ONGC to in­vest $5 bil­lion to take out hy­dro­car­bon from KG block

The Financial Express - - FRONT PAGE - Fe Bureau

THE coun­try’s flag­ship ex­plorer ONGC on Mon­day un­veiled plans to in­vest $5.076 bil­lion to drill oil and gas from a part of its much-touted deep­wa­ter block KG-DWN-98/2 in the pro­lific Kr­ishna-Go­davari (KG) Basin.

ONGC chair­man and manag­ing di­rec­tor Di­nesh K Sar­raf said the fir m’s board has given the goa­head on the in­vest­ment plan to take out hy­dro­car­bon from clus­ter-II area of the KG-DWN-98/2 block in the east coast. The block is di­vided into three clus­ters and the ex­plorer is cur­rently tak­ing up the devel­op­ment of clus­ter-II, which is fur­ther di­vided into IIA and IIB. ONGC has al­leged that Re­liance In­dus­tries, which op­er­ates the neigh­bour­ing block KG-D6, has drilled out gas from the clus­ter-I area. At present, the PSU ex­plorer is not tak­ing up devel­op­ment of clus­ter I and III.

The first gas from the block is ex­pected by June 2019, while crude oil pro­duc­tion is likely to com­mence by March 2020.

It would take three years to achieve peak pro­duc­tion, which is ex­pected to be main­tained for an­other five to six years. Dur­ing peak out­put, the area is ex­pected to pro­duce 77,305 bar­rels per day of crude oil and 16.29 mil­lion met­ric stan­dard cu­bic me­tres per day of gas.

The IIA area has crude oil re­serves of 94.26 mil­lion tonnes and 21.75 bil­lion cu­bic me­tres (bcm) of nat­u­ral gas. On the other hand, the IIB area is rich in gas with re­serves of 12.75 bcm. ONGC plans to drill to­tal 35 wells, com­pris­ing 15 for pump­ing out crude oil, 8 for gas and 11 for wa­ter in­jec­tion.

When asked about the risk of in­vest­ing in a low-price sce­nario, Sar­raf said that the project reaches a ‘thresh­old rate of re­turn’. Also, the cost of oil­fields’ ser­vices and equip­ment have dropped and prices are likely to go up in the fu­ture. Brent crude futures were up 25 cents at $40.69 per bar­rel on Mon­day. Last week, the con­tract fell 76 cents, or nearly 2%, in its first de­cline in five weeks.

A K Srini­vasan, di­rec­tor (finance), ONGC, said that in or­der to achieve a post-tax re­turn of 15% on the KG Basin in­vest­ment, the ex­plorer would re­quire a crude oil price of $51 a bar­rel and nat­u­ral gas price of $6.5 per mil­lion Bri­tish ther­mal units. The gov­ern­ment re­cently al­lowed mar­ket­ing and pric­ing free­dom for drilling out nat­u­ral gas from dif­fi­cult ar­eas. The ONGC block qual­i­fies to claim the ben­e­fit, though the caveat is that there is a ceil­ing price for nat­u­ral gas based on a ma­trix of al­ter­na­tive fu­els.

Srini­vasan is con­fi­dent that the project would be vi­able be­low the ceil­ing price for nat­u­ral gas. The project is ex­pected to boost ONGC's top line by $846 mil­lion in the first year of pro­duc­tion, while profit af­ter tax would be a neg­a­tive $593 mil­lion in that year. In three years, the KG Basin project would gen­er­ate rev­enues to the tune of $1.896 bil­lion, which would add $585 mil­lion to the ex­plorer’s profit af­ter tax.

Sar­raf said that it is yet to be fi­nalised if the en­tire project would be funded by in­ter­nal ac­cru­als or whether there would be some bor­row­ing. Cur­rently, ONGC is a debt-free com­pany on a stand­alone ba­sis and is ex­pected to re­port a cash bal­ance of Rs 11,500 crore by March 30.

In or­der to evac­u­ate hy­dro­car­bon, ONGC would set up float­ing pro­duc­tion, stor­age and of­fload­ing plat­form, about 430 km of sub-sea pipe­lines of var­i­ous sizes from 6 to 22 inches, about 151 km um­bil­i­cal and 10 man­i­folds, riser base man­i­folds and an on­shore gas han­dling ter­mi­nal.

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