EOGEPL eyes JV with upstream investors under OALP - Essar | Creating Value EOGEPL eyes JV with upstream investors under OALP - Essar

EOGEPL eyes JV with upstream investors under OALP

Coal Insights , April 2018

May 4th, 2018

Essar Oil and Gas Exploration and Production (EOGEPL) is poised to seize the opportunities that are being thrown up by the government’s Hydrocarbon Exploration and Licensing Policy (HELP) and Open Acreage Licensing Policy (OALP), which have virtually unlocked the available sedimentary basinal area of the country, with access to all the available sub-surface resources.

Consequently, the company is engaged in a detailed review of technical and infrastructure data from a short-listed set of blocks and is in dialogue with a few upstream investors for a joint venture model under the OALP bidding norms to optimise its risk exposure, Vilas Tawde, Managing Director & CEO, EOGEPL, tells Madhumita Mookerji. However, he adds, the immediate focus remains completion of the balance work commitment of the 152 wells for EOGEPL’s showcase Raniganj project for producing ~2.5 mmscmd of coal-bed methane (CBM) in the near term.

Excerpts from an interview:

Please give an overview of the coal-bed methane (CBM) blocks scenario in India. What are the estimated reserves of CBM in India and what is the break-up of reserves in the blocks?

India, has the fourth largest proven coal reserves in the world, and naturally a huge CBM potential. However, no assessment about total prognosticated CBM resources in the country, including CIL’s mining lease areas, is readily available (as per the CBM Lok Sabha Standing Committee Report, 2015-16).

The Ministry of Petroleum and Natural Gas (MoPNG), in consultation with the Ministry of Coal and CMPDI, has identified 26,000 sq km of area for CBM operation. The total estimated CBM resources in this identified area is about 2,600 BCM (92 TCF).

Essar is the pioneer in CBM exploration in India with our first CBM wells drilled and test flowed way back in 1992-93 near Mehsana, Gujarat. Subsequently, the National CBM Policy was released in the year 1997.

Since, the year 2000, four International Open Bidding Rounds for CBM had been held in India. Thirty three CBM blocks were awarded. Total prognosticated CBM resources of 62.4TCF were prognosticated in the 33 awarded blocks.

However, till date, only about 10 TCF has been established as ‘gas in place’ in the 8 development blocks. Eighteen blocks, after initial assessment by exploration activities, were found to be having poor CBM potential and are under relinquishment/or have been relinquished.

The Damodar Valley Basin in eastern India has been reasonably proved to be the best area for CBM development with 6 of the 8 development blocks located here. The Raniganj Coalfield in the Damodar Valley master-basin has been the best area for CBM with 2 blocks, namely Raniganj East of Essar and Raniganj South of GEECL, already in commercial production.

The scenario in the Damodar Valley is slated for a further boost with ONGC starting development activities in its Bokaro and North Karanpura blocks. It is also understood that Coal India, with the Union Cabinet approval allowing it to develop CBM in its leasehold, is also planning its initial CBM foray in the Jharia and Raniganj coalfields of the Damodar Valley master-basin.

What sort of investments are required for development, exploration and extraction of CBM from a block?

CBM, being an unconventional play requires drilling of a large number of wells. In addition, CBM being a low pressure gas, requires an elaborate gas compression and evacuation facility. There are very few CBM cost-specific examples in India considering that CBM development has been relatively nascent. So far, CBM investments in India are around `10,000 crore, as per the Directorate of Hydrocarbons (DGH).

Essar, in Raniganj East, has successfully explored, assessed and developed the block, with it already in commercial phase since 2016. As per our approved field development plan (FDP) we have completed nearly 80 percent of it. As of now, the field has 348 wells, 5 GGS, one MCS and in excess of 300 km of pipeline (infield to customer). The total cost incurred so far is around `4,000 crore. Going forward, an additional drilling and required facilities upgradation will cost `900 crore. In addition, it may be mentioned here that based on available data of cost comparison with other successful CBM plays in the world, Essar’s costs are very competitive and even lower than some of our counterparts in Australia and China.

What are the challenges in relation to CBM extraction in India?

There are a host of challenges that have to be endured for a CBM development effort. This can be across the entire sub-surface to surface and logistics handling.

Technical challenges: Despite CBM development being declared a success, there are several inherent operational and future projection uncertainties due to heterogeneity in the reservoir and a complex geological set-up. Hence, it requires an efficient modelling of the reservoir and proper planning for development.

Land acquisition: Is one of the most challenging issues considering such a large number of wells are required for CBM development.

Regulatory and statutory: There is a huge list of clearances across all the operational phases in a CBM block starting from petroleum exploration licences (PELs) in the exploration phase to the mining lease (ML) in the production phase.

Presence of industries/infrastructure in the CBM area: This is due to the fact that such areas are normally in non-oil and gas belt, so there is no ready gas evacuation facility. Our Raniganj field is a genuine example. Hence, we are ardently awaiting commissioning of the Urja Ganga pipeline.

Treatment and disposal of water: Environmental-friendly disposal of huge volumes of produced water is a challenge.

However, it is a matter of great pride for us that we have successfully negotiated all these challenges at Essar, the result of which is seen by the fact that we are the first operator to cross the coveted threshold of 1 mmscmd of CBM gas produce.

Another major challenge factor which has been addressed by the Government of India (GoI) in its April 2017 Early Monetization Policy, along with some other changes for operational ease. This has slowly started bringing the lustre back into the industry.

Give us an overview of the 33 CBM blocks awarded so far?

Only four blocks in India are under commercial production – namely Essar’s Raniganj East, GEECL’s Raniganj South and RIL’s Sohagpur East/West blocks. Altogether, this is a volume of around 2 mmscmd as of now.

The outline of the status of the 33 blocks is as follows:

♦ 8 blocks in development (4 in commercial production).

♦ 18 blocks relinquished/under relinquishment

♦ 4 blocks in exploration stage (which includes Essar’s Rajmahal East and Sohagpur NE)

♦ 3 blocks are under arbitration and/or awaiting required clearances to start operations.

The total recoverable reserves from these 8 development blocks is envisaged at 4 TCF, which means a volume of 10-12 mmscmd of CBM gas upon full development of these blocks.

Why has progress been so slow in that only four have reached commercial production stage?

As outlined above, the challenges have been a dampener impeding a more expeditious development of the CBM resources in these blocks. From our own experience, it was found that the prospects initially projected in the awarded CBM blocks were based on available data from the surrounding coal blocks/mines and actual CBM prospects came out to be entirely different.

In addition, surface constraints like forest, build-up and infrastructure within the blocks became critical to exploring or developing the blocks. Unlike oil and gas plays, lack of infrastructure in the CBM belts has been a major factor.

However, with the recent spate of investor-friendly moves by the GoI there is a definitive chance of recovery of the sector. CBM development is more crucial for eastern India which has remained a coaldominated belt and lacks any conventional oil and gas play.

What is the environmental impact of CBM extraction?

The energy sourcing comes with a growing concern for the environment. Direct methane emission from coal mines is ~25 times more potent GHG than CO2.

Secondly, there is industrial Co2 exhaust from coal-based power plants. There is an acute need to supplement the energy demand in eastern India through CBM. In this regard, the Cabinet nod for CIL to start CBM in its coal leasehold areas is a big upside.

Of late policy changes have been initiated. A Cabinet decision had been taken last fiscal to give marketing and pricing freedom to CBM producers? And, more recently, Coal India and its subsidiaries will now be able to extract coal bed methane from its mines without seeking approvals under the Petroleum & Natural Gas Rules 1959 (PNG Rules, 1959). What will be the larger implications of both policy changes?

CBM is a capital-intensive and marginal economics play and we would heartily thank the Government of India for providing the much-required thrust to the sector with the announcement of the ‘CBM Early Monetization Policy of April, 2017’ which has helped the operators get a very remunerative price for all their endeavours.

At this juncture, we feel there is a significant scope for growth in unconventional gas. CBM’s commercial development already being a reality, it may be considered as a ‘preferred future energy resource’.

We remain committed towards the ’10 percent hydrocarbon import dependency reduction by 2022’ goal set by the Prime Minister. Thus, EOGEPL is gearing up to leverage our CBM ‘learning curve’ for efficient and effective development of future unconventional pursuits. At the same time, we are keen to work with our peer CBM operators to help them achieve a fast tracked and cost-effective CBM development for the benefit of the nation.

The decision by the Union Cabinet (April 11, 2018) allowing exploration and exploitation of coal bed methane (CBM) from areas under the coal mining lease allotted to Coal India Limited (CIL) and with the amendment giving CIL freedom to engage CBM developers is welcome news. With this, CIL will be able to fast track the exploration and exploitation of CBM in the Raniganj coalfield, through capable and experienced CBM operators.

As per preliminary estimates, there is a potential of 3 mmscmd gas production from the CIL (ECL) leasehold areas in the Raniganj coalfield area. And this assumed 3 mmscmd of gas coming on stream from CIL will offset a certain percentage from R-LNG imports.

The fiscal and socio-economic benefits are overwhelming.

♦ Every cubic meter of CBM will result in  `8.00 subsidy saving to the fertilizer sector;

♦ Rs.1.6 of royalty to the state government;

♦ Rs.22 of forex saving (considering the LNG landed and transported prices);

♦ 30 tons of equivalent CO2 emission (CG4 is ~25 times potent GHG than CO2);

♦ Direct investment in excess of `10,000 crore;

♦ Indirect investment of approximately `18,000-20,000 crore;

♦ In addition, there will be direct socio-economic benefits to the local population

(Broad assumptions are that the landed price of LNG, including regasification and transportation, would be $12/mmbtu on NCV basis and CBM price at $8.0/mmbtu – which is the discovered price of Essar and Reliance).

Please give an overview of your existing project (all existing blocks in India and overseas) and pipeline projects.

Essar Oil and Gas Exploration and Production (EOGEPL) is the flagship upstream exploration and production business arm of Essar. EOGEPL has a portfolio of high impact conventional and unconventional coal bed methane (CBM) assets in India and abroad. It has established itself as a leader in unconventional CBM in India, with its Raniganj East CBM block being the first to cross the 1 million cubic meters of gas per day.

The E&P outlook is positioned on:

Unconventional

♦  Unique CBM learning curve exposure gained through the Raniganj East CBM asset’s life cycle (exploration to development and production);

♦ Replicate learning for cost-effective and reliable performances for future unconventional development (CBM, shales, tight reservoirs).

Conventional

♦  Focus on exploration by co-partnering with operators;

♦ Farm-down for risk sharing and/or early value realisation.


A detailed outline of EOGEPL assets in India/abroad

Conventional Assets

Unconventional Assets

Mehsana CB-ON/3

Resources: Essar share: 0.65 mmbbls

Status: 2 fields on production, 2 more fields to be on production by December 2017

Additional CBM upside

Thick lignito-bituminous seams

CBM potential: 2 TCF (ARI, 2013)

Raniganj CBM

Resources: 1.1 TCF 3P / 1.7 TCF 2C+Prospective (NSAI, 2016)

Status: Production of 1.0 mmscmd, 348 wells drilled, 5 GGS & 1 MCS, +300 km pipeline

CBM gas price of +$8.00 under new CBM policy scenario

Vietnam

Resources: Essar share- 116 mmbbls / 378 BCF

Status: Processing of 2500 sq km 3D in progress.

CBM exploratory blocks

4 blocks

(Rajmahal E, Sohagpur NE, Talcher & IB Valley)

Resources: 8.5 TCF (DGH)

Status: Exploration phase I to start in Rajmahal & Sohagpur from next FY.

Nigeria

Resources: Essar share- 12.9 2C + 87.8 mmboe

Prospective status: – Preparation for drilling of 1 well

Mumbai Offshore

Resources: Essar Share – 74.1 mmboe

Phase-II drilling of 1 well, resulted in marginal gas discovery produced at c. 47,000 M3/ day.

Shale (Raniganj)

Resources: 8 TCF (ARI, 2015)

Status: Shale E&P program in place

Excellent synergy with existing CBM ops.


What are Essar’s plans, going forward?

At this stage, our Raniganj CBM asset is poised perfectly with improved economics, based on recent CBM gas price discovery and agreement on the CBM gas sale and purchase agreement (GSPA) with GAIL, in addition to the Urja Ganga pipeline which is to be commissioned by end of this year. Hence, our immediate focus remains completion of the balance work commitment of 152 wells for Raniganj to produce ~2.5 mmscmd in the near term. From here we are also planning to bring at least 2 of our other CBM blocks to monetisation and the reserve map of India. At the same time, on a policy announcement, we also plan to start exploration for shale gas.

The above is in line with our strong commitment to the import dependency reduction goal and promotion of a gas-based clean fuel economy model set by the Prime Minister and to maximise gas production.

Having said that, the other E&P scope of the country is immense. The Hydrocarbon Exploration and Licensing Policy (HELP) and Open Acreage Licensing Policy (OALP) regime have virtually unlocked the entire available sedimentary basinal area of the country, with access to all the available sub-surface resources. Essar’s geo-scientific team is now engaged in a detailed review of technical and infrastructure data from a short-listed set of blocks. At the same time, we are in dialogue with a few upstream investors for a joint venture model in the OALP bidding to optimise our risk exposure.

What more policy-level changes are needed for further exploration, production?

The GoI has already made three milestone announcements, which have been received with a lot of enthusiasm by the industry. These are the Hydrocarbon Exploration & Licensing Policy (HELP) & Open Acreage Licensing Policy (OALP); Policy for Early Monetization of CBM; and the Discovered Small Field Round.

Going forward, the government is on the threshold of few more crucial announcements. These include the Policy on Simultaneous Exploration & Production. We particularly look forward to this policy which will open up exploration of shale in our Raniganj block and CBM in our Mehsana oil and gas block. That apart, there will be the Discovered Small Field Round II and Bid Rounds on Production from Ageing Fields & Enhanced Oil Recovery.

The above have created an extremely conducive investment environment in the E&P sector and we are keen to leverage our extensive E&P experience and expertise for accretion of new resources and their production in the next 3-5 years. A few other considerations will also play a vital role in this regard. For instance, gas is proposed to be brought under the GST regime along with a unified transportation tariff which will provide a trans-India market for the gas. Further, a mechanism of sliding scale royalty on CBM gas produce instead of a flat rate of 10 percent across all production tranches is also on the anvil.

What are the demand and pricing scenarios like now after arms’ length pricing was introduced? How much have margins improved post this?

We have discovered the gas price as per the April, 2017 CBM Policy Guidelines and have established a very remunerative price for our Raniganj CBM gas, which is in excess of $8.00/mmbtu. It is linked to the Brent price of the three preceding months and as per the RasGas LNG pricing formula. We envisage doubling our revenues by FY20 from CBM Raniganj.

We initialled the contract at the closing hours of the year (March 31, 2018). This has given us the single-most important setting, ie, establishling our credentials as a bankable player with robust technology and commercial standards. With improving crude price, we foresee this as a great achievement for the future of the company in general and Raniganj project in particular.

What was production in 2017-18 like? What was Essar Oil’s CBM biz share in this? Did the production meet the government’s target?

CBM production in 2017-18 was around 350 mmscm. We had reached 1.0 mmscmd of gas production in September, 2017 and successfully supplied this gas to commission the Matix Fertiliser Plant. However, in November, 2017 our then anchor customer, Matix Fertilizers, undertook a planned shutdown for internal maintenance and upgradation. To reduce the flaring of this valuable natural gas resource, we started immediate gas supplies to about 25 alternate customers in the region on fallback basis and also undertook a host of planned activities to temporarily reduce the production.

What do you feel about the future scenario of CBM in India? Where will it likely find more takers?

Conventional gas production is dominated in India by a handful of ageing conventional fields while a limited number of new plays have been added over the years. The current scenario is expanding natural gas demand supply gap and there is a strong need to decarbonise the fuel mix. Therefore, the Prime Minister has given a strong mandate of 10 percent reduction in hydrocarbon import dependency by 2022.

There is a significant opportunity for growth in unconventional gas resources like CBM and futuristically shale gas (IEA, 2015). CBM development is already a reality and thus may be a ‘Preferred Future Energy Resource’.

CBM is crucial for eastern India with this part of the country experiencing a sharp increase in energy demand and remaining a coal-dominated belt and lacking in conventional oil and gas play. Thus, there is an acute need to supplement the energy demand in eastern India through CBM.

The commissioning of the Urja Ganga pipeline by end of 2018 will open up the entire customer base ineEastern India with an offtake capacity in excess of 10 mmscmd. One of the key targets for the Urja Ganga pipeline is revival of the fertiliser sector with an estimated offtake of around 8 mmscmd across four plants namely Sindri, Barauni, Gorakhpur and Matix. CBM is already a reality and is a viable option for reducing our import dependency.

Going forward, what will be share of CBM in total gas production in the next 3 years?

There is a prolific development chance for CBM with three main areas of inputs. One is the existing CBM blocks with an in-place reserve of around 4 TCF which will give 10-12 mmscmd of gas in the near term (3-5 years).

Secondly, the development of CBM by Coal India in its leasehold areas would be another huge upside. With the coal occurrence and properties well known in such areas under the CIL leasehold, the development and production window can be fast-tracked.

Thirdly, output from the possible development of shale gas in the region is also one area that needs to be looked into.

Source: Coal Insights