The economics of petroleum exploration and development in India By Sajith Venugopal A thesis submitted to the University of New South Wales in partial fulfillment of the requirements for the Degree of Master of Engineering July 2005 School of Petroleum Engineering The University of New South Wales, Sydney, NSW, AUSTRALIA. ACKNOWLEDGMENTS I would like to express my sincerest gratitude to Mr. Guy Allinson from the School of Petroleum Engineering, University of New South Wales, for his excellent advice and enduring guidance. Without his encouragement and wisdom, my research endeavour would have been far more difficult. I thank him for his patient reading of my write- ups and the opportunities he provided me to conduct occasional tutorials and lectures. I am also extremely grateful to Deepak Mehta and Madhu Nainan from Petrowatch for granting me access to their exclusive database, the interest that they showed in my work played a pivotal role in motivating me to complete this research. I would like to extend my warmest thanks to my flat-mates Vivek, Frank and Ankur. They were my family in Australia. Each of them has given me great memories that I would cherish throughout my lifetime. They have been the best friends that I could wish for and have helped me greatly through my ups and downs. I express my deepest thanks to my parents K.P.Venugopal and Valsala Venugopal and my siblings Ajith and Anjali for their unconditional love and support. They have been there for me whenever I doubted my capability to complete this thesis. Without their motivation and blessings this thesis would not have been a reality. I also thank my dear Leena for her patience and love through the difficult times. Her presence in my life was a key ingredient in the drive that I had to complete this thesis and I am looking forward to my life with her. I dedicate this thesis to my parents Abstract This thesis provides the background to and an analysis of the economics of exploring for and developing oil and gas discoveries in India. It is aimed at helping the oil and gas industry assess the financial attractiveness of investment in that country. The thesis describes the geography, climate, infrastructure, and energy market with an emphasis on how these affect upstream oil and gas industry investment. A detailed description and analysis is given of the petroleum production sharing contract ("PSC") terms embodied in India's New Exploration Licensing Policy ("NELP"), and demonstrates that, depending on negotiations, Government Take under NELP terms is likely to be in the range 50% to 60% for a stand-alone petroleum development. However, PSC terms are regressive for marginal discoveries. In particular, State royalties might hinder the development of small or marginal discoveries and render them uneconomic. As an illustration, depending on the oil price, up to 6 MMbbls of oil in otherwise economically viable small fields in a geological basin might be made uneconomic and left stranded because of the effect of royalties. The thesis also analyses the economics of developing a sample of actual Indian oil and gas fields offshore the east and west coasts of the country in shallow and deep water. Onshore field developments are not analysed because of lack of data. All of the offshore developments analysed are profitable based on past and current economic conditions and knowledge. The majority are also relatively low-risk investments. Finally, the thesis evaluates the profitability of new oil and gas exploration and development offshore the east and west coasts of India. The required minimum size of new exploration prospects are in the range 10 to 17 MMbbls for oil prospects and 138 to 1,100 Bcf for gas prospects assuming a low probability of success. Once a new discovery is made, the required minimum economically developable reserves are 4 to 12 MMbbls for oil discoveries and 63 to 1,400 Bcf for gas discoveries. Contents Page 1 The economics of petroleum exploration and development in India Contents Acknowledgements Page Chapter 1 Introduction 1.1 Chapter 2 Summary and Conclusions 2.1 Chapter 3 Geography 3.1 Petroleum activities 3.2 3.2 Climate 3.4 3.3 Topography 3.5 3.4 Rivers 3.6 3.5 Vegetation 3.8 3.6 Population 3.9 Chapter 4 Infrastructure 4.1 The economy 4.1 4.2 The oil and gas industry 4.3 4.2.1 Sedimentary basins of India 4.5 4.2.2 Key players of petroleum sector 4.6 4.3 Labour market 4.8 4.4 Roads 4.8 4.5 Railways 4.9 4.6 Airports 4.10 4.7 Ports 4.11 4.8 Electricity distribution 4.13 4.9 Telecommunications 4.14 4.10 Refineries 4.14 4.11 Pipelines 4.18 Sajith Venugopal July 2005 Contents Page 2 Page Chapter 5 Energy Market in India 5.1 Crude Oil 5.1.1 Crude oil demand/supply 5.2 5.1.2 Crude oil pricing 5.4 5.2 Petroleum Products 5.2.1 Petroleum product supply 5.6 5.2.2 Petroleum product demand 5.7 5.2.3 Petroleum product quality 5.11 5.3 Natural Gas 5.3.1 Natural gas supply 5.13 5.3.2 Natural gas demand 5.14 5.3.3 Additional natural gas 5.16 5.3.4 Natural gas pricing 5.21 5.4 Liquefied Petroleum Gas (LPG) 5.4.1 LPG supply 5.28 5.4.2 LPG demand 5.30 5.4.3 LPG pricing 5.30 5.5 Coal 5.5.1 Coal supply 5.31 5.5.2 Coal demand 5.34 Chapter 6 Fiscal Regime 6.1 Structure 6.3 6.2 Illustration of workings of Indian PSC 6.4 6.3 Components of Indian NELP PSCs 6.3.1 Royalty 6.7 6.3.2 Cost Recovery 6.7 6.3.3 Profit Sharing 6.11 6.3.4 Income Tax 6.12 6.4 Worked example of an Indian NELP PSC 6.13 Sajith Venugopal July 2005 Contents Page 3 Page Chapter 7 Fiscal Analyses 7.1 Government Take 7.1 7.2 Assumptions 7.2.1 Economic assumptions 7.2 7.2.2 Development assumptions 7.3 7.2.3 Fiscal assumptions 7.3 7.2.4 Summary of assumptions 7.3 7.3 Impact of individual components of Government Take 7.5 7.4 Reserves deemed uneconomic because of Government Take 7.11 7.5 Summary and conclusions 7.17 Chapter 8 Economics of Ravva oil and gas development 8.1 Introduction 8.1 8.2 Assumptions 8.3 8.2.1 Participating interest 8.3 8.2.2 Past oil prices, production and revenues 8.4 8.2.3 Past costs 8.5 8.2.4 Past and future gas prices 8.5 8.2.5 Future oil prices 8.5 8.2.6 Future production 8.5 8.2.7 Exploration and development costs 8.8 8.2.8 Operating costs 8.8 8.2.9 Abandonment costs 8.9 8.2.10 Escalation 8.9 8.2.11 Discounting 8.9 8.2.12 Summary of assumptions 8.9 8.3 PSC terms 8.3.1 Contract period 8.11 8.3.2 Compensation for import waiver 8.11 8.3.3 Production payments 8.11 8.3.4 Cess and Royalty 8.13 8.3.5 Cost petroleum 8.13 8.3.6 Abandonment sinking fund 8.13 Sajith Venugopal July 2005 Contents Page 4 Page 8.3.7 Profit petroleum 8.14 8.3.8 Income tax 8.17 8.4 Results 8.18 8.4.1 Net cash flow 8.19 8.4.2 Components of Government Take 8.20 8.4.3 Sensitivities and uncertainties 8.4.3.1 Spider diagram 8.21 8.4.3.2 PTTR effects – changing front-end development costs 8.24 8.4.3.3 PTTR effects – changing mid-field life costs 8.25 8.4.3.4 Arbitration 8.27 8.4.3.5 Monte Carlo simulation 8.31 8.5 Summary and conclusions 8.33 Chapter 9 Economics of D-1 South oil development 9.1 Introduction 9.1 9.2 Assumptions 9.2.1 Oil prices 9.2 9.2.2 Future production 9.2 9.2.3 Exploration costs 9.3 9.2.4 Development costs 9.3 9.2.5 Operating costs 9.4 9.2.6 Abandonment costs 9.5 9.2.7 Escalation 9.5 9.2.8 Discounting 9.6 9.2.9 Summary of assumptions 9.6 9.3 PSC terms 9.3.1 Cess and Royalty 9.7 9.3.2 Cost petroleum 9.8 9.3.3 Abandonment sinking fund 9.8 9.3.4 Income tax 9.8 9.4 Results 9.9 9.4.1 Net cash flow 9.10 9.4.2 Components of Government Take 9.10 9.4.3 Sensitivity analyses 9.12 Sajith Venugopal July 2005 Contents Page 5 Page 9.4.4 Monte Carlo simulation 9.13 9.5 Summary and conclusions 9.16 Chapter 10 Economics of PY-1 gas development 10.1 Introduction 10.1 10.2 Assumptions 10.2.1 Gas prices 10.2 10.2.2 Condensate prices 10.3 10.2.3 Production 10.3 10.2.4 Exploration and development costs 10.5 10.2.5 Operating costs 10.5 10.2.6 Abandonment costs 10.6 10.2.7 Escalation 10.6 10.2.8 Discounting 10.6 10.2.9 Summary of assumptions 10.6 10.3 PSC terms 10.3.1 Cess and Royalty 10.8 10.3.2 Cost petroleum 10.8 10.3.3 Abandonment sinking fund 10.8 10.3.4 Profit petroleum 10.9 10.3.5 Income tax 10.10 10.4 Results 10.11 10.4.1 Net cash flow 10.12 10.4.2 Components of Government Take 10.13 10.4.3 Sensitivity analyses 10.4.3.1 Spider diagram 10.14 10.4.3.2 Monte Carlo simulation 10.16 10.5 Summary and conclusions 10.19 Chapter 11 Economics of KG-DWN-98/3 gas development 11.1 Introduction 11.1 11.2 Assumptions 11.2.1 Participating interest 11.3 11.2.2 Future gas price 11.3 Sajith Venugopal July 2005 Contents Page 6 Page 11.2.3 Future production 11.3 11.2.4 Exploration costs 11.6 11.2.5 Development costs 11.6 11.2.6 Operating costs 11.7 11.2.7 Abandonment costs 11.7 11.2.8 Escalation 11.7 11.2.9 Discounting 11.8 11.2.10 Summary of assumptions 11.8 11.3 PSC terms 11.3.1 Royalty 11.10 11.3.2 Cost petroleum 11.10 11.3.3 Abandonment sinking fund 11.10 11.3.4 Profit petroleum 11.11 11.3.5 Income tax 11.12 11.4 Results 11.13 11.4.1 Net cash flow 11.14 11.4.2 Components of Government Take 11.15 11.4.3 Sensitivity analyses 11.16 11.4.4 Monte Carlo simulation 11.20 11.5 Summary and conclusions 11.22 Chapter 12 Economics of exploration 12.1 Objectives 12.1 12.2 Cases analysed 12.1 12.3 Approach 12.2 12.4 Assumptions 12.4.1 Economic assumptions 12.3 12.4.2 Market assumptions 12.5 12.4.3 Exploration and development assumptions 12.5 12.5 Net present value per barrel or per thousand cubic feet graphs 12.8 12.6 Minimum prospect reserves graphs 12.10 12.7 Offshore eastern India – Ravva area 12.13 12.8 Offshore western India – D-1 area 12.18