In his first major decision, the petroleum minister, M Veerappa Moily, has allowed Reliance Industries and Cairn India to explore oil and gas within producing fields, subject to conditions.
The ministry, which had been sitting on the proposal for over a year, wrote to the directorate general of hydrocarbons (DGH) this week, saying it had decided to permit exploration in producing fields, sources said.
Moily, who took over as a minister at October-end, allowed companies to drill exploration wells within an oil and gas field, but with the condition that cost recovery of such wells would be allowed only if there was a commercially-exploitable discovery.
Currently, when a company finds oil or gas in an area, the discovery zone is ring-fenced and a mining lease granted for production of hydrocarbons.
Operators get to recover all their cost, whether successful or not, from the oil and gas produced and sold from that block.
The DGH had earlier taken a view that further exploration in this ring-fenced mining lease area was not permissible. It felt the government's profit share, triggered when an explorer recovers cost, would be affected if new costs are added.
"...Cost recovery of such exploration being subject to establishment of commerciality of the new discovery..., mitigating any risk to the government revenue from existing discoveries," the ministry wrote to DGH. "Cost recovery will be governed by current provisions of PSC on the establishment of commerciality."
RIL and Cairn have maintained that exploration being a continuous process is allowed in the mining lease under which they produce gas from eastern offshore and Rajasthan blocks, respectively.
They felt the 'ring-fencing' proposed by DGH and seconded by the Oil Ministry was not practical and legal. While RIL has proposed to drill an exploration well on the flagging D1&D3 gas fields in the KG-D6 block to study reservoir characteristic, Cairn wants to drill new probes to help raise output from the Rajasthan block to 300,000 barrels per day (bpd) from 175,000 bpd. Globally, exploration is permitted in fields that are under production so as to keep adding new reserves to replenish ones that have been produced. In absence of rejuvenation, the fields will terminally decline from the day output starts. The same has been followed in fields in Assam and Mumbai offshore.