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ONGC seeks to share RIL KG-D6 infra to save $4 bn

ONGC has made nine gas discoveries in its KG block called KG-DWN-98/2, which sits next to RIL’s KG-D6 block

Oil and Natural Gas Corporation (ONGC) has initiated talks with Reliance Industries seeking a deal to share infrastructure at the Krishna-Godavari (KG) basin. The state-run explorer’s move follows an internal study that said it could save $4-5 billion in capital expenditure if the deal materialises.

For ONGC, which has lined up a capital expenditure of around `51,500 crore or close to $9 billion for the block by 2030, the estimated savings from sharing of infrastructure could be a windfall. ONGC is now planning to appoint a consultant to work out the modalities of how the resources can be shared. Some of the international consultants the company could consider include Aker, Technip and GE.

ONGC wants to share RIL’s gas processing and transportation facilities for the KG basin. This includes RIL’s underutilised gas gathering station at KG-D6 along with pipelines that take the fuel on to the land as also its processing plant at Kakinada in Andhra Pradesh. “We might have to pay only for the tolling charges of transporting gas through RIL’s pipelines. As RIL has recovered the rest of the investments like pipelines, transmission systems, controls, etc, these assets are as good as owned by the government,” an ONGC official said.

Currently, oil companies are allowed to first recover the entire cost of exploration and production and only then share the profit with the government. This policy could change if the government implements the Rangarajan panel’s proposal for a shift to a revenue-sharing model, but the perceived benefits for ONGC from sharing infrastructure with RIL won’t be affected by the new regime either as the costs have been recovered.

The ONGC official added that infrastructure sharing arrangements have been made in the past in gas fields in the Panna-Mukta-Tapti block. Analysts, however, say that RIL’s May announcement of a new gas discovery in the KG-D6 block called D-55 field might have an impact on ONGC’s plans to share infrastructure. RIL might claim that its assets in KG-D6 will be needed to be utilised for this new find. According to a Barclays report, the monetisation from D-55 is still about four years away and it could add 15 mmscmd of gas production.

However, the ONGC official who has been part of talks with RIL over sharing infrastructure said that discussions have been positive. Even with the new find there is sufficient capacity to accommodate ONGC’s gas resources, the official said. “We think RIL will come on board as it is a win-win situation for both companies. This is not unprecedented and happens globally,” the official said.

RIL has pipeline and other offshore and onshore facilities capable of handling gas output of 80 million standard cubic metres per day (mmscmd). It is, however, producing just around 14.63 mmscmd from the the D1 and D 3 fields in the KG-D6 block, which is way below the peak production of 69 mmscmd reached in March 2010. Oil ministry figures show that in the case of RIL’s KG-DWN-98/3 block, investments to the tune of around $10 billion were made up to March 31, 2012.

The appraisal of ONGC’s wells in the KG block is expected to be completed in three months and the company expects to start production in 2016-17. ONGC has found around 4.85 trillion cubic feet of gas reserves in the block, with potential peak production of 22 mmscmd.

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