Ministry backs DGH on Cairn finds

The petroleum ministry has decided to side with the upstream regulator "" the Directorate General of Hydrocarbons (DGH) "" and accept the regulator's rejection of two recent oil and gas discoveries of Cairn India in the Rajasthan basin.

"We accept that Cairn has not followed the rules of the production-sharing contract," said a senior official in the petroleum ministry. "The ministry will now write to the DGH, which will inform the company," he said.

The rejection of the new oil and gas finds means that the company may not be allowed to include the cost of the development of the well in the field production costs. Including development costs in the overall field production cost enables the contractor, in this case Cairn, to recover its costs from sale of oil and gas before the government starts taking its share of the profit petroleum.

"Not including the well development cost in the overall cost or a fine being imposed on Cairn are the two options. With the country in need of both oil and gas, no one can afford to plug the wells," a Delhi-based analyst said.

The latest finds, known as Kameshwari West-2 and Kameshwari West-3, were drilled without the regulator's approval, the official said. The DGH had earlier written to the oil ministry on the matter.

In June 2005, Cairn was granted an 18-month extension (until November 14, 2006) to complete its activities in the northern and western part of the field. Cairn had said -- in a statement in early May -- that the Kameshwari West-2 discovery was made on November 29, after the expiry of the extension.

Cairn had then applied to the DGH for extending the work programme, which was rejected by the regulator. The final approval for extension came from Petroleum Minister Murli Deora in May this year.

"We cannot say anything about this till we actually get a letter from the government. We will decide our plan of action once we get that," Cairn spokesperson David Nisbet said. "We stand by our statement that all necessary disclosures were made to the DGH," he added.

Meanwhile, Cairn's production plans may itself need to be changed as the government has still not cleared either the pipeline from the area or a refinery in Rajasthan.

"The feasibility of a refinery in Rajasthan needs to be further studied. Its a long-term investment and would involve huge investments," another oil ministry official said.

The pipeline, a pre-heated one to keep the "waxy" crude fluid, will cost Cairn and ONGC, its 30 per cent partner in the field, around $800 million.

Cairn has applied to the oil ministry to get the cost of the specialised pipeline included in the overall field development cost, which will enable them to recover the cost of the pipeline. This could delay the government getting its share of the profits from the crude oil discovered.

Constructing a refinery would take at least four years while a pipeline can be completed in a year. Cairn had earlier said that the pipeline would need to be completed by June 2008 in order to meet production which is scheduled to start by mid-2009.

Cairn plans to spend $1.5 billion in developing the Rajasthan basin which is estimated to have 1 billion barrels of oil. This could boost the country's output by about 20 per cent from the current production of about 6,80,000 barrels a day once production starts in 2009.