Cairn India to pay $0.1 million if it fails to meet exploration commitment in oil block

New Delhi: Mining baron Anil Agarwal’s Cairn India won a third of its total haul of 41 oil blocks in India’s maiden bid round under open acreage licensing policy by committing a minuscule exploration programme whose non-fulfilment will attract less than Rs 1 crore penalty, according to bid information available with DGH. However, company CEO Sudhir Mathur insists that Cairn has put in an offer far superior than the originator or the firm which originally wanted the block, and it will do much more than the committed work programme. Cairn India, which is now part of Vedanta Ltd, had earlier this year won 41 blocks of the 55 areas auctioned in the first bid round under the Open Acreage Licensing Policy (OALP). It was the only company to bid for all the 55 blocks on offer, much ahead of state-owned ONGC and OIL. The blocks were awarded based on the work programme or the commitment to explore and drill for oil and gas, and the percentage of hydrocarbon a company was willing to share with the government. Both these parameters had equal weightage. According to information available with the Directorate General of Hydrocarbons (DGH), the firm appeared keen to acquire only 26 blocks on which it committed to drill wells and do 3-dimensional (3D) seismic survey. [caption id=“attachment_1993503” align=“alignleft” width=“380”]  Seeking restructuring. Reuters[/caption] On a Rajasthan block, it committed to drill 16 wells while most had work programme committed of doing 2D/3D seismic running into several hundred square kilometers. But on 14 blocks it committed to do a maximum of ?50 or 60 sq km of two-dimensional (2D) seismic or less than 0.02 percent of acreage got over an exploration period of 6 years, the bid information with DGH showed. No well was committed to be drilled on any of these blocks. As per rules, a company will have to pay a cost equivalent to the committed work programme if it failed on its promise made in the bid. For Cairn, the penalty would be a maximum of $0.1 million or Rs 71 lakh for each of the 14 blocks. Industry sources said such a “ridiculously low” Cairn India to pay  $0.1 mn if it fails to meet exploration commitment in oil blocks bid tantamounts to hoarding of exploration acreage and defeating the purpose of OALP which was to quickly explore all the sedimentary basins in India. Reached for comments, Mathur however rejected all such criticism, saying “anybody could have ?the same work programme but the fact that we made a superior bid than the originator of the block shows our confidence and commitment.” Under OALP, any explorer can choose from areas presently not under exploration or production, for acquisition. The areas so listed are accumulated and then offered for bidding. The originator gets a 5 point advantage in the bidding. Mathur said Cairn was not the originator for most of these blocks and having started at a 5 point disadvantage, it went on to make a superior bid to the company that originally wanted to area or block to explore for oil and gas.

“This was an open bidding. We committed a minimum of $550 million in all the 41 blocks put together and will end up spending much more,” he said. “Our work programme was 50 percent superior to the second highest bidder.”

He also rejected criticism that the company made those bids only to help the government achieve the target of getting bids for all the 55 blocks. “We have to answer to our board and shareholders who will eventually ask why are we blowing up money if we weren’t interest or confident in an area. It is going to hurt us if we mindlessly bid,” he said, adding the work programme was based on prospectivity of the block and previously available data. Under OALP-I, Oil and Natural Gas Corp (ONGC) – the country’s largest oil and gas producer – put in bids for 37 blocks and won two of them when bids were awarded in August this year. Oil India Ltd (OIL) won 9 out of 22 blocks it had bid for. The government had in July last year allowed companies to carve out blocks of their choice, with a view to bringing around 2.8 million sq km of unexplored area in the country under exploration. Under this policy, companies are allowed to put in an expression of interest (EoI) for prospecting of oil and gas in an area that is currently not under any production or exploration licence. The EoIs can be put in any time of the year, but are accumulated twice annually. The blocks or areas that receive EoIs at the end of a cycle are put up for auction with the originator or the firm that originally selected the area getting a five-mark advantage. The 55 blocks offered in OALP-I have a total area of 59,282 sq km. This compares to around 1,02,000 sq km that is currently under exploration.

Blocks are awarded to the company which offers the highest share of oil and gas to the government as well as commits to do the maximum exploration work by way of shooting 2D and 3D seismic survey and drilling exploration wells.

Increased exploration will lead to more oil and gas production, helping the world’s third largest oil importer to cut import dependence. Prime Minister Narendra Modi has set a target of cutting the country’s oil import bill by 10 per cent to 67 percent by 2022 and to half by 2030. India currently imports 81 percent of its oil needs.