New Delhi: Reliance Industries has drilled two new wells in its KG-D6 gas block, but both have turned out to be almost dry, with very little hydrocarbon presence, vindicating the company's stand that indiscriminate drilling will not help solve the problem of falling gas output.

 "The wells were disappointing, showing presence of very little gas. It is simply not economical to produce gas from those wells," a source privy to the development said.

In July, RIL completed drilling of two wells to take the number of producer or development wells in the Dhirubhai 1 and 3 (D1 and D3) gas fields of the eastern offshore KG-D6 block to 20. It, however, decided not to make a further investment to connect them to production facilities and transport the gas by pipeline to its onshore plant.

"The two wells will not even yield 1 million standard cubic metres per day," the source said.

Since last year, RIL has witnessed a drastic drop in reservoir pressure and water ingress in its gas producing wells, leading to a drop in output from 61 million standard cubic metres per day to less than 44 mmscmd, instead of rising as planned to over 70 mmscmd.

The firms wants to carry out more geological and reservoir studies and induct better technology before drilling more wells, but the Oil Ministry, on the advice of its technical arm, the DGH, has ordered RIL to drill 11 wells by March next year.

RIL's opposition to indiscriminate drilling has led to the Oil Ministry contemplating the disallowance of cost-recovery of a third of the USD 5.69 billion investment that the company has already incurred on field development.

Sources said RIL drilled one of the two wells over the main reservoir/channel of D1 and D3 and the other outside, but both gave disappointing results.

The D1 and D3 gas fields currently produce 37.1 mmscmd of gas and another 7.4 mmscmd comes from the MA oil field in the same block.

Of the 18 wells drilled, completed and connected to the production system in the KG-DWN-98/3 (or KG-D6) block, only 16 are currently producing, as RIL had to shutdown two because of high water ingress, they said.
Sources said the ministry and DGH are upset with RIL because the billionaire Mukesh Ambani-led firm has not adhered to its commitment to drill 22 wells by April, 2011, as laid out in the 2006 field development plan for D1 and D3.

They feel the main reason for the fall in output is this unmet drilling commitment, whereas RIL has been trying since early this year to explain that more wells will not lead to any significant increase in production.

Output, according to the company, will rise only when new pools or reservoirs of gas are brought into production. This can happen only when geology is studied afresh with deep sea exploration specialist BP Plc, which has taken a 30 per cent stake in KG-D6.

RIL has so far spent USD 5.694 billion on the two fields and has recovered USD 5.258 billion from the sale of gas produced.

However, the Oil Ministry wants to limit cost recovery in the block in proportion to the slippage in output vis-à-vis the stipulated timeline, reducing RIL's entitlement to USD 3.405 billion.

RIL, however, feels such a move would be illegal, as the Production Sharing Contract (PSC) does not have any such provision and the USD 1.85 billion already recovered by RIL cannot be reversed.

"If the PSC were indeed to be re-written to link cost recovery to levels of production, it would also have to include provisions for allowing the contractor (RIL) to recover costs in excess of his investment in case he were to achieve a rate of production higher than that estimated at the time of capex approval," RIL Senior Vice-President (Commercial) B Ganguly wrote to the ministry on September 16.

RIL said as per the PSC, all costs and production numbers provided in the field development plan (like the one approved for KG-D6 in 2006) are only estimates based on the understanding of the reservoir and the market prices at any given point of time and "such estimates cannot be construed as constituting a commitment under the PSC."

"There is no provision under the PSC that can limit cost-recovery to either production levels achieved by a contractor or to the extent that facilities are utilised under a development plan at any given point of time," RIL wrote.

(Agencies)