” an RIL official had earlier told Business Standard. With a continuous fall in production from D6 for the past seven quarters, the worry is gathering momentum as the country’s energy economics go awry. Power, fertiliser, steel plants and other industrial users, which had built up a business case on cheaper availability of feedstock, are running at sub-optimal capacity or have had to close operations. RIL might now be factoring in a reserve of a round 8.5 tcf for D1/D3 as against the initial estimate of 12.6 tcf in place and recoverable reserves of 10 tcf.

The total capex factored in for development of the producing D1/D3 gas blocks was $8.84 billion and included drilling of 50 developmental wells. Instead, RIL till date has only drilled 18 in the main sands.

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