At a time when Coalgate is attracting all the attention, another instance of bungling in natural resource management has gone relatively unnoticed — India’s efforts at commercial exploitation of coal-bed methane (CBM).
Commercial exploitation of CBM began in 1995 when one block was awarded to a foreign operator. By 2001, the country started auctioning CBM assets, armed with an elaborate policy. Compared to the oil and gas sector, the CBM policy is relatively more investor-friendly, both in fiscal terms as well as contractual obligations. With a total of 33 blocks distributed so far, the policy has been successful in attracting substantial investments in CBM exploration. Investors’ interest was most pronounced in the third round of bidding (2006), when 54 bids were received for 10 blocks.
Yet, as in 2012-13, the country’s total methane production stands at approximately 0.32 million standard cubic m a day (mmscmd), enough to generate approximately 80 MW of power, meeting the energy needs of a mere 40,000 urban middle-class households having one air conditioner each.
To put it straight, India’s aspirations to establish CBM as a viable energy source remain more in the realm of an idea than a reality.
ONGC’s failure
And, unless there is a dramatic discovery of reserves, which does not appear very likely, there is little chance that CBM production would reach the promised 7.4 mmscmd a day in 2013-14, as was estimated by the Directorate General of Hydrocarbons (DGH) two years ago.
Nearly 90 per cent of this minuscule commercial methane production comes from one company, Great Eastern Energy Corporation, followed by Essar Oil and ONGC.
The State-owned exploration and production (E&P) major — which bagged more than half of the 17 blocks awarded till 2004 — is often credited with enhancing CBM potential in the country, and criticised for failing to live up to expectations.
According to the latest estimates, ONGC spent Rs 600 crore on its pruned asset portfolio of four blocks for net revenue of Rs 3 crore from one producing well. The failure of the company also makes one doubtful if India has as much CBM reserves as is often claimed by the Government.
The company failed to establish viable reserves in five blocks, bagged in the second round (2003), which were eventually relinquished.
Interestingly, while the regulator announces a huge prognostic reserve of 4.6 trillion cubic m of methane gas in the country’s vast coal fields, insiders in the CBM exploration sector allege a serious mismatch between such estimates and the reality.
Overestimation
While the DGH Web site suggests that only three blocks have been relinquished till May 2010, unofficial estimates point out that operators of at least one-third of the CBM blocks (out of 33) have either relinquished their interests, or have approached the regulator to relinquish interests, till date.
Insiders say operators in seven out of eight blocks awarded in the second round of bidding and four out of 10 blocks in the much-hyped third round (2006) have reportedly failed to establish viable reserves and preferred to forgo assets, after completion of phase-1 of the work programme.
The general observation is that India’s CBM potential is largely restricted to eight blocks, three of which were awarded on nomination basis, and the rest in the first round of bidding. In a recent energy conference in Kolkata, the chief executive of a foreign player, Dart Energy, claimed that the actual gas-in-place in CBM assets in India falls way below DGH estimates, in blocks auctioned from the second round onwards. The commercial reserves are naturally even lower.
According to the presentation, while DGH claims presence of a total of 1,790 billion cubic metres (BCM) of gas, actual in-place reserve is around 992 BCM. The actual reserve ratios, he claims, are as low as 30 per cent of DGH estimates, in the 10 blocks awarded in the third bidding round, which has witnessed maximum investor interest so far.
The company, in its earlier avatar as Arrow Energy, relinquished three blocks, awarded in the third round. Of this, one block in Chhattisgarh was found to have only 6 BCM gas or 5 per cent of the DGH estimation of 118 BCM.
Disturbing signals
Leaving aside claims on reserves, which have a direct bearing on the prospect of striking gas, one can discern a drop in investors’ interest in the last (fourth) round of bidding opened in 2009.
As against 54 bids received in the third round, the fourth round attracted just half, or 27 bids. Also noteworthy is the exit of a major player in the global energy sector, which failed in its CBM foray in India. Industry insiders blame the lack of quality assets vis-a-vis over-hyping of CBM potential, as a major spoiler of the business environment.
A number of assets were awarded against promises to share up to 65 per cent of the production with the Government.
It is alleged that such high-payment obligations do not compensate the high risks involved in CBM development. Nevertheless, the bidders were seemingly taken in by the regulator’s projection of reserves. Such a high commitment to production-sharing is considered risky in the E&P sector.
While the Government seems keen to invite competition and pave the way for maximum revenue generation, overexploitation may harm the long-term strategy to establish CBM as a cheap and viable solution to the nation’s growing energy needs.
A review of the strategy may benefit the eastern region in particular, which has most of the coal resources in the country.