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Prashant Modi, President and COO, Great Eastern Energy Corporation Ltd (GEECL)

27 Apr 2011

Great Eastern Energy Corporation Ltd. (GEECL) was one of the first private sector company in India to monetize Coal Bed Methane (CBM) in the country. It entered into this business way back in 2001. At present it has two CBM blocks - one at Raniganj in West Bengal and the other at Mannargudi near Trichi in Tamil Nadu.

Modi, shares his thoughts with InfralineEnergy's Sangeeta Tanwar about GEECL's growth plans, the sector's intricacies, and government's policies and strongly advocates free market price for attracting further investment in the CBM.

Edited Excerpts

What is your outlook on CBM over next five years?
Many of the CBM blocks are not producing at the moment. When all of them would be active, India would produce CBM gas to the tune of eight to 10 MMSCMD. Our own production from Raniganj block is expected to go up to three MMSCMD in the next five to six years.
How competitively is CBM priced in comparison to substitute fuels?
In order to sell anything it has to be competitive. It holds true for CBM as well. Lot of arbitrage is involved in selling it. The CBM price depends from customer to customer and it's a partnership for us.
The current CBM production is well below the projected 1.11 MMSCMD per day set by the government. Why has CBM production failed to pick-up?

It is difficult to project CBM production in the beginning, as there is no production history in India for any CBM. The duration for production processes such as deep watering is unknown. It could take two to three months or more.

For any sort of assessment, if you feed data in CBM software, it asks for your production history, which is non-existent. Based on little available data the software extrapolates. So, if I put my one-month-old production history data in the software, it will only produce a very theoretic figure. Based on such analysis it is difficult to predict whether one will be in a position to meet the projected targets.

"There are law and order problems in certain areas. All these are State subjects but if these can be addressed and get streamlined, it could accelerate the pace of CBM business."

It is because of this reason that we fell short of matching up the previously estimated production targets. While announcing the CBM production, the government had thought that it will have 20 CBM producing blocks. But some of these blocks haven't started production yet.

How long does it takes to produce from a block?
CBM block takes four to five years of initial work before you can get into production and development phase.
What are the critical enablers required for the growth of CBM in the country?

The government's policy on CBM is very simple and straight forward. It protects the interests of both the operator and the government. It should remain as it is. The policy allows for royalty contract and there is no cost recovery. So it's in operators' interest to increase production and efficiency.

At the same time, we do need some facilities that would help in the growth of CBM. We need to dig nearly 300 wells to produce three MMSCMD gas. If you are working on offshore wells, then one well alone would produce double the amount of this gas. Now, one has to connect these different wells. It requires transfer of rigs and heavy equipment. And for this one needs roads, which are unfortunately missing in most part of the country. Then, there are law and order problems in certain areas. All these are State subjects but if these can be addressed and get streamlined, it could accelerate the pace of CBM business.

How do you address such challenges?
We ourselves have built nearly 40 to 50 kms of roads till now. They are also for people's use and benefit the local economy.
How does Indian CBM market compare with the international market?

Comparison of CBM blocks at geographically different locations is not logical because geology changes from block to block. Each field is unique depending on quality of coal, amount of coal, amount of gas per tonne of coal. It also depends on saturation, permeability and several other factors. However, on a broader basis, one can compare different basins to benefit from global knowledge.

Also, if one block has one tcf of reserves and the other one has two tcf, it's not as if the second field is better than the first. This is so because owing to geology your cost of extraction could be less in a given field resulting in low production cost. In some other field the production cost could be lower owing to higher reserves. It ultimately boils down to per cubic feet cost.

"Sadly the distribution infrastructure is not fully available in the country. And you have to set up your own infrastructure or pipeline to take the gas to your consumers through pipeline."

In US, the fields such as Mannargudi, which are powder-river basin fields are big CBM producing areas. Then you also have black warrior basins which are like Raniganj field in West Bengal.

With different sort of geological structure one cannot say that black warrior is better than powder river or vice-versa. For example, Australia has good coal but the problem is that most of this coal is in areas where there is no market for it. China also has thick coal. The country has gas, but it lacks pipeline infrastructure. You have the resources, but if you do not have consumers or the pipeline network in place, then the big question is how do you commercialise your gas?

What is GEECL's initial assessment of Mannargudi block in Tamil Nadu? How much money GEECL plans to invest in it?

We won the block under the CBM - IV licensing round and signed the production sharing contract (PSC) last year. The work on Mannargudi will start in the last quarter of this year between October and December to complete our minimum work programme committed at the time of the bid.

As per the Directorate General Hydrocarbons' assessment based on the data available to them, the Mannargudi block is estimated to have 0.98 tcf of gas. Now, we need to do our work there and get the results.

However, currently we are fully engaged in developing our Raniganj block. As we are drilling and completing more wells, the production from the block is set to increase. As of now, the production in Raniganj stands at 0.16 MMSCMD.

What are the key overseas CBM markets that GEECL is looking at?

Indonesia is opening up. South Africa and China are also key markets. All these countries make for very virgin CBM territories. As and when more data comes out, one would be in a better position to take a call.

What are the challenges that you face in building pipeline infrastructure in remote locations?

Sadly the distribution infrastructure is not fully available in the country. And you have to set up your own infrastructure or pipeline to take the gas to your consumers through pipeline. Under the PSC, you are duly allowed to lay pipelines. In our business we have to connect internal wells to gathering stations and from there we have to lay pipeline outside the contract area to supply gas to consumers.

And nobody will come forward to set up a pipeline for CBM because it's a standalone business. In CBM the production takes eight to ten years to reach peak. With such a long gestation period, the pipeline operator would argue about how return on his investment would come. As a producer I cannot be expected to pay pipeline operator twenty times the existing tariff.

What are the possible solutions for developing pipeline infrastructure?

If I look at it as a standalone business, it's unviable investment proposition. But I see the investment made in building infrastructure network as an upstream asset investment. This is the only way to monetise my gas. It is a part of my project cost and it is spread over my wells over project production lifecycle.

" Take for example NELP IX. There were hardly one or two international bids. Oil and gas is a high risk business and people will only invest if they are assured of returns on their investment."

Unless you own or have access to a pipeline, it is tough to take your gas to consumers. In case of our second acreage, the Mannargudi block a pipeline already exists in its vicinity. We do not have to invest money in creating a distribution network there. We will rather connect to the existing pipeline by paying the required cartage.

In case of Raniganj block, since pipeline infrastructure was non-existent, we had no option but to create our own pipeline infrastructure. In the US, unlike India, the grid already exists and the whole country is connected with pipeline network. All that a new player has to do is plug in at the existing pipeline at the desired location, get a meter and get money for your gas as it goes into the system.

The government is keen on gas pooling for various sectors. What will be its impact on CBM?

CBM is expensive business involving huge investments for exploration, drilling and establishing pipeline network. To recover costs and attract investment in the sector, we have to have free market price.

Take for example NELP IX. There were hardly one or two international bids. Oil and gas is a high risk business and people will only invest if they are assured of returns on their investment.

Our PSC is clear on free market pricing. We are not for gas pooling. Crude oil is attracting a lot of investment because the government has allowed crude oil to be traded at international free market price. LNG also sells at market price. Then there is no reason why CBM should be treated differently.

"In Raniganj block, we will be investing close to Rs 2000 crore in the next five years. Our minimum work commitment at the Mannargudi block will cost us about Rs 100 crore during this fiscal."

Why should there be any differentiation in gas prices when other fuels are being sold at market price. On the contrary being a cleaner fuel, gas usage should be further encouraged. The price should be best left to seller and the buyer. Why should operator expected to offer any subsidy to consumer? If Government wants to offer concessions to certain sections, it's their business.

PNGRB has fined GEECL Rs 25 lakh for illegal construction of pipeline in West Bengal? What is GEECL's stand on the issue?

As advised by our lawyers we are sure and confident that as per the PSC we are duly authorised to build a pipeline. Our PSC was signed in 2001 and according to our lawyers we are outside the purview of PNGRB since PNGRB came into force on July 16, 2010.

Our pipeline was completed in 2009. So, as per their act, even if we are covered under given regulations we are very much authorised to build and lay the required pipeline infrastructure. PNGRB argues that our spur pipelines are dedicated.

Moreover, in the Supreme Court judgment against PNGRB in IGL and Voice of India, the court has restrained the regulatory board to pass any order. The order is distinct as it says that PNGRB can process applications but it cannot pass any order. And this is why no further progress is being witnessed on City Gas Distribution.

Also, if I am not allowed to build pipeline infrastructure, then what am I supposed to do with my gas. The PNGRB Act governing pipeline infrastructure says if a player has been authorised to build pipeline before the Act came into existence the concerned player is deemed as authorised to build pipeline network.

The Act does not talk about dedicated pipelines. And PNGRB claims that our spur pipelines are dedicated pipelines. Rather it's the regulation that talks about pipeline. I wonder how regulation can overrule an Act. We have moved High Court on the issue and we did not argue on the merit of the issue instead we argued over jurisdiction of PNGRB. In fact, PNGRB has not even entertained our call to meet and present our merits on this particular issue.

What are GEECL's business plans for the next two years?
In Raniganj block, we will be investing close to Rs 2000 crore in the next five years. Our minimum work commitment at the Mannargudi block will cost us about Rs 100 crore during this fiscal. Initially our commitment towards Mannargudi block will be very less. However, depending upon the progress we make and the kind of results we get, in the long run it could see an investment of as much as Rs 3000 to 4000 crore. At present we have two fracturing units, two drilling rigs. By March 2012 the estimated production would be 500,000 SCMD, which is over 17 million cubic feet per day (MMSCFD).
How seriously is GEECL looking at Shale Gas?
We will look at the available opportunities as and when we come across them. The government is coming out with a policy on shale gas and once it does we will examine what the policy is. Depending on what blocks are on offer, we will accordingly take a decision.
The government has recently announced a spate of reforms in the oil and gas sector such as market freedom for new gas fields, uniform licensing policy, pricing freedom for small and marginal fields, and replacing PSC with open acreage licensing. Being an oil and gas operator, how do you see these decisions impacting the investment climate in India?

New policies announced are welcome. Pricing and marketing freedom are keys to attracting investment. What is needed is implementation of the same at the earliest as that will attract investment.

What are your suggestions to resolve issues facing the CBM sector?

CBM industry has a large potential in India. However, lack of infrastructure facilities and timely clearances are hindering growth. More importantly, for new CBM blocks to come on line, pricing and marketing freedom is a must. Clearances by various agencies of the government should be given before any areas are allotted to operators.

Please update on your production scenario with respect to the Raniganj (South) CBM block. How much of CBM is currently being produced and what are the future targets?

We have already drilled 156 wells which are continuing to be dewatered and further optimised. The block has 2.62 tcf of gas in place. To exploit the potential, we have to drill a total of 300 wells. We have the plan to drill another 144 wells in our Raniganj (South) Block.

What is the update on Mannargudi block? When is production likely to commence from the block?

Mannargudi block covers an area of 667 sq. km and 0.98 TCF Gas-in-Place. The Company has received Environment Clearance and approval is awaited from the State Government of Tamil Nadu. The current minimum work programme consists of 30 pilot production wells and 50 core holes. The block is currently under Arbitration with the Government.

How much has GEECL invested so far in the CBM sector?

GEECL has already invested over Rs. 1500 crore in its Raniganj block.

The government recently allowed Coal India to mine CBM gas in order to speed up production. However, CIL is not allowed to involve a third party for CBM exploitation. What are your views on the same?

CBM operations should be auctioned to bidders who have the necessary know how and experience.

Please specify your future plans and areas of expansion.

We are continuing to make strong progress with our strategic goals of further optimising well production. We plan to drill another 144 wells in our Raniganj (South) Block. Our underlying performance in the past gives us confidence for the future. We further look forward to an early resolution with regard to our Mannargudi block.

(InfralineEnergy thanks Prashant Modi, President and COO, GEECL for sharing his valuable insights with our readers. The column 'In Conversation', is a platform to engage experts from various sectors to share their views on the different transformations in the Indian energy sector)