Shell-ONGC tie-up may take roots in KG basin

“We have submitted a proposal to Shell for equity investment and technical collaboration in our deep-water KG Basin block. Shell is currently studying the proposal and we are awaiting their response,” ONGC’s director (exploration) Narendra Verma told FE. Verma added that there was no fixed percentage of stake that was on offer to the Anglo-Dutch energy company. “Shell could take 10%,20% or even 30%,depending on their appetite,” he said.

A Shell spokesperson could not provide an immediate comment.

ONGC has lined up a massive capital expenditure plan of around R51,500 crore or close to $9 billion for the block by 2030. This,and the fact that ONGC doesn’t normally use debt to finance its exploration and production ventures,indicate that Shell’s investment,if it materialises,would be substantial.

ONGC has found around 4.85 trillion cubic feet of gas reserves in the KG-DWN-98/2 block,with potential peak production of 22 million standard cubic metres per day (mmscmd). The exploratory company currently produces about 55 mmscmd from all its gas fields. The KG-DWN-98/2 block will be the company’s first significant producing block in the technologically-challenging deep-water zone.

The ONGC-Shell strategic alliance dates back to early 2006,when the two signed a memorandum of understanding that was revisited early this year.

The original alliance has not made any major headway primarily because the Indian oil products market remained under government control. ONGC has ambitious plans to enter the downstream segment of refining and marketing and it wants to partner Shell in setting up retail marketing infrastructure. With the progressive decontrol of the retail petro-products market,both companies have a renewed interest in the downstream segment.

If Shell partners ONGC at the KG Basin,it would mark the entry of the global giant to Indian exploration and production sector after a gap of 16 years.

ONGC,which was formed way back in 1956,does not produce from a single deep-water block at the moment. Though it expects to start production from its first deep-water G 1 block (also in the KG Basin) at the end of August,. this is not a significantly large block with an estimated peak production of only 2.6 mmscmd.

The company has discovered gas in eight exploratory wells in the KG-DWN-98/2 block,with the appraisal due to be completed in the next three to four months. The appraisal wells have been drilled at depths of up to 2,541 metres. It expects to start production from the block in 2016-17.

The KG block has been marred by numerous delays in the past that analysts say is partly because of ONGC’s lack of technical expertise in deep-water blocks. ONGC officials on their part state that issues like rig availability and bureaucratic hurdles in getting clearances have delayed the production from the block. It was awarded to Cairn in the NELP round in 2000,which offloaded a 90% stake to ONGC in 2005 before selling out completely.

The ONGC block has received interest from international players in the past as well but delays in approving their participation stymied their entry. Though the farm-out agreements for giving 15% to Brazil’s Petrobras and 10% to Norway’s Statoil were signed in 2007,a joint operating agreement could not be signed.

Verma said that Shell’s global expertise would come in handy given its vast global experience. Shell has been part of major deep-water projects over the last three decades including in blocks in the US (Gulf of Mexico),Brazil and Malaysia. “However,even if they do opt not to come in,we can work with consultants to appraise and develop the block,” he said.

Bob Fryklund,chief upstream strategist at IHS,agrees. He said that more than the technical expertise,which can be acquired with the help of consultants,its the difficult regulatory environment and unattractive pricing policy in India that has resulted in a weak deep-water play for Indian companies.

An official from the upstream regulator Directorate General of Hydrocarbons said that it has taken so long for the company to produce from deep-water blocks owing to the high costs and technical expertise involved. “ONGC has been exploring deep-water blocks right from the nomination era but did not find it viable to produce from these blocks. Also,Indian companies do not have the technical expertise to produce from deep water,” he said.

Shell’s main European rival BP has signed a partnership with Reliance Industries and the companies plan to to invest billions of dollars to boost gas production from the KG-D6 offshore block. Shell’s Indian operations currently consist of a retail fuel network and a floating LNG import terminal at of Kakinada on the country’s east coast.