Digging deep

Having struck both oil and gas in the Cauvery basin, RIL's plans acquire a new dimension.

Eighty thousand dollars a day. That's the kind of money oil major Reliance Industries (RIL) spends searching for oil. The investment's finally paying off. This week, India's biggest private sector oil and petrochemicals firm struck not just oil but also gas in the Cauvery basin off the Pondicherry coast, at a depth of 1200 metres in the sea. About five years back in 2002, the Rs 110,886 crore RIL had discovered the largest gas field in the world on the east coast Krishna Godavari (KG) D6 basin, about 1200 metres deep in the sea.

Experts believe the Cauvery basin has huge potential. Says Ajay Arora, partner, Ernst& Young, "Cauvery is going to be the next big opportunity for gas discovery. Its potential was perhaps not explored earlier was because the players that were operating here were midsized exploration & production "E&P" independents. However, with the entry of a big player like RIL, the basin's potential can now be harnessed."

Apart from the Cauvery basin, RIL is working in the Krishna-Godavari, Mahanadi and the Saurashtra basins. And an estimated 82 per cent of the area that it is drilling is in deep waters, unlike that for other oil firms which are mainly drilling on land or in shallow waters. Although RIL has already forked about Rs 9,000 crore, much more will be needed before the oil comes gushing out. PMS Prasad, president, (oil&gas), RIL, reckons it will cost the firm an equivalent amount, if not more, to keep the work going.

Says Arora, "In the highly active global E&P environment, there has been a consistent increase in the drilling costs."Arora estimates that costs have gone up by more than 50 per cent in the last couple of years and says they are expected to stay firm. Moreover, the operations involve a high degree of risk; for instance, RIL has not found either oil or gas in as many as 20 blocks, where it has been working for the last six years.And that's possibly why RIL is toying with the idea of roping in a foreign player. Says Prasad, "We are looking to form either a joint venture or some kind of strategic alliance to develop exploration capabilities for operating in ultra deep water of over 2000metres." Prasad isn't talkingnames yet, but industry watchers believe it may tie up with majors like Chevron and Exxon Mobile. Chevron has already picked up 5 per cent stake in Reliance Petroleum and has the right to buy an additional 24 per cent.

The most important reason why RIL needs a partner is technology. In India, 76 per cent of gas reserves are in deep waters and the success ratio is barely 16-20 per cent. Since the drilling has to be done in the depths of the seas "" sometimes upto 1,500 metres deep "" it calls for technology of a level that is used in space. Explains Prasad, "That's why we might need to tap the expertise of global majors in the field."

The other reason why a tie-up might help is because there is a severe shortage of skilled people. Says Deepak Mahurkar, associate director, PricewaterhouseCoopers, "There is a big gap in the demand and supply of manpower not only

in India but globally, because the oil cycle this time round has lasted longer than before. Mahurkar feels that the fraternity might want to get together to pool their resources.

Adds Prasad, "In the early nineties, two generations of manpower quit the industry because of the taxing regime and since then there has been a people crunch.When we got into the business, we hired some of the best available experts and each of them were mandated to train and develop ten similar people like them."

However, there are those who feel it might not be best for RIL to team up with global majors immediately. Since RIL is still building the business, it might want to further consolidate its position,before giving away a stake. says an expert, "RILmay want to acquire overseas exploratory fields in areas like West Africa or Latin America and could then consider partnering with a global firm.

Currently, RIL outsources services such as engineering and analysis to experts like Aker Kvaerner or Bechtel. For its exploration operations, on India's east coast, it is using three rigs belonging to Transocean, a global major. RIL has also entered into a strategic tie-up with Niko Resources of Canada -Niko has picked up an equity stake in one of the oil blocks in the KG basin. Besides, Hardy Oil and Gas, another global major has bought into the equity of two other blocks, again in the KG basin.

Says Mahurkar, "RIL has followed the model of outsourcing exploration services from different parts of the world even as supply chain costs have increased significantly in the last one and a half years. But thus far, it has not parted with stakes to oil majors even for development technology. This reflects RIL's ability to take technical and commercial risks and thereby get rewarded handsomely without sharing them".