Explained: Why did RIL close production in three fields in the KG Basin?

The closure of three fields in the KG Basin by RIL casts nagging doubts about India's success under the 23-year-old New Exploration and Licensing Policy

Till recently, the Krishna Godavari (KG) basin off the Andhra coast was a bed of hope for India’s biggest oil companies. After Reliance Industries Ltd (RIL) was awarded a block in 2000, the private sector oil refiner aimed to overtake government-owned Oil and Natural Gas Corporation (ONGC) to become the country’s biggest natural gas producer. But earlier this month — 20 years later — RIL decided to cede natural gas production from the Dhirubhai 1 and D Dhirubhai 3 field in KG-DWN-98/3, popularly known as the KG-D6 block. This follows a shutdown of the MA field in the same block in 2018 after producing crude for 10 years.

Beyond RIL’s ambitions, the closure of these production fields cast nagging doubts about the 23-year-old New Exploration and Licensing Policy (NELP), which was introduced to offer the private sector a level playing field with public sector enterprises and expand India’s oil and gas production. The KG Basin was a centrepiece of this policy.

In the onshore area of the KG basin, 141 discoveries have been made by 375 exploratory wells by ONGC, of which 11 oil and gas pools and 31 gas pools have been discovered; most of them are on production. Offshore, so far more than 84 prospects have been made by 182 exploratory wells (a prospect is an area of exploration in which hydrocarbons have been predicted to exist in economic quantities). According to the Directorate General of Hydrocarbons, 33 of these prospects have proven oil and gas reserves (11 oil and gas and 22 gas prospects). Private and joint venture companies have made about 19 discoveries so far in NELP blocks (see table).

Why did RIL close production in three fields? A statement from RIL said the company and its partner British Petroleum had successfully extended the life of the D1 and D3, which otherwise would have ceased production in 2015 owing to issues concerning reservoir pressure and water ingress.

Unstated, though, are the multiple controversies that dogged RIL’s KG basin activities from the start. The first of them flowed from the fact that, despite the entry of the private sector, pricing and distribution continued to be administered by the government.

 

This dispute involved the price at which gas from KG-D6, under Mukesh Ambani-owned RIL, would be supplied to brother Anil Ambani’s Reliance Natural Resources Ltd (RNRL). According to the latter, a pact between the brothers, which followed a split in 2005, gave RNRL the right to gas for 17 years at $2.34 per mmtbu (million British Thermal Unit), about double the price at which ONCG supplied the government (though half the price a government committee eventually finalised in 2007). This dispute led to a court case that RNRL lost when the Supreme Court unequivocally established the public ownership of natural resources (meaning pricing and distribution could not be decided between private parties). But RIL, too, lost its marketing freedom and had to sell natural gas to government-identified customers.

Another controversy concerned the migration of gas from one of the adjoining fields of ONGC. ONGC accused RIL of producing gas from the government-owned company’s share of reserves, which led to a dispute. A committee under Justice A P Shah was set up to examine the matter. The government followed it up with a penalty of $1.55 billion, sending the dispute into arbitration in which RIL won a favourable verdict. The government has challenged this in the Delhi High Court in 2018 and the case is sub-judice.

Controversy also erupted over production volumes. When the D1 and D3 fields in the KG-D6 block went into production in 2009, natural gas availability in the country doubled. The approved field development plan for D1 and D3 envisaged gas production of 80 million standard cubic metre (mmscmd) a day from the third year of commercial production (that is, 2012-13). Based on these estimates, a number of gas-based power plants and enhanced fertiliser production capacity were planned across the country. Then production started falling: From 60 mmscmd a day in mid-2010 to 52-53 mmscmd, initially, and then dwindled to single digits. Ahead of their closure, D1 and D3 were producing 1.5 mmscmd of gas.

Now, buoyed by some degree of deregulation in gas pricing policy, RIL has embarked on the second leg of its journey in the KG basin. It expects to start production from three fields — R cluster, Satellite cluster and MJ — by the middle of this year. The RIL-BP joint venture has committed an additional $5 billion (Rs 35,000 crore) in these new fields, and aims to monetise reserves of about 3 trillion cubic feet (TCF) (about 500 million barrels of oil equivalent) from all three. Peak production from these three fields is expected to account for about 15 per cent of India’s anticipated demand.

Last year, RIL-BP had called for bids to sell 5 mmscmd from R-cluster field through an e-auction for gas that will be made available to them between April 1, 2020 and March 31, 2021. A second round of auctions is expected soon. But unlike last time, no big-bang announcements of downstream capacity are being made. Indeed, much of India’s ambition to be a gas-based economy is currently banking on imported liquefied natural gas. Nevertheless, with this new project comes another dream run of the KG basin turning into a prolific energy producer.