Reliance Industries and partners BP and Canada's Niko Resources have abandoned the D4 oil and gas block off India's east coast, Niko said, underlining the production problems in the region.
The D4 block, situated in the Mahanadi Basin, lies north of Reliance's main D6 block in the neighboring Krishna-Godavari Basin, where gas output has declined sharply over the last year, marring the growth outlook for the Indian energy major and forcing the government to hold back approvals.
Niko, based in Calgary, Alberta, said its decision and that of its partners stemmed from the current geological assessment related to the size of the trapping mechanism and the commercial environment prevailing in India.
The partners drilled no wells on the block, Niko Chief Executive Edward Sampson said.
Niko's stock was down C$1.46, or 4%, at C$32.60 late in the session on the Toronto Stock Exchange. Earlier it dropped as much as 16%.
Sampson said he was somewhat surprised by the steep initial drop, speculating that some investors may have misread the abandonment as being for the much more important D6 Block.
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"From our geological model of it (D4), we just feel that the reserve potential is just not as great as we once envisioned with it," Sampson told Reuters. "Secondly, the commercial terms in India right now are not moving as fast as a person would like."
Niko had been required to conduct seismic work and drill three exploration wells until June 2013 on the block, which is spread over 17,000 square km, according to information on its website.
The company has a 15% interest in the D4 block, while BP holds 30%. Reliance owns the rest and is also the operator of the block.
According to reports, in 2010, Niko initially estimated the D4 block could be twice as large as the flagship D6 block in the Krishna-Godavari Basin and hold as much as 100 trillion cubic feet (tcf) of gas.
However, analysts currently estimate the D4 block's reserves at a small fraction of that number.
"It is not that significant a block. But it just reiterates that the exploration and production block that Reliance holds is not that promising. The entire block is being relinquished," Ambit Cap analyst Dayanand Mittal said.
A Reliance spokesman did not immediately comment. Officials at BP declined to comment on the matter.
Earlier this month, Reliance cut estimates for proven gas reserves in its Indian blocks by 7% to 3.67 trillion cubic feet (tcf), blaming low pressure and uneconomic volumes for the lower-than-expected volumes.
Niko holds a 10% stake in the D6 block, which is estimated to hold probable reserves of more than 9 tcf of gas. Last year, Reliance sold a 30% stake in 21 oil and gas blocks - including in KGD6 and D4, to BP, in a $7.2 billion deal.
Reliance shares closed 0.6% lower at Rs 691.10, in a Mumbai market down 1%.