By R. Sasankan
British
economist E.F. Schumacher propounded the theory that Small is
Beautiful. In his scheme of things, people and ecology mattered more
than anything else. But if Schumacher were alive today, he would have
had to exempt the exploration and production (E&P) industry from the
rigours of his concept.
In the E&P industry Big is Best – and this is best illustrated by
highlighting the woes of the small players that are struggling to
survive amid regulatory challenges and falling crude prices.
Niko Resources of Canada, a minor player in India’s upstream sector, is a
small company. Faced with a mounting debt burden, Niko is finding
survival extremely difficult. Niko’s problems started even before the
crash in crude price.
Hardy Oil & Gas has always been a small company with certain
acknowledged advantages in developing small and marginal oil and gas
fields. Hardy entered India a few years ago through a Production Sharing
Contract (PSC) for the PY-3 field in the Palar Basin on the East coast.
Of late, it has started to specialise in the art of
threat-cum-persuasion as it fights to stay on as the operator of the
field that was shut down about five years ago.
A
few weeks ago, Hardy threatened to quit as the operator of PY-3 if the
government did not honour its commitments in the PSC. This was preceded
by a presentation to Dharmendra Pradhan, minister for petroleum and
natural gas. Hardy made a similar threat last year as well. Does Hardy
deserve to be in the plight that it is in? Who is at fault: the Indian
government or the contractors headed by Hardy? Is Hardy more sinned
against than sinning?
The PY-3 consortium, headed by Hardy as operator, comprises ONGC, the
original licensee, Hindustan Oil Exploration Company (HOEC) and Tata
Petrodyne.
In the early 1990s, the Ministry of Petroleum and Natural Gas (MoPNG)
was desperately trying to attract foreign E&P companies to India
under pressure from the International Monetary Fund (IMF) which wanted
cash-strapped India to open up the E&P sector to the private sector.
As there were no experienced players from the private sector in India,
the move was obviously designed to benefit the foreign players. The
Ravva field on the East Coast, Panna, Mukta and Tapti (PMT) on the West
Coast, discovered and partially developed by the state-owned ONGC, were
handed over to foreign companies as part of the policy. The joint
ventures included Indian private players as well. PY-3, a relatively
small field, was farmed out later.
MoPNG
messed up the PSCs for Ravva and PY-3 by committing that the original
licensee, ONGC, would bear the entire burden of cess and royalty. Being a
Public Sector Unit (PSU), the ONGC management could not resist. Both
PSCs have since turned out to be an albatross around ONGC’s neck.
However, the PSU behemoth succeeded in wriggling out of the Ravva mess
when Cairn Energy sold out its stake to Anil Agarwal-controlled Vedanta.
In the renegotiated PSC, ONGC was relieved of the exclusive burden of
paying cess and royalty. But nothing could be done in the case of PY-3.
Although a small field that produced only 3000 barrels of oil per day
through an early production system, the PY-3 JV partners such as Hardy,
HOEC and Tata Petrodyne raked in profits. However ONGC, the licensee,
saw its losses rise as it had to pay the entire cess and royalty for the
JV.
ONGC attempted a similar strategy to force all PSC partners of PY 3 to
share the burden of cess and royalty. MoPNG stepped in by rejecting
Hardy’s recommendation to award a contract to Aban Offshore for the
Early Production System. Did Hardy violate the norms in seeking to award
the contract to Aban’s Tahara? According to one JV partner, the
contract was rejected by MoPNG on a mistaken assumption. Others do not
share this perception. There was still a chance of working out a
settlement. But that faint hope disappeared when the government raised
the cess on crude from Rs 1800 a ton to Rs 4500 which broke the back of
ONGC, the licensee which is committed to pay the entire cess and royalty
for the JV.
The
split in the ranks of the JV members aggravated the crisis. The trigger
for the split was the Field Development Plan (FDP) that Hardy presented
for approval. The FDP provided for the drilling of five new development
wells and a few recompletions to ensure 14 million barrels of
incremental oil production. The FDP met with resistance from ONGC, and
HOEC which by then had become a unit of ENI, also raised objections. And
that is when Hardy preferred to shut down the field.
The shutdown occurred when the international crude price was ruling very
high. This not only meant a loss of revenue for the constituents of the
JV, but also crimped the government’s share of the profit oil which
could be a few million dollars.
The question now is whether it will be economical to re-commence
production in PY-3 at the prevailing crude price? Definitely not. HOEC
has come out with an innovative plan to use its already installed
infrastructure at the adjacent PY-1 gas field in which it holds 100 per
cent stake. Its proposal is to re-commence production by laying a couple
of pipelines between the two fields. HOEC may want to be the operator
if the field is to be bailed out by it. This can happen only after Hardy
quits the operatorship. HOEC has not so far staked claim for the
operatorship. Among the JV members, there is an argument that Hardy
should not be the operator when production recommences in PY 3. Why?
Hardy, they say, hasn’t been an operator anywhere for the last five
years. Tata Petrodyne does not seem to share this perception. It is
credited with the view that there is no such condition in the PSC.
HOEC is busy developing its gas field in Assam and may not like to
assume responsibility for the fortunes of PY-3 before putting the Assam
project into operation. The Assam project will brighten HOEC’s
liquidity.
Did Hardy commit a mistake in shutting down the field without attempting
a negotiated settlement? Will the government intervene to break the
stalemate? Though small, PY-3 has been a star offshore field that was
awarded under the pre-NELP round of offers. The field not only saw an
enhancement of its reserves over time, but also produced close to 25
million barrels of oil, earning revenues of more than $1 billion. The
Government of India share of profit oil amounted to $ 132 million during
the period that the JV was in operation. PY-3 stopped production in
July 2011.
The field deserves to be saved. The situation calls for imagination on the part of MoPNG. Will it rise to the challenge?
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