Offshore Oil & Gas Sector | Natural Gas | Indian E&P

Offshore Oil & Gas Sector:

The ongoing resilience shown by the E&P industry suggests that companies will refuse to back down in the face of economic turmoil they’ve been reeling from. One figure that might underscore the above claim is that the global investment in the upstream sector will be close to $450 billion in 2011; a 10% growth. If oil price were to reach $100 per barrel, the same capex could inflate by about 30% due to price inflation resulting from slow movement in the upstream sector in terms of equipment and services. NOCs (National Oil Companies) will be in the driving seat to help materialize this growth. Operators have started to look beyond land and toward offshore to satiate the oil and gas demands of their economies.

Gulf of Mexico (GoM), West Africa, Latin America (Brazil in particular) and the Asia Pacific region are high on the exploratory lists of these operators. Lower oil prices in the past had resulted in deferment of some of the offshore drilling and logistics projects, translating into inflicting a momentary but debilitating backlash on the global economy. However, not everything is doom and gloom currently, and things have started to look up.

It is estimated that demand for petroleum as well as other liquid fuels is likely to be 95 million barrels per day in 2015 and118 million barrels per day in 2030 from current levels of 84 million barrels. Non- OECD Asian countries like India and China, where strong economic growth is expected, are slated to be the major contributor in this category. The production of crude oil is concentrated mainly in the OPEC countries.

USA and Europe have been the traditional consumers, with China and India having emerged as potential contenders in recent times. As land reserves have started to reach its state of complete exhaustion, while economics of E&P activities in offshore looking attractive at high oil prices, companies have started to focus on offshore avenues of the world.

Natural Gas is a much cleaner and more efficient alternative to oil and coal. It is often found along with oil reserves and is transported in pipelines or LNG carriers to regions like North America, Europe and North East Asia, where the demand is the highest. The demand for Natural Gas is expected to grow faster than any other kind of primary energy source.

Demand Drivers for Indian E&P:

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As of June 2010, India is the fifth largest oil consumer in the world. India, or any other country, is more or less depended on energy sources to fuel its economy. India has been on a rapidly progressive path, in which one of the energy sources, oil, plays a vital role. Due to major focus on oil, offshore activities have been put on the high-priority list. Domestic oil consumption is expected to be around 2,142 million bbl/day in 2010, which is to rise to about 30.21 million bbl/day by 2014. There is a need to undertake offshore drilling due to lack of major domestic reserves.
Import by Volume

Of the total import expenditure in June 2010, India spent $8,354 million on oil; a 26.5% increase from the same period last year, constituting for about 30% of the overall import expenditure. Hence, India is looking to step up its domestic crude production through various channels (including offshore) which hovers around the 32 million tonne mark annually, about 25% of domestic requirement.

The graph is conclusive enough to point out that there has been a substantial increase in crude oil’s import, in both volume and value over the past nine fiscal years. However, the disparity between the two attributes is blatantly evident. In Fy-01, India imported close to 80 million tonnes, while the bill ran close to Rs.500 billion. The demand for offshore activity in this segment is therefore very high.

Oil represents 1/4th of India’s total import and is a major reason why India’s Exim trade deficit for April- June 2010 was at $32,267 million; higher by roughly 27% when compared to the deficit of the previous year for the corresponding period. Hence, India is focused on increasing domestic production of oil, both onshore and offshore. Demand for natural gas is expected to nearly double to 320 mmsmcd by 2015, with power generation and fertilizer industry being the main drivers. Of the current demand of 166 mmscmd, close to 90% is met through domestic gas reserves, and the rest is handled by imported LNG. As of 2009, India ranked 25th in the world when it came to the 1.075 trillion cubic meter of proven natural gas reserve, which is low. To maintain a sustainable production rate, fresh discoveries are needed to be made in offshore regions.

Oil and Gas Exploration in India:

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The offshore sector accounts for 67% of India’s total crude oil production. The offshore fields at Bombay High, Rava and Gulf of Cambay and others produce about 23 million tonnes of crude oil per annum. If the Integrated Energy Policy of the Planning Commission, GoI, is any indication, then country’s energy demand is set to grow four-fold from 433 MTOE to around 1,856 MTOE by 2032. However, India has to depend on foreign inflow of oil to meet the ever-rising demand. In order to facilitate offshore oil and gas exploration, GoI has come up with a phased auction of seabed plots to both private and public players to encourage offshore drilling.

Termed the NELP (New Exploration Licensing Policy), this policy has so far awarded 235 exploration blocks from NELP I to NELP VIII rounds.

Of the 121 discoveries, 80 are either under evaluation or at appraisal stage, 21 have been declared commercial, 7 are under development, 12 are already on production and only one has been categorized non-commercial/relinquished. So far, 50% of India’s sedimentary basin area is under offshore exploration thanks to NELP. This has resulted in increase of hydrocarbon reserves equivalent to 600 million metric tonnes.

The latest NELP round garnered only an average response, since only 32 blocks were awarded from the total of 70 blocks that were on offer. To ensure that this disappointment isn’t repeated, the blocks in NELP XI round will include only those that are backed by high quality data, with the hope of piquing interest among all the E&P firms. This process is advertised by the so called ‘road shows’ which are held in major cities all over the world.

Oil and Natural Gas Corporation (ONGC) is the foremost E&P in India, which is a public sector company. It has a 79% share in offshore crude oil and the remaining production is carried out by private players.

Offshore oil reserve basins in India are located on the east and west coast. On the west coast, the major fields are in Mumbai High, Gulf of Cambay and Kutch, and Cauvery Offshore, KG Offshore (deep & shallow), Mahanadi and Andaman are on the east coast.

Recent Discoveries:

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Indian Government Policy:

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Government of India had entrusted the Directorate General of Hydrocarbons (DGH), India’s upstream regulator falling under the Petroleum Ministry, with the responsibility of scouring the Indian land and waters, and charting out hotbeds for E&P activities. It deals with the technical aspects related to exploration and production in both offshore and onshore areas. It is due to DGH’s efforts that the unexplored area has come down from 50% to 15% since 1995-96, thereby giving a boost to the country’s E&P activities. All these efforts pave the way to attract investment and also to make the field more competitive. Private sector companies have been allowed to determine the price of their products. Policies like NELP and CBM have been instrumental in showcasing India’s potential in the oil and gas sector to the world.

Apart from the domestic private players, these initiatives have attracted significant interest from leading E&P players in the global market, viz., Petrogas, Niko Resource Ltd., Cairn Energy India Pvt. Ltd., Hardy Exploration & Production (India) Inc, etc.

As part of the NELP program, firms are encouraged, via incentives, to explore in deep seabeds, like tax exemptions on imports, low to moderate royalty rates, concessions for deepwater blocks, etc. Foreign Direct Investment (FDI) has been allowed up to 100% in exploration (including offshore), refining (private sector only) and retailing of petroleum products. Gradually, the Indian oil sector is moving from a subsidy and price controlled environment to a free market, and along the way, paving the way for initiatives in offshore drilling and logistics.

Offshore Support in India:

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AHT (Anchor Handling Tug), AHTS (Anchor Handling Tug Supply), PSV (Platform Supply Vessel) and MSV (Multipurpose Supply Vessel) constitute nearly 90% of the 190+ supply vessels servicing the Indian offshore rigs. AHTS occupy a little over 50% of the total lot. Of these, nearly 3/4th of the vessels are foreign registered, with players like Tidewater Marine, Bourbon Offshore, Swire Pacific, etc.

Close to 50% of the Indian offshore support fleet are over 20 year old. Many of these ships are plying without the Dynamic Positioning (DP) system, and they’re not capable of servicing deep sea platforms. DG Shipping is considering implementation of the rule which bans vessels older than 25 years of age. However, this is unlikely to be carried out without replacing the current fleet.

Future Outlook:

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India plans to raise crude oil production by more than 30 percent and double its natural gas output by the end of the 11th five year plan. "By the year 2012, natural gas production will be more than double from the present level of about 90 million standard cubic meters per day,"

Close to 44% of India's sedimentary basin is already under offshore exploration for hydrocarbons and is expected to rise to 80 % in the next four years. The NELP program aims to make this 100% by 2015.

India's oil import bill for the year to end-March 2009 was expected to be around US$110-US$120 billion. The government had allotted $42.5 billion for its fuel subsidy bill, assuming global crude prices at US$123 a barrel. Since then, however, oil prices fell sharply to as low as $40 a barrel, but which has now recovered and is currently above US$ 60.

Although this development gave government some breathing space in terms of lower import bills, the drop in prices had a major impact on the E&P companies. Everyone started to tread on the safer side. Companies cut down on their capex, cold stack up of rigs, as a result of which charter rates took a nosedive. Fleet on long-term contract remained immune to this development, but spot charter fleets had to bear the brunt of this fallout. One instance where the slowdown in the offshore industry was made apparent was during the NELP VIII round. Of 70 blocks that were of offer, only 32 were awarded, and the number of companies that bid for the round dropped from 96 to 44.

In the long term, offshore oil and natural gas exploration is headed towards deepwater and ultra deepwater territories. With the increased influx of companies converging on these territories, production in these areas is bound to become commercially viable and necessary. Natural Gas consumption is likely to increase as it is a more efficient and cleaner alternative to coal and petroleum. For both these fuels, the increase in demand is likely to be due to Non-OECD nations like India and China.