State-owned Oil and Natural Gas Corp (ONGC) may have overstated the natural gas reserves in its much-talked about KG basin KG-DWN-98/2 block, which sits next to Reliance Industries' prolific KG-D6 fields.
Cairn India, which had made four discoveries in the KG-DWN-98/2 block before selling 90% out of its 100% stake in the block to ONGC in 2005, has written to the oil regulator DGH saying the state-owned firm is grossly overstating the reserves in block, sources said.
It believes that "the hither-to discovered oil and gas resources in the block are only marginal to non-commercial, because of their small size and the potential high development costs due to water depth versus the prevailing gas prices."
ONGC estimates that the blocks holds an in-place volume of 25.61 million tonnes of oil and 197 billion cubic metres of natural gas. It is proposing an investment of over $7.3 billion to produce up to 30 million standard cubic metres per day of gas.
The warning by Cairn, which holds a 10% interest in the acreage and is credited with finding oil in an area in Rajasthan where global giant Royal Dutch/Shell exited saying there was no hydrocarbons, is significant in view of the fall in gas output from Reliance's neighbouring KG-D6 block.
Reliance had in 2007 estimated that the Dhirubhai-1 and 3 fields in the KG-D6 block would hit 69 mmscmd of output, but production has fallen to 40 mmscmd due to what the Mukesh Ambani-led firm says are reservoir complexities.
Cairn, which is recognised the world-over for its expertise in assessment of hydrocarbon resources, wants "a correct reserve estimation of the block through an independent agency."
"The work undertaken (to assess reserves in the block) by Schlumberger Data and Consulting Services in 2007 (at the behest of ONGC) is flawed and they substantially over-estimated the resources in the block," it wrote to DGH.
Stating that it had on various occasions pointed out to the flaws, Cairn said, "It is imperative that a new study is undertaken by a third party of repute which enjoys the confidence of both ONGC and Cairn, such as DeGolyer & MacNaughton, in order to establish a correct assessment of the resources, based on which the stakeholders would be able to take appropriate decisions."
Cairn said ONGC had submitted a proposal to declare some of the discoveries in the block as commercial, a step toward developing the finds, without keeping it informed.
ONGC, it said, was submitting various proposals without prior approval of the Operating Committee -- an oversight body comprising representatives of both partners. Submission of proposals without OC approval is a violation of the Production Sharing Contract and Joint Operating Agreement.
Cairn claims that an innovative production method has to be worked out for the block in discussion with the DGH and the oil ministry.
It also questioned the basis on which ONGC is seeking an extension of the appraisal period, which was completed as per the provisions of the PSC. It has asked for re-submission of the Declarations of Commerciality for the discoveries made in the block as well.
ONGC bought 90% interest in Block KG-DWN-98/2 from Cairn Energy India Ltd in 2005. Cairn still holds 10% in the block. Before selling most of its stake and giving away operatorship of the block, Cairn made four discoveries in the area -- Padmavati, Kanakdurga, N-1 and R-1 (Annapurna).
Subsequently, ONGC made six significant discoveries --E-1, A1, U1, W1, D-1/KT-1 and the first ultra-deepwater discovery UD-1 at a record depth of 2,841 metres.
The block is divided into a Northern Discovery Area (NDA) and Southern Discovery Area (SDA). The NDA comprises discoveries like Padmawati, Kanadurga, D, E, U, A, while the ultra deepsea UD find lies in SDA.
Even ONGC has acknowledged that the NDA discoveries are small to marginal and can not be developed on a standalone basis due to high deepwater development costs. Accordingly, it is proposing to develop the discoveries in an integrated cluster.
Sources said the ONGC Declaration of Commerciality (DOC) of NDA on July 15, 2010, was submitted without OC approval and so was the DOC of SDA on December 21, 2009.
The DGH, they said, wants a fresh proposal for DOC to be submitted by the operator after completion of the proposed appraisal drilling programme by July 16, 2013, in case of NDA and by December 22, 2012, in case of SDA, or by July 16, 2013, for both the NDA and SDA.