RIL surrenders 14 blocks

Reliance Industries Ltd (RIL) has surrendered 14 blocks to the government after incurring an expenditure of Rs 1,400 crore in unsuccessful exploration. RIL had in the New Exploration Licensing Policy (Nelp) rounds won 45 blocks and among these it has surrendered those blocks to the government where it could not find commercially recoverable oil and gas, sources close to the company said.

The company invested over Rs 13,200 crore in exploring oil and gas and their appraisal in the 45 blocks, but made commercial discoveries only in two blocks — KG-D6 in Krishna Godavari basin and NEC-25 in Mahanadi basin.

Sources said RIL cannot recover the Rs 1,400 crore expenditure it incurred on seismic surveys and drilling wells in the 14 blocks and that would be treated as sunk or lost investment.

Exploration and production (E&P) is a highly risky business and end results of the efforts are not known, and under the Nelp regime, operators can recover their investment from sale of oil and gas only in blocks where they discover commercial hydrocarbons and the same in the rest are simply lost.

In the KG-D6 block alone, RIL has committed about Rs 38,000 crore till date, of which Rs 28,000 crore have been already spent, they said.

RIL has put on production one oil find and two of the 18 gas discoveries in KG-D6. Its plans for nine satellite finds in the block as well as six discoveries in NEC-25 are yet to be approved.

Sources said the rate of return for companies investing in exploration/appraisal and development of a gas field cannot be estimated with any degree of certainty.

The exploration and appraisal expenses which do not result in a commercial discovery have to be written off altogether, unless a contractor is able to recover these from the proceeds of sale of gas from the field or the block where exploration/appraisal does lead to commercial discovery.

Explaining the nature of the uncertain and risk-laden E&P business, they said even after reaching the stage of commercial production, the behaviour of a producing gas field and the recoverable reserves therein cannot be predicted to a degree of certainty, even with the help of latest technology.

There are no remedial measures available and there is nothing a contractor can do if the field does not produce the gas at the rate or to the extent anticipated previously.

The costs and profits of E&P companies cannot be based on individual blocks but has to be looked from a portfolio point of view, where the cost of production by such portfolio approach can be significantly higher, they added.