Home and away
With GDP growth running at about 8% a year India's economy is booming. That is forcing the authorities to focus on how to meet future energy demand. Other South Asian countries are equally keen to secure energy supplies, writes Martin Clark
Home to a billion people, give or take a few, India is a country on the move. One of the giants of Asia, it has posted steady and impressive economic growth over the last few years – not quite as high as China's, but similar enough to propel the energy sector to the top of the government's agenda.
There is a renewed emphasis on domestic exploration, both by state-owned companies and private investors, as well as a determination to seek out upstream opportunities abroad. Indian companies are active across Asia, Africa, Russia, the Middle East and other hydrocarbons-rich provinces. Import projects – from liquefied natural gas (LNG) terminals to the much-hyped natural gas pipeline across arch-rival Pakistan – are also coming into sharper focus.
As the economy squeezes oil and gas supplies, India, like China, will become more aggressive in its pursuit of energy. "They are going in the same direction," says one commentator. Most obviously, the national oil companies are heading abroad with a fixed mandate to shore up energy supplies. "China has the advantage of quicker decision-making, while India has been hampered by bureaucracy, but they share similar characteristics."
At the same time, energy priorities could even soften attitudes to such intractable issues as Kashmir, the main rift dividing South Asia's two nuclear powers, and help push forward long-awaited gas-import schemes from Iran and the Mideast Gulf. Conversely, oil has a long history of widening even the slightest fracture in India's tense relationship with Pakistan.
Demand for oil – which accounts for about 30% of India's total energy consumption – is rising steadily and is expected to hit around 2.8m barrels a day (b/d) by the end of the decade. At present, demand of 2.2m b/d is met from the country's 0.67m b/d of domestic output, plus around 1.5m b/d in imports. India sits on roughly 5.4bn barrels of proved crude reserves.
Wood Mackenzie analyst Praveen Martis says demand will continue to rise for the next couple of decades at least. "India is importing around 70% of its oil and these imports are expected to increase," he says. "It's now a question of supply."
The fastest-growing energy source, however, is natural gas. Gas demand has risen from just 0.6 trillion cubic feet (cf) in 1995, to about 1 trillion cf and is forecast to reach 1.6 trillion cf by 2015. Although several new fields have been discovered in the last few years, notably in the Krishna-Godavari basin, the sheer pace of demand growth places the emphasis firmly on expediting import projects. New Delhi is investing heavily in the gas-transmission infrastructure through state-owned Gas Authority of India (Gail) to prepare for the future.
For such a large country, oil production is comparatively small – certainly dwarfed by China's 3.5m b/d. The majority of known reserves are in the Mumbai High, Upper Assam, Cambay, Krishna-Godavari, and Cauvery basins. The offshore Mumbai High field is by far the largest producer, with output reaching 270,000 b/d earlier this year. Although a mature field – production began in the 1970s – the state-owned operator, Oil and Natural Gas Corporation (ONGC), has deployed modern technologies to raise output significantly in recent years. It hopes to raise output to as much as 300,000 b/d next year.
ONGC is also deploying enhanced oil-recovery techniques on other major oilfields across the states of Gujarat, to the west, Assam and Nagaland, near the Bangladeshi border, and Tamil Nadu, in the southeast. Priority projects also include the development of the deep-water Sagar Samriddhi field, while on the exploration side it is targeting over 100 wells this year.
The most exciting gas discovery in recent times was the Dhirubhai field, in the Krishna-Godavari basin, in 2002 – the largest gas find in India in 30 years – which is said to contain around 9 trillion cf of reserves. Although fairly modest by international standards, the field could play an important role in India's energy future.
However, the state's dominance of the upstream sector has in some ways hindered exploration and production (E&P) activity.
The government is seeking to entice greater foreign investment through its New Exploration Licensing Policy (Nelp). Since the new guidelines were introduced, New Delhi has run four licensing rounds, with mixed results. ONGC has been awarded more than half the blocks under the earlier rounds, sometimes picking up acreage no-one else wants.
For the supermajors, such as ExxonMobil and Shell, the reserves are simply not there to justify the investment, although India could be emerging as a niche market, with BP showing some interest in the latest round. On the other hand, the country is host to a number of loyal Western players, such as UK firms BG Group and Cairn Energy. The government is acutely aware that it must compete head on for investment with other locations and "India is not the most attractive country in terms of E&P," says Martis.
Nelp V promise
The Nelp V round, which closed earlier this year, is the latest offer of blocks from New Delhi and promises a better yield for foreign hopefuls. Of the 50 or so companies that submitted bids, more than half were overseas players. The list of names includes important newcomers such as BP, Italy's Eni and Brazil's Petrobras. The 20 blocks cover a mix of deep-water, shallow-water and onshore areas scattered around the country, from the Nepalese border to the Andaman Islands in the Bay of Bengal.
The most sought-after areas are the deep-water blocks, in the Kerala-Konkan, Krishna-Godavari, Mahanadi and Andaman-Nicobar basins. "This round has been more successful than those before, but I guess it's relative," says Martis. "There is still a long way to go before they match other countries. Certainly information flows have been a lot better. The authorities are not as indifferent as they once were." Nonetheless, the usual suspects, ONGC and domestic, privately owned Reliance Industries, are expected to feature prominently again. "They know the system; they know how it works."
Whatever happens, Western oil companies will take heart from the open and transparent bidding process, a measure of the government's commitment to modernisation and reform. Production-sharing contracts are expected to be in place by later this year.
The upturn in interest may have been partly triggered by Cairn Energy's spectacular run of success in the northwestern state of Rajasthan – its Mangala discovery is the biggest oil find in India for 22 years. A development plan has been submitted to the authorities targeting first production by the end of 2007. A further 11 discoveries on the block have highlighted the prospectivity of the acreage. Development plans have also been submitted for the Aishwariya, Saraswati and Raageshwari discoveries.
Cairn has several rigs in Rajasthan and is conducting fast-track exploration, appraisal and development activities across the block. It is hoping to produce between 120,000 and 150,000 b/d from its three main fields – Mangala, Bhagyam and Aishwariya – against a reserves base of at least 0.5bn barrels. When these fields come on stream, it will be a significant step forward for Indian oil production. In January, ONGC took up an option to acquire a 30% interest in the discoveries.
Increasing oil production will help offset rising crude imports, but the real focus area is gas, not least to cut pollution in the country's choked cities. Although India's primary aim is to beef up domestic reserves and output (see Figure 2), there is a greater awareness of the role of imports in meeting future supply requirements.
The country's second LNG import terminal, Hazira, near Surat in Gujarat, was opened earlier this year. The project is led by Shell, which is keen to gain access to the country's immense gas-market potential. The 2.5m tonnes a year (t/y) plant has the potential to be expanded to 10m t/y subject to demand.
ONGC has a stake in Petronet LNG, which operates the Dahej terminal, also in Gujarat, the country's first LNG regasification site. And the state-owned company is looking to establish a second terminal at Kochi, in Kerala in in the southwest, one of numerous plans on the drawing board. According to reports, India is close to agreeing a major LNG import deal with Iran, which could facilitate further receiving terminal growth.
Pipeline gas is another option, but political realities have so far stalled progress. Two main projects are on the table, one taking Iranian gas through Pakistan en route to India, the other from Myanmar (Burma), through Bangladesh. Another initiative to channel gas from Turkmenistan through Afghanistan appears to have been shelved for security reasons.
The prospect of a pipeline from gas-rich Iran is a mouth-watering prospect and one that would feed enough gas into India's economy for decades. But there is a critical problem in the lack of trust between India and neighbouring Pakistan, which has suggested that it would like the pipeline on stream by 2010 – analysts claim the earliest it could start is 2013. Recent dialogue has hinted at progress, but nothing has been decided and nor is it likely to be for sometime to come.
"If you go by news reports, these things change every day," says Martis. "In terms of security of supply, the Myanmar pipeline seems more likely, but in terms of economics the Iran pipeline makes more sense."
A question of price
In the short-term, analysts say there is definitely a need for LNG to shore up gas supplies as India powers ahead, although when the Dhirubhai gasfield comes on stream the picture may look different. Competing sources of supply will be judged on price by the two main consumers – the power sector and the fertiliser industry.
"The key issue is pricing," adds Martis. "At the moment, regasified LNG is more expensive than the subsidised domestic gas supply. Supplies priced above $3.6/m Btu will find it difficult to secure a market."
The real issue becomes whether LNG or pipeline gas imports – wherever they come from – can compete for a sustained period with subsidised domestic gas. The government is addressing the subsidies issue, but like all complex reforms in India, these things take time, and a lot of it. "Yes, there is rising gas demand, but if the key sectors can't make it economic, then these projects probably won't go ahead," says Martis.
The possibility of new discoveries in such a vast country – which could radically alter the scenario – cannot be ruled out. The award of a concession near the Nepalese border under Nelp V indicates the emergence of a new frontier area in the foothills of the Himalayas.
Last year, Cairn expanded its reach by signing up five concessions inside Nepal adjacent to the border with India. To date, only limited seismic acquisition has been carried out on the acreage and no wells have been drilled. With an overall well density of one well per 15,000 square km it is one of the most under-explored basins in the world.
However, with known oil seeps in Nepal and gas shows in a number of wells, there is every possibility that it will yield some commercial hydrocarbons. Not to be outdone, another hopeful, Sri Lanka is now contemplating a debut licensing round in a bid to study its relatively unknown offshore waters. The country, totally import dependent and experiencing energy growth of about 8% a year, has been encouraged by recent finds in India and Bangladesh.
Enjoying its own mini economic revival, Pakistan also faces mounting energy supply pressure. The country – which uses a near equal share of oil and gas in the energy mix, plus some hydro-electric power – predicts a widening deficit around 2010, when it hopes the Iran gas-import line will be operational.
Despite political differences, officials are keenly chasing Indian support to help move the project forward. Amanullah Khan Jadoon, the petroleum minister, said earlier this year that the energy-supply gap in the country could reach as much as 20m tonnes of oil equivalent (toe) over the next five years.
Pakistan consumes around 360,000 b/d of oil, the bulk of it from imports. Domestic crude production of around 70,000 b/d is complemented by the country's sizeable natural gas reserves, estimated at about 27 trillion cf (see Figure 3).
Islamabad is keen to make gas the fuel of choice – it is already one of the leading proponents of compressed natural gas – and expects demand to grow rapidly. Domestic supply, however, is unlikely to match demand in the medium to long term, raising the import issue to the fore. The petroleum ministry forecasts a gas supply shortfall of around 0.5bn cf/d in 2010, rising to 2.5bn cf/d in 2015 and 6.0bn cf/d by 2020.
Inevitably, rising demand is injecting greater urgency into exploration, prising the door open to foreign investors. Jadoon also talked of opening new exploration acreage in non-traditional locations, offering greater returns for higher-risk zones, such as the little-known offshore areas. In the 2005 licensing round – which closed at the end of June – 20 onshore and offshore blocks across the country were on offer.
At the same time, new concessions have been awarded to international firms following bilateral negotiations. Business has been fairly brisk. In April, six blocks in Sindh, North West Frontier Province (NWFP) and Balochistan were allocated to firms including established players Premier Oil, BHP and Tullow Oil, as well as a number of smaller operators.
Pakistan continues to attract a mixed bag of investors. It also recently tied up a new exploration pact with Polish Oil & Gas for a block in the Kirthar area. Security concerns in certain parts, including a tribal uprising earlier this year in Balochistan, in the west of the country, which targeted energy installations, have not visibly deterred investment.
The largest foreign oil producer is BP, largely by default, following a spate of acquisitions a few years ago. Its subsidiary, BP Pakistan Exploration and Production, pumps 30,000 b/d, nearly half of all oil output, as well as 207m cf/d of gas. Much of the oil production is based on various small fields in the Badin block. State-owned Oil and Gas Development Corporation (OGDC) produces much of the other half of the country's oil, around 38,000 b/d, notching up a 20% rise in output since last year. As well as new output from the Chanda oilfield, OGDC has improved performance at existing fields. Other major foreign players include Eni, Austria's OMV and Hungary's Mol.
There have been numerous gas discoveries in the past year including new identified reserves at the BHP-operated Zamzama field and at the Eni-operated Kadanwari gasfield. Most recently, Eni and Petronas started production of 70m cf/d from the Rehmat field in Gotki Sindh.
At the start of the year, first gas came on stream from the Mol-operated Manzalai field in NWFP. The Hungarian firm – which is actively seeking additional exploration assets in Pakistan – is also looking to start production on the Makori-1 discovery, in the same block, by the year-end, to add a further 4,000 b/d of oil and 15m cf/d of gas.
OGDC and its fellow state-owned firm, Pakistan Petroleum – in which the state is looking to divest some of its equity in the coming year – have also added new reserves. And exploration work continues, with Premier planning a well in its Jhangara licence in the next few months and Shell looking to sink a well in its offshore acreage, subject to rig availability.
Weighing up the options
On top of domestic production, Pakistan is sizing up all other options. Although the main focus of its import strategy is securing the gas pipeline from Iran, it has not yet given up hope on a 1,700 km line from Turkmenistan through Afghanistan. Talks are continuing, although security concerns are likely to weigh heavy on the idea, which has received some support in the past from the Asian Development Bank.
The prospect of importing gas from Qatar, through an extension of its Dolphin project to the UAE and Oman, seems remote. The idea has been discounted for both technical and economic reasons.
An LNG project is being planned, however, by Sui Southern Gas, one of the country's main state-owned gas suppliers, which operates the Sui gasfield in Balochistan. The facility, which would have an initial capacity of 2.5m t/y, rising to 4m t/y, would probably to be sited at Port Qasim, near Karachi.
And in India, there is even talk of pushing the state-owned energy companies overseas is search of reserves. Although its ambitions remain at a very early stage, OGDC showed some interest in the recent Libyan licensing round and the government has reportedly allocated $1bn to acquire upstream assets abroad over the next few years.
Operating in Myanmar remains a contentious affair, but it has not deterred several high-profile Western companies from staking a claim in the flourishing gas sector, notably Total and Unocal. The French giant operates the offshore Yadana field, which supplies neighbouring Thailand. But like other Western operators, it regularly receives stick for working with a regime that has a dubious human rights record.
Much of the interest in recent times, however, has come from fellow Asian states, particularly China. China National Offshore Oil Corporation is one of the largest stakeholders in the upstream sector after taking on a batch of blocks last year.
South Korea's Daewoo International and India's ONGC Videsh are undertaking an intensive drilling campaign in offshore block A-1 in the Bay of Bengal, which has already yielded substantial success. Preliminary estimates place gas deposits in the area at around 10 trillion cf. The group includes Korea Gas and India's Gail.
In May, India's Essar Oil signed a deal for two blocks nearby. Offshore block A2 is between Daewoo's A1 and A3 licences off the Rakhine coast; Essar has also taken on onshore block L. The deal follows a reputed ban on further onshore agreements with foreign firms, although officials say the concession was negotiated before then.
Since Myanmar opened for business to foreign players in 1988, it has attracted a cool $2bn in foreign direct investment, despite the bumpy political backdrop. The abundance of natural gas – some estimates place possible reserves as high as 90 trillion cf – is the obvious draw (see Figure 4), but the issue of marketing raises questions.
Much of Myanmar's 330m cf/d production in 2004 was exported to Thailand, with the balance consumed in the small local market. Although Thailand is said to be looking to raise its imports, Myanmar is still likely to face a large surplus should further major discoveries be made.
Daewoo has said that if reserves in the A1 area turn out to be large enough it would propose a 3m t/y LNG export plant, targeting sales to South Korea. More gas discoveries could provide the impetus for the proposed pipeline project west to India through Bangladesh, although it is still in its formative stages.
Bangladesh could be facing gas shortages as stronger-than-expected economic growth stretched indigenous supply to the limit. Economic growth has strengthened to around 5.5% a year and a supply deficit is likely unless new gas production is brought on stream.
The authorities in Dhaka are looking to stimulate more international interest in the upstream sector with a licensing round, possibly later this year or in early 2006. Until the early 1990s, state-owned Petrobangla and its various operating divisions, was the sole player in the oil and gas business.
Oil production is a modest 7,000 b/d, but the country is said to hold significant gas potential (see Figure 5). Reserves are placed in the region of 12 trillion cf, although some estimates suggest there could be double this. Tullow Oil's Bangora-1 discovery in 2004 in Block 9 – which tested at an aggregate rate of 120m cf/d – suggests there are still plenty more reserves to be uncovered. Appraisal is under way, but site activity is largely restricted to the dry season, from November to May, when the monsoon flood waters are at their lowest.
A ready market
The availability of a ready market is a major draw for investors, but production shut-ins at some fields to avoid a glut of gas being released on the market are irksome. Another problem facing investors is payment delays. Petrobangla's tardiness in paying for its gas from foreign producers has been an endless source of frustration as well as a drag on investment. There are signs of improvement, however. From six months overdue in 2002, arrears are being settled more or less on time, according to data from one foreign operator.
The largest foreign producer is Unocal – recently acquired by Chevron – which discovered the 5.5 trillion cf Bibiyana field in 1998. In March, it launched production at the 440bn cf Moulavi Bazar field, which is set to produce up to 150m cf/d following the start-up of additional wells later this year. The $42m development cost includes a 24 km pipeline link to the national grid. "Production of natural gas from the Moulavi Bazar field is a major milestone towards energy security for Bangladesh," says Unocal Bangladesh's president and managing director, Andrew Fawthrop.
The next major development for the company will be realising the potential of Bibiyana to add another 200m cf/d of production by late 2006. With a total expected investment of $230m, Unocal forecasts that Bibiyana could ultimately produce 0.5bn cf/d by the end of 2009.
The US firm also operates the 1.6 trillion cf Jalalabad field, in block 13, which supplies around 200m cf/d of gas, about 12% of the country's total energy requirements. Cairn operates the 1 trillion cf Sangu field, offshore Chittagong, with output of over 150m cf/d and is lining up an exploration programme for late 2005 and early 2006.
Despite continued upstream success and a swelling gas reserves base, the prospect of Bangladesh exporting any of its natural resources seems pretty dim. Gas exports to India are a hugely sensitive issue, with local opinion arguing that domestic reserves should be used to safeguard the country's energy future.
More likely is a pipeline link from Myanmar through Bangladesh to its larger, and energy-hungry, neighbour. The three countries are holding talks and hope to establish a tri-nation consortium that will build the pipeline although a route has yet to be finalised. Feasibility work is planned on taking the pipeline up to landlocked Nepal and Bhutan. Bangladesh would stand to net around $100m in transit fees if the scheme were to go ahead.
The demand is there, but like all pipeline initiatives in the region, progress has been agonisingly slow. Things may pick up later in the decade as the regional energy supply tightens, but decisions are rarely made overnight anywhere in South Asia.
|ONGC Videsh: playing away
India's drive for oil has led ONGC Videsh, the overseas arm of state-owned ONGC, to pastures new around the world. The company hopes to achieve oil and gas production of some 20m tonnes of oil equivalent (toe) by 2010, up from around 5m toe.
It has an impressive portfolio of upstream assets across several key oil plays around the globe. ONGC Videsh is present in 13 countries including Sudan, Libya, Egypt, Ivory Coast, Nigeria, Vietnam, Myanmar, Russia, Iran, Iraq, Qatar, Syria and Australia. Most significant is Sudan, where it partners China National Petroleum Corporation and Malaysia's Petronas in defiance of external pressures facing the contentious African state.
Oil production in the Greater Nile oil project – Sudan's principal crude producer – totalled 3.7m tonnes during 2004-05, up by 11% year-on-year. With this, ONGC Videsh became the second-largest exploration and production firm in India, behind only to its parent. It also has some production from its Vietnamese activities where it partners BP. Gas sales from its Vietnam project crossed the $100m mark last year.
ONGC Videsh's combined output could double in the next year or so as new projects, including blocks 5A and 5B in Sudan, come on stream. Other initiatives set to yield new production include the Sakhalin-1 project in Russia's far east and its Myanmar project, another controversial location for oil operators.
The company has so far invested more than $4bn in its overseas foray and plans to spend another $2bn in the near term to secure more assets. In the past 12 months alone, it has gained access to seven new assets in half a dozen of its operating countries, most recently securing exploration rights in the Nigeria São Tomé e Príncipe joint-development zone. The company is looking at new upstream projects in areas such as Latin America – where it bid for EnCana's Ecuador assets – as well as Thailand and Nigeria.
It is said to be keen on corporate acquisitions, drafting an unsuccessful bid for First Calgary Petroleums, which is focused on Algeria, another new territory. ONGC Videsh is also seeking related business in its core markets. In Sudan, the company secured a contract to build a new 741 km products pipeline from Khartoum to Port Sudan. Much of the pipeline is already in place and is set for completion in August. In the Mideast Gulf, the company recently set up a Dubai office to manage its Farsi block operations offshore Iran, as well as to oversee its regional expansion.