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India enters new deep-water era

India’s plans for its deep waters could take its energy industry into a new phase

Sparked into action by prime minister Narendra Modi's grand plan for India's manufacturing industry, the oil and gas industry has embarked on an era of deep-water exploration.

To date, the Satellite field lying at 1,700m is where the main action is, but there's more on the way. In late April, BP and India's Reliance Industries sanctioned the second phase of development of this cluster of deep-water gas fields on the east coast.

The first phase, the "R-Series" field, went ahead in mid-2017. When the third phase starts up, the result of a $6bn investment, the field is slated to deliver a total of about one billion cubic feet a day of gas by 2022.

In another sign of confidence in deep-water India, in June Reliance invited bids for the construction of a floating production storage and offloading (FPSO) for its so-called MJ gas and condensate field.

As Rystad Energy's oil field service research analyst Jo Friedmann reports, India's deep-water exploration sector is driving industry. "Activity in shallow water and onshore sectors is expected to continue to represent the largest markets in terms of oil field service spending in India, but large new field developments in deeper waters are emerging as the key driver for growth and recovery in the market."

According to Rystad's forecasts, future greenfield spending will be almost entirely down to deep-water projects—that is, at depths of 125m or more. The consultancy expects compound annual growth rate of 24% in greenfield capex right through to 2021.

Big ambitions

Right on cue, state-owned Oil and Gas Corporation (ONGC) drilled 503 wells during the 2017-18 financial year—the highest in 27 years. The group has big ambitions in deep-water drilling. "There is a significant upside in the number of deep-water development wells planned by the company," says chairman and managing director Shashi Shankar. In the new financial year, ONGC plans to drill 24 deep-water wells in its Cluster 2 development off the east coast.

The issue is whether oil companies can bring up enough oil to meet Modi's grand vision for the energy sector to support for his ambitious manufacturing industry plan, Make in India. By 2022, domestic manufacturers are to contribute 22% to the country's overall gross domestic product, a rise of 15% today. That is to happen in tandem with a 10% cut in oil imports by the same year.

The goal has put a lot of pressure on the domestic oil and gas industry—and the plundering of ONGC by the government hasn't helped. As reported by Bloomberg in June, the $4.3bn in cash that the group held in reserves last year had shrunk by more than 90% to $148m in March after the government ordered it to buy the state's stake in a refiner. "ONGC is heavily leveraged now", former chief financial officer Aloke Kumar Banerjee, told Bloomberg.

The numbers are moving too slowly in the intended direction, however. According to BP's latest statistical review, India's gas production rose 4.5% in 2017, reversing a six-year trend of decline. But that only restores gas production to its 2006 level.

The next couple of years should reveal how successful the new fiscal regime designed to revive investments in the upstream sector really is. As an early 2018 study by the Oxford Institute for Energy Studies points out, the Hydrocarbon Exploration Licensing Policy (HELP), "changed the regime from a profit-sharing to a revenue-sharing model".

But as the OIES points out, citing a study by Platts, the latest round of bids for both shallow and deep-water fields won't produce the required results: "Although a second [round] is proposed, these quantities are unlikely to make more than a dent in India's oil import requirements."

The government is examining a range of other options, but the targets still look too ambitious, especially for imports.

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