Drilling ahead. HOEC awaits a big pump up

For investors of Hindustan Oil Exploration Company (HOEC), it has been a long wait to see the company live up to its potential. The wait might be coming to an end now.

The company produces a million barrels of oil and oil-equivalent-gas as of today. A three-year, ₹1,000-crore investment programme has just begun — to triple production.

Looking at the activities underway in its five hydrocarbon assets, one gets an impression that these efforts are to converge to fruition in a 2-3-year time frame.

HOEC was set up in 1983 by HT Parekh, the man who founded the HDFC group. Over time, HOEC saw many changes in its promoters, and in 2015, two oil industry veterans — Pandarinathan Elango and Ramasamy Jeevanandam, friends and colleagues from their early days in ONGC —walked into the company as promoters and took over the reins.

Ramasamy Jeevanandam, MD, HOEC

Elango hung up his boots in September 2023 and Jeevanandam took his place as the Managing Director. For years, Elango had been the public face of the company, while the CFO, Jeevanandam, kept himself away from the limelight. In a chat with businessline, he explained why the next 2-3 years, when many programmes mature, would be epochal for the company.

Set to scale up

HOEC’s five assets are: Dirok in Assam, B80 in Bombay Offshore, Kharsang in Arunachal Pradesh, Cambay in Gujarat and PY-1 in Bay of Bengal.

The story of each has just begun. Dirok and B-80 are in production, but neither is producing to its full potential. Dirok is now producing about 23 million cubic feet (mcft) of gas, less than half its potential from the existing wells.

Lack of demand in the region is holding back production. HOEC is waiting for the PSU, Indradhanush Gas Grid Ltd, to complete the project of laying a 1,656 km pipeline linking Northeast to the national gas grid. The completion of the pipeline is two years away. “By 2026-27, all our gas can go to the national grid,” Jeevanandam told businessline.

Meanwhile, HOEC is preparing to raise production from Dirok. Wells Dirok-1, 2 and 4 are being worked over (repaired); once this is over, the plan is to drill two more producing wells, to raise production to 70 million cubic feet.

B-80, a Bombay High oil and gas field that HOEC won in a 2016 auction of ‘discovered small fields’, has been facing some teething problem or the other. When one gets solved, another pops up, but the company believes it is a matter of time before both the wells there — D1 and D2 — will start full production. Today, D1 is not producing because of clogged holes at the bottom of the well. Baker Hughes of the US has been hired to de-clog it.

B-80 can produce 15 mcft of gas and 4,000 barrels of oil per day, but in Oct-Dec 2023, its production averaged 5.7 mcft of gas and 1,044 barrels of oil. Three more wells are to be drilled in 2026-27.

PY-1 in the Bay of Bengal is a legacy field that HOEC has had in its portfolio for years. All the infrastructure, built over the years with an investment of $383 million, is in place — enough to handle production of 55 mcft of gas, but the current production is barely a million cubic feet. Drilling more wells can raise this dramatically, but that has proved to be a challenge — unlike in other places, you must drill through hard rock here.

It is a tough challenge, but not insurmountable. HOEC had been putting its money on B-80, which meant that PY-1 had to wait but now B-80 is done; the focus has shifted to the Bay of Bengal. The plan is to spend another $50 million over the next two years to drill three wells.

In May 2023, the ratings agency, India Ratings, had said that given the large capex already incurred “any output from PY-1 would have a high impact on profitability”, but had cautioned that “the production from the asset could be some distance away.” The company has said that a “third party expert” in London was reviewing the data; “if everything goes as per plan” the first well could be drilled in April 2025.

In Kharsang, HOEC plans to drill 15 wells, including one for exploration. In the three fields in Cambay, Gujarat, it will pump up production from 75 barrels of oil to 300, before drilling three more wells.

In 2022-23, HOEC earned revenues of ₹567 crore and net profit of ₹197 crore, against ₹167 crore and ₹19 crore respectively in the previous year. In the first three quarters of the current year, it reported revenues of ₹475 crore (84 per cent of full year 2022-23) and net profit of ₹163 crore.

HOEC has not paid a dividend since 2010 — the ₹1,000 crore investment is all from internal generation, no loans. Such an investment programme should mean something — answering a question about internal rate of return (IRR), Jeevanandam told businessline that it would “not do any project less than 21 per cent, post-tax”.