RIL, Cairn get nod to explore further in producing fields

In his first major decision, Oil Minister M Veerappa Moily has allowed Reliance Industries and Cairn India to explore for oil and gas within the producing fields subject to certain conditions.

Updated: Jan 04, 2013, 19:54 PM IST

New Delhi: In his first major decision, Oil Minister M Veerappa Moily has given conditional approval to Reliance Industries and Cairn India to continue exploring for oil and gas within their producing fields.

RIL and Cairn had not been able to add to their production as their requests for drilling exploration wells in producing areas were not acted upon for over a year now.

Moily, who after taking over as the Oil Minister in end of October had promised speedier decision making, said the approval has been given to the two firms.

"The government has decided to allow exploration in mining lease area. This will open up sufficient investment climate and it will help reducing imports," he said at an Assocham meeting here.

However, the permission is subject to the condition that cost recovery of such exploration wells would be allowed only in case there is a commercially exploitable discovery.

This essentially means that cost of drilling any well that does not lead to a discovery or a small find that could not be independently produced, will not be allowed and will have to be entirely borne by the companies.

This is a significant departure from the current practice where upon a discovery all successful and unsuccessful well costs in that particular blocks are first recovered from sale of hydrocarbons and profits with the government split thereafter.

Currently, when a company finds oil or gas in an area, the discovery area is ring-fenced and a mining lease granted for production of hydrocarbons.

Operators get to recover all their cost -- whether successful or failed wells, from the oil and gas produced and sold from that particular block.

The DGH had previously taken a view that further exploration within this ring-fenced mining lease area is not permitted. It felt the government's profit share, which is triggered when an explorer recovers all his cost, would be adversely impacted if new costs are added.

To overcome this, the ministry has put a condition that cost of the fresh exploration will be allowed to be recovered only when a new commercial discovery is made, sources said.

"...Cost recovery of such exploration being subject to establishment of commerciality of the new discovery..., mitigating any risk to the government revenue from existing discoveries," the ministry wrote to DGH. "Cost recovery will be governed by current provisions of PSC on establishment of commerciality."

RIL and Cairn have maintained that exploration being a continuous process is allowed in the mining lease under which they currently produce gas from eastern offshore and Rajasthan blocks respectively.

They felt the 'ring-fencing' proposed by DGH and seconded by the Oil Ministry was not practical and legal.

While RIL has proposed to drill an exploration well on the flagging D1&D3 gas fields in the KG-D6 block to study reservoir characteristic, Cairn wants to drill new probes to help raise output from the Rajasthan block to 300,000 barrels per day (bpd) from 175,000 bpd.

Globally, exploration is permitted in fields that are under production so as to keep adding new reserves to replenish ones that have been produced. In absence of rejuvenation, the fields will terminally decline from the day output starts.

The same has been followed in fields in Assam and Mumbai offshore.