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Prashant Modi, President & COO, GEECL

10 Jul 2012

Great Eastern Energy Corporation Ltd (GEECL) is the first Private Sector Company in India to foray into the field of CBM. It is a part of the YKM Holdings Group, promoted by Mr. Yogendra Kr Modi and Mr. Prashant Modi. It was started in 1992 after receiving approval by Government of India. GEECL became the first Indian Company to be listed on the London Stock Exchange's Alternative Investment Market (AIM) in December 2005 and commenced sales in July, 2007. GEECL is exploring and developing production wells for CBM in Damodar Valley (Raniganj coal-field) near the city of Asansol, West Bengal.

In an exclusive interview with Infraline Energy’s Neeraj Dhankher, Mr Modi talks of various issues facing GEECL’s CBM business operations in India, prevailing pricing structure, role of the government and how the company plans to expand in Shale Gas business. The following are the excerpts:  

What is the status of production from your Raniganj (South) block? How much of CBM gas are you producing at present?

Currently we are producing slightly over 0.27 million cubic metre (MMSCMD) of CBM gas. We have 121 wells already drilled of which around 90 wells are dewatering / producing. Every day we are adding more and more wells as we continue to drill. The block has about 2.35 TCF of CBM gas reserves. To exploit the potential, we have to drill a total of 300 wells. The drilling process is likely to be completed in another five to six years. On an average, we plan to drill 40 wells a year and we are well on track to meet that target. We have deployed two of our own rigs for the job.

How much of investment is required for achieving the targeted production of CBM gas? How do you plan to raise the capital?

So far, we have already invested Rs 1,000 crore for drilling, while another Rs 2,500 crore of investment is further required to accomplish the targeted production. We have enough money to fund the activities. We will be able to raise it when needed as we have enough equity.

The government seems to have ticked the company for low production of CBM gas from the Raniganj (South) block. What are your comments?

Unfortunately that is not how the CBM fields work. We are the first field in Asia to commercialize CBM gas. There is no production history before this. It is very difficult to forecast production in this industry. Production rates can vary as the dewatering time can be anywhere between two to nine months. According to me, our production is coming as expected. We have already explained to the government that this is consistent with CBM fields all over the world.

In CBM, there is no cost recovery (and rightly so) and we pay royalty / PLP on the sales as soon as the commercial production commences. So it is in my interest to increase production at the earliest as we need to recover the cost.

So you think you can increase the production gradually?

Of course! In CBM there are no dry wells. The question is how much a well can produce and how much time it will take to dewater. As and when more wells come on-stream, the dewatering time also reduces.

There has been some controversy over your proposal to retain the entire 210 sq km of block area. What was the issue?

Firstly, there is no controversy. As per the Production Sharing Contract (PSC) the non-producing areas in a block have to be relinquished. In our case, all area is producible and there is no area which does not have coal. We have all the data to prove it and the same has already been submitted. As per our data, the entire 210 sq km of the block area have coal deposits which have also been verified by internationally reputed firms. Hence, we proposed to the government that we want to retain the entire area to achieve optimum production which has been approved by them.

Pricing of products in India has always been a contentious issue. How do you look at this with respect to pricing of CBM gas?

The PSC is very clear on pricing and the all parties should follow the contract. The contract allows a CBM gas seller marketing freedom at arm’s-length pricing. Why would anyone want to susidise price as everyone is a looser in that case? Customer will pay only if it makes sense to him, Government will make more by way of royalty / PLP, and so will the operator! In CBM, base price is approved because the government wants to protect its royalty / PLP. Higher you sell, higher will be the royalty / PLP to the government. The government has provided a formula which allows deduction for transportation and compression. Currently, we actually spend much more on compression and transportation as provided for by the government as volumes are much less. As per the formula, royalty / PLP is to be paid on the well head price approved or actual whichever is higher.

What, as per you, should be the government’s role in ensuring successful CBM operations?

The government approves the base price, which has already been done. In our case, the government has approved a base price of $6.79 / MMBTU at well head, excluding transportation and compression costs. Even if we want to sell at say $6 at well head, we would have to pay royalty / PLP on the base price approved. But if we sell at say $8 / MMBTU at well head, then we would have to pay royalty / PLP on $8 / MMBTU. So royalty / PLP has to be paid on the well head selling price or the base price whichever is higher.

We just want that the all parties should follow the contract and should not deviate from the terms and conditions of the contract. There cannot be any mid-way changes, whereby if one is successful then you change the goalpost.

If you are willing to buy imported gas (LNG / TAPI) at a much higher price, then the same price can also be afforded to domestically produced gas. The government is willing to pay much more for imported gas but not for domestic gas, despite the fact that the end-product is still the same. All this is doing is encouraging companies to invest overseas in E&P and eventually sell the same (LNG) to India. What this means is that, investment is overseas, employment generated overseas, and India pays for the same through its foreign exchange reserves! So, the government should not curtail marketing freedom in any way and let the market decide the price as per the contract.

Overlapping of coal and CBM block seems to bring about a lot of mudslinging. What are the issues and likely solutions?

The coal blocks are carved out by Ministry of Coal and given to the petroleum ministry for bidding for CBM operations. The coal ministry is involved in all processes, including road shows. Now if they want to deviate from the contract then we will take all steps to protect our interest. The CBM contracts are very clear- the government cannot give any rights for coal mining in a CBM block. CBM blocks are exclusive for CBM and that’s it! Clause 8.2 of the PSC clearly mentions the same.

Coal India Limited has so much of unexplored area. Coal can be mined anywhere, but not CBM gas, for which one needs a specific kind of coal and geology. Moreover, it presents a safety hazard and should not be allowed.

All over the world where simultaneous operations are permitted, there are two things. First, it is done prior to awarding the block so that planning can be done accordingly. Secondly, it is given to the same operator to carry out simultaneous activity so that safety issues can be addressed adequately. So, first one should take out gas and then do mining. Surely, mining cannot be done in a working field and has to be planned before you scratch the surface. You hear of explosions in China etc. in coal mining, which is caused by methane gas. What CBM does is extract the methane prior to mining so when mining takes place in the future it is much safer. Also, methane is not vented in the atmosphere which is otherwise an environmental hazard.

As far as we are concerned, the petroleum ministry is the nodal agency for executing CBM contracts. Accordingly, the petroleum ministry should handle all issues concerning CBM operations.

India has the 3rd largest coal reserves in the world. Why do you have to exploit coal from the very 33 blocks that have been awarded from blocks carved out of CIL leaseholds exclusively for CBM? Has India explored it’s all other coal reserves so far? Even if the government is keen on carrying out simultaneous activities, the same should be clearly stated in the contract at the time of bidding and not after work has commenced. This will be tantamount to changing the basic essence of the contract.

What are the other areas in which you plan to carry out CBM operations? Please throw light on your future expansion plans.

We already have been awarded a CBM block in Mannargudi in Tamil Nadu in the year 2010. However, no activity has commenced so far as we are still awaiting the environment clearance. Hopefully, the clearance should be coming anytime soon.

In addition, we have bid for ONGC’s CBM block in Raniganj. If we find some further economically viable acreage we will bid for it.

We are only going to expand in this business, be it CBM or shale gas. We will be closely looking at the shale gas policy prepared by the government and will bid for it, if feasible. The most important thing is the Policy, which should be fair and transparent, along with sound regulatory framework.

Do you plan to list in India anytime soon?

Yes, we may consider to list on the Indian stock exchange and raise capital at some point in the future. But the details are yet to be worked out as to the timing etc. It is not on the horizon at the moment.

What are your plans to expand in the retail segment?

Currently, we have seven CNG outlets in Asansol area of West Bengal in association with IOC and BPCL. We will definitely expand, but only within the same region as we supply CNG through cascades. CNG sales are only a small part of our business and majority is industrial sales to medium and small consumers.

What support do you want from the government?

The image of Indian E&P sector was the best in the world at one point. Foreign companies used to talk highly of Indian policies as well as transparency in bidding. However, now, the situation has changed for the worst. Pricing rows in India have becoming a talking point all over the world and are acting as a hindrance to entry of foreign players in the country.

According to me, policies should be made investor friendly. E&P is a high risk business. In E&P, the scrap value of an asset is nil. If no hydrocarbon is encountered all losses have to be borne by the contractor, but if gas is found, the profits are to be shared with the government. The government should look to provide more incentives to produce in India.

In addition, the government should provide import parity pricing for gas, just like for crude oil.

How do you see the CBM market in India shaping up in future?

CBM is going to remain a small portion of India’s total energy mix. But CBM production is favourable for domestic market and is also environment friendly. If explored and produced properly, CBM can contribute 5 to 10% of India’s energy mix, just like it happened in the USA. But CBM gas being low pressure gas and compressing cost of gas being fairly high, its market will remain mostly regional. But if you have a national grid like we have in USA, then CBM can be transported to distant places at lower cost.

(InfralineEnergy thanks Prashant Modi, President & 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 happening in the Indian energy sector.)