09 September 2011

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Part 3 Complete CAG Report – Reliance, Cairn Energy Petroleum and Natural Gas for a special audit of PSC

Part 3 Complete CAG Report – Reliance, Cairn Energy Petroleum and Natural Gas for a special audit of PSC

Petroleum Exploration and Production (E&P) –

Petroleum covers hydrocarbons in liquid form (viz. crude oil) as well as in gaseous form (viz. natural gas). While hydrocarbon fields primarily contain either crude oil or natural gas, they also include associated natural gas (natural gas produced in association with crude oil), as well as condensate (liquid hydrocarbons segregated from natural gas).
Petroleum Exploration and Production (E&P) operations, also referred to as upstream
operations1, can be broadly grouped into three categories
1. Exploration Operations
2. Development Operations
3. Production Operations

The first phase in the process for extraction of petroleum is exploration — the search for oil and gas deposits beneath the earth's surface. Such deposits could either be onshore or
Offshore. Exploration consists of several sub-phases:

Downstream operations include refining of crude oil, and marketing of petroleum and gas products. Midstream operations (which are often included under downstream operations) include storage, transportation and related operations.

Areas thought to contain hydrocarbons are subjected to aerial, geological, geochemical, topographical and other surveys to detect large scale features of sub-surface geology.

After narrowing down the list of potential areas, detailed seismic surveys are carried out to identify formations with high probability of being petroleum reservoirs. These work on the principle of the time it takes for reflected sound waves to travel through matter (rock) of varying densities and using the process of depth conversion to create a profile of the substructure.

• Typically, the seismic survey involves Acquisition of seismic data, computer-based Processing of the data (including reprocessing of existing data), and its Interpretation by geologists to identify formations with high probability of being reservoirs (the API process).

There are different types of seismic surveys—
two dimensional (2D), three dimensional (3D) standard/ high resolution, 4D/ 4C

When a prospect has been identified and evaluated, and passes the oil
companies selection criteria, an exploration well is drilled to conclusively
determine the presence or absence of oil or gas.

• The well could turn out to be "dry". Alternatively, hydrocarbons (oil and/or gas)
could be "discovered", and a discovery area is delineated.

Once a 'discovery' is made and is considered to be of potential commercial
importance, 'appraisal' wells are drilled around the discovery in order to
determine the contours of the reservoir (in terms of thickness and lateral
extent) and its characteristics, and come up with a relatively accurate estimate
of the recoverable oil /gas reserves.

Once a 'discovery' is made and is considered to be of potential commercial
importance, 'appraisal' wells are drilled around the discovery in order to
determine the contours of the reservoir (in terms of thickness and lateral
extent) and its characteristics, and come up with a relatively accurate estimate
of the recoverable oil /gas reserves.

Development Operations

The next phase in the extraction of potential is the development of field, where a
commercial discovery of hydrocarbons has been made. This will first involve the drawing up of a field development plan to ensure the most efficient, beneficial and timely extraction of petroleum, keeping in view engineering, economic, satety and environmental considerations.

Development will then include the following aspects, among others:

• Drilling of production wells (for producing crude oil and gas);

• Drilling of injection wells (for injecting water or gas, in order to sustain or accelerate the production of hydrocarbons);

• Installation of offshore platforms and installations, for handling offshore production of
oil and gas; and

• Laying of gathering lines, and installation of separators, tankages, pumps, artificial lift
facilities, which are required to produce, process, store, and transport petroleum.

Production Operations

Production operations involve operations after the commencement of production from a
developed field. This would typically involve, among others:

• operation and maintenance of existing facilities;
• workovers;
• plugging and abandonment of wells;
• improved oil recovery; and
• site restoration (after cessation of petroleum operations) etc.

Private Sector Participation in Petroleum E&P in India

Efforts to involve foreign and domestic private sector companies in the business of
Exploration and Production (E&P) of oil and gas in India began as early as 1973, followed by three rounds of bidding between 1980 and 1986, which did not yield any concrete results.

In 1991, the Government of India decided to invite foreign and domestic private sector
companies to participate in the development of discovered oil and gas fields, and in some
cases, fields partially developed by the National Oil Companies (NOCs) — Oil and Natural Gas Corporation Limited (ONGC) and Oil India Limited (OIL). In 1993, the Government introduced a policy of round-the-year bidding for exploratory blocks. In all, a total of nine rounds were held:

• One round for medium-sized discovered/ producing fields (1992);

Two rounds for small-sized discovered fields (1991 and 1993); and

• Six rounds for pre-NELP exploratory blocks (1993 to 1995)

New Exploration Licensing Policy (NELP)

In 1997, the Government announced the New Exploration Licensing Policy (NELP), under which NOCs would compete with Private Sector Companies for obtaining E&P licenses through a bidding process, instead of getting them on nomination basis. The main features of NELP, which was notified in 1999, are summarised below:

The NOCs were required to compete with the private sector for
obtaining Petroleum Exploration Licenses, instead of getting them on
nomination basis. There was no mandatory State participation through
the NOCs, nor any "carried interest of the State.

No special privileges for National Oil Companies (NOCs)

There would be open availability of exploration acreages, to be demarcated on a grid system, to provide a continuous window of opportunities to all companies

Open availability of exploration area

Government's share would be based on pre-tax sharing of profit petroleum based on investment multiple achieved. Contractors would be allowed full cost recovery.

Contractors were free to market the crude oil and gas in the domestic market.

Royalty rates were fixed at 12.5 per cent of the wellhead value of
crude oil in onshore areas and 10 per cent for offshore areas, while the rate was fixed at 10 per cent for natural gas. In addition, to encourage exploration in deep water and frontier areas, royalty was reduced by 50 per cent for offshore deep water areas for the first 7 years after commencement of commercial production.

Further, there would be no payment of signature, discovery or production bonuses, nor would any cess be levied on crude production.

There would be a seven year tax holiday after commencement of commercial production, and exemption from import duty for goods imported for petroleum operations.

An Empowered Committee of Secretaries, consisting of Secretary, MoPNG, Finance Secretary and Law Secretary would consider bid evaluation criteria, conduct negotiations with the bidders, wherever necessary, and make recommendations to the Cabinet Committee on Economic Affairs (CCEA) on award of blocks.

The Oilfields (Regulation and Development) Act, 1948 provides for regulation of oilfields and development of mineral oil — petroleum and natural gas — resources. The Petroleum and Natural Gas Rules, 1959 (PNG Rules), which are drawn up under Sections 5 and 6 of the Oilfields (Regulation and Development) Act, regulate the grant of exploration licenses and mining leases in respect of petroleum and natural gas. Under these Rules, Gol has the power to grant exploration licenses/ mining leases for offshore areas, while the State Governments are empowered to do so for onland areas.

Rule 5(2) of the PNG Rules specifically empower the Gol to include "additional terms,
covenants and conditions as may be provided in the agreement between the Central
Government and the licensee or the lessee", after consulting the State Governments (where onland areas are involved). The Production Sharing Contracts (PSCs) between the Gol and the contractor (s) are signed under the provisions of this rule.

Organisational Structure

The Ministry of Petroleum and Natural Gas (MoPNG) is inter alia responsible for the
exploration and production of petroleum and natural gas, including the administration of
the Oilfields (Regulation and Development) Act, 1948. MoPNG is assisted by the Directorate General of Hydrocarbons (DGH), which was established in April 1993 with the objective of promoting sound management of Indian petroleum and natural gas resources having a balanced regard for the environment, safety, technological and economic aspects of petroleum activities.

Award of Production Sharing Contracts (pre-NELP/ NELP)

The position of PSCs awarded/ signed under different fiscal regimes was as follows:

• Discovered/ Producing fields rounds— 29;
• Pre-NELP Exploration Rounds — 28; and
• NELP Rounds (I to VIII) — 235

The process of award of contracts under the NELP rounds is broadly as follows:
Under 9th NELP round (launched in October 2010), Government of India has offered 34 exploratory blocks (19 onland, 8 deep water and 7 shallow water). The NELP Round, for which submission of bids closed on 28 March 2011, attracted a total of 74 bids for 33 out of the 34 blocks on offer.

Preparation of data packageb and basin information docket',

• Road shows for publicizing the NELP round;

• Publishing of bid document (which includes the Notice Inviting Offer (N10), the bid
format, the Model Production Sharing Contract (MPSC), the petroleum tax guide, the
Site Restoration Fund scheme, and price list for information docket, data package etc.);

• Purchase of bid document and data package/ basin information docket by contractors;

• Submission of bids, evaluation thereof, and award of blocks; and

• Signing of Production Sharing Contracts (PSCs).

Evaluation of bids is carried out, on weightages based on technical and financial capability, proposed exploratory work programme, and the fiscal package offered

Data package contains seismic data, navigation data, relevant maps and well log data for the individual block.

• Basin information docket is for the basin as a whole, and less detailed than the data package. It contains information on regional and local geology, status of exploration activities, hydrocarbon potential and a brief write-up on the blocks.

Contractor's share of Profit Petroleum at various levels of pre-tax
multiples of investment reached.

• (Royalty receivable is also considered for calculation of Government

The qualifying criteria included non-zero score under technical capability8; confirmation to Minimum Work Programme Commitment; and Certificate from a Chartered Accountant that net worth was equal to or more than the MWP for Exploration Phase I.
As regards the fiscal package, nine scenarios were envisaged with low, medium and high
reserve sizes and oil/ gas prices. The ratio of Government NPV (Net Present Value) to
Project NPV was calculated, using a discount rate of 10 per cent, in each of the nine
scenarios, and a weighted average was calculated to arrive at the final value offered by the bidder. The bidder offering the highest Government NPV was given the maximum points, with other bidders receiving proportionate points.

As can be seen, substantial weightage is given to exploration work as part of the bidding
criteria, so as to incentivise an aggressive exploration programme with better prospects
for discovery of new national oil and gas resources.
The exploration programme, which includes both seismic surveys as well as drilling of
exploration wells, is to be carried out in a phased manner within clearly defined
timeframes and similarly phased relinquishment of portions of the contract area. At the
end of the exploration period, the entire area (except for areas where oil and gas has been
discovered, or is being developed) is to be returned to the Government, which can then
re-offer it through a bidding process to other parties. Evidently, the idea is to prevent
hoarding/ accumulation of exploration acreage.

Suggested Reading –
Complete CAG Report – Reliance Petroleum and Natural Gas for a special audit of PSC Part One

P- 2 Complete CAG Report – Reliance, Cairn Energy Petroleum and Natural Gas for a special audit of PSC

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Friday, September 09, 2011

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