TAX LAWS SCARE OFF KG BASIN PROSPECTORS

With an area of 50,000 sq.km, and estimated natural gas reserves 10 trillion cubic feet (Tcf) to 20 Tcf, the Krishna Godavari Basin is drawing more and more foreign investors with promises of more hydrocarbon finds. Although Brazilian oil giant Petrobras and Norwegian oil major, Statoil pulled out of KG Basin, many a foreign investor sees the glint of black gold here. The latest to join the oil hunt is Exxon Mobil Corp.

ONGC’s strong foreign connections, especially with that of Exxon Mobil in Russia, and their massive discoveries in the KG Basin, has opened new options in the Indian energy market.

Exxon Mobil, one of the world’s top energy majors, had revealed to the media, their interest in joining the oil hunt in the KG Basin. The Exxon move was seen as a silver lining in the Indian offshore biz as most oil majors were either exiting KG Basin or had already called it quits. The KG Basin is governed by certain policies which foreign companies consider as ‘irritants.’ Most of the oil majors who were initially keen on business with India had finally decided to pull out of KG Basin.

Of the many blocks allocated to explorers in the Krishna Godavari Basin, only a few have been effectively utilised. Reliance was the first to make a big discovery. They discovered seven trillion cubic feet of gas after which others followed. Of course, the KG basin story has had its own share of controversies. What reached the SC was the fight between Mukesh Ambani’s Reliance Industries and Anil Ambani’s Reliance Natural Resources over gas pricing. Whatever might be the final outcome of that dispute, it is impossible not to be awed by the sheer scope of the KG Basin gas projects — from the deep sea engineering challenges that have to be overcome before the gas could be mined, to the way it will change India’s energy landscape. As if the issues between the companies involved were not enough, the Government came out with some policies which further complicated the issue. Although these policies hit the foreign companies hard, Indian companies have not been spared. The impact of government policies have been harder on the MNCs Their work stalled, and after seeing no improvement they decided to back out.

British Gas, which held a 30 per cent stake in KG-DWN-98/4, had announced around mid-April 2010 that it no longer was willing to continue, and was pulling out as the output-sharing agreement had ended in May 2008, and was not extended. ONGC, which has a fair share in KG Basin as do Reliance, was paving way for Exxon Mobil to join them in their quest for oil in their blocks last April. There has been no progress in the matter after Exxon Mobil chief was heard expressing his interest in working with ONGC in the KG Basin. Towards the end of August 2010 what grabbed public attention was Cairn India’s discovery of oil, though accompanied by the Vedanta controversy, in the Nagayalanka 1z well in the KG-ONN-2003/1 block. Cairn had only a 49 percent interest in the block while ONGC held the remaining 51. Announcements made in November 2010, that deep water exploration in 18 blocks in the Basin had resulted in 36 gas discoveries, brought a spark of hope in the Indian market. The KG Basin discoveries have undeniably boosted sentiments in the domestic gas market.

Statoil and Petrobras exited over the inordinate delays in approving their deepwater acreage. Farm out agreements were signed in August/September 2007 with Petrobras and Statoil but the JOA (Joint Operating Agreement) could not be signed right away because of the nine month hold-up in obtaining approval on the assignment of participating interest. Following the delay, it took a year for all the parties including the Government, to sign the Production Sharing Contract (PSC). Other blocks were also affected by the same issue.

Can the stake holders function without an external hand, and are the discoveries sufficient? These are questions that can be answered only by the Indian government, as it was its stringent laws which forced foreign energy giants to exit the basin.

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