Drilling of two wells in B-80 block has completed, says HOEC Managing Director P Elango

P Elango, Managing Director, HOEC, talks about increasing crude prices & their impact on HOEC, B-80 block, Hardy Exploration & Production as well as Kharsang Oil Field and CapEx during a candid chat with Swati Khandelwal, Zee Business. Edited Excerpts:  

Q: Crude prices have reached around $70 per barrel. What impact will it have and what are your expectations related to crude prices?  

A: Really what happened is in January is Russia and Saudi Arabia did a very surprise announcement of cutting their production by one million barrels during February and March. This action which is taken by Saudi Arabia almost after several years without consulting OPEC sent a very strong signal in the market after which you saw the oil prices rallying upwards. The other factors that are happening are before the COVID hit the world an average of 100 million barrel of oil demand and supply was there in the global system. Post the pandemic about 8-10 million barrels of oil demand declined sharply and the industry has never seen such a sharp decline in demand globally. Now, why the rebound is happening, but it is happening at a very uneven pace in the different region, for example, China didn’t lose much of demand and India came back very strongly as the lockdown opened up. And Europe is still struggling because the market is expecting a scenario in which as the demand for oil and petroleum products recover in 2022, the market expects that the current supply to shrink marginally and particularly whenever you put additional 1 million barrels into the market, the price will go down. And, if you take out a million barrels of oil from the global market the prices will shoot up. This is what is happening in the market. General predictions across the analyst's world are for oil prices to get stronger in the latter part of this year and touch pretty higher levels in 2022 as the whole world demand comes back. What the pandemic has really taught is the world’s dependence on oil and petroleum products only becomes stronger than ever as people prefer a personal mode of transportation rather than using the public mode of transportation. That is the overall outlook. Specifically, at HOEC, we really don’t look at the oil price movement, but we focus on how we improve the volume of production and how do we keep down our cost always. So, our focus has always in on how to keep up the volumes and how to keep down the prices and our efforts and focus always remains in that direction.  

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Q: You have said that rising crude oil prices is positive for HOEC and the rally of crude is visible since November 2020 and we have not seen its impact on your P&L. Is it a lag and going forward, it will be visible in your books, if yes, then how it will impact your book positively? 

A: If you look at our current portfolio of production roughly 85-90% of our production comes from gas and 10-15% comes from oil, currently. But as you know, we are developing the Discovered Small Fields (DSF) called B-80 in Mumbai high and this is the first DSF field that will come into production. We have completed 75% of the project and a balance of 25% will be completed by end of April. So, our target is to bring up the production from B-80 in the next quarter, i.e. April-June quarter, we will bring the production to the market. When we do that, what happens is currently at a gross level, we are producing about 9,000 barrels of oil but B-80 alone will add 8,000 barrels of oil. Therefore, our gross production will go up from 9,000 barrels to 17,000 barrels of oil. Out of the gross production in B-80, our shares are 60%, overall, our net production of oil will increase, and the market is aware of this project and we have kept the market very updated about all the activities before there is an expectation that oil price movement will have a positive impact on the company. Just to give an idea, every dollar increase in oil price would help us with about Rs 8 crore in our EBITDA straight from the B-80 block, alone. So, we are moving towards higher exposure to oil than we were last year, so we don’t see it in last year balance sheet. But going forward, next year onwards, we will be a significant oil producer in the country.  

Q: You talked about the B-80 block. So, to give a sense of how much drilling has been completed in it and by when it will be fully operational? Do you think that the timelines that you provided earlier are continuing? 

A: Yes, we are still on track with the project. We have already drilled two wells and they have completed the subsea, which means the production is stern is also installed subsea. We have tested these wells. Both the wells together produce 8,000 barrels of oil per day out of that about 5,500 barrels of oil and the balance constitute about 50 million cubic feet of gas. What we are planning to do is that these wells are already drilled, and we have to process these oil & gas. We have bought an offshore ridge and converted that into what is called a mobile offshore processing unit (MOPU). This conversion was done in Sharjah in the Middle East and the Mobile Off-shore Processing Unit (MOPU) has already arrived in India. Whatever fuel that we produce, we have two sets of a pipeline of which one is the gas pipeline and the other is the oil pipeline, to connect the well to the Mobile Off-shore Processing Unit (MOPU). Then from the MOPU, the gas pipeline will tap into the ONGC line and the oil pipeline will go to a Floating Storage & Offloading (FSO) unit through a Single Point Mooring system. So, for all this, whatever the project material is required has already been mobilized. The MOPU has already arrived in India. The insulation vessel, which will lay this flexible pipeline. In the pipeline, there are two types (i) rigid pipeline and (ii) flexible pipeline. The flexible pipeline is easy to make but you need a specialist barge to do that, and that vessel has also been mobilized to India. So, we have got everything arranged now. We plan to complete the remaining activities, which is about 45-60 days, and that activity has already commenced. So, we are confident that it will be completed pre-monsoon. Typically, the monsoon happens around mid-of-May and our target is to complete it by April-end.  

Q: Update us about the case on Hardy Exploration & Production as well as Kharsang Oil Field that is in court? 

A: In Kharsang there is no other court case is pending. We had bid under the IDC process. We had bid for the stake of the JEKPL stake but did not win that bid. So, the competitor has won the bid. So, as far as Kharsang is concerned, no legal cases are outstanding. As you know that already we have a 25% direct stake in Kharsang and we have another 5% indirect stake through the operating company which we own 50%. So, overall, we have a 30% stake in the Kharsang field, and the field is currently producing about 600 barrels of oil. With oil prices increasing, profitability is also going up. That is on Kharsang. As far as Hardy court arbitration case is concerned then the arbitration order was against us. It was not only against HOEC, but it was against all the three non-operators, which is ONGC, HOEC and Tata Petrodyne. The award was in the favour of Hardy which is an operator. Now subsequently, we have filed an appeal against that award in the Malaysian court and the court has accepted the appeal and the case will be heard, what they call case management process, which is going on. Right now, the case is in the Malaysian High Court.  

Q: What CapEx you have done in FY21 and what it will be in the future? At the same time, can you provide a ballpark idea about the exploration that will be done? 

A: Overall, our strategy is always to focus on what we call discovered resources. In oil and gas, we have exploration, development and production. These are the main three set of value chain activities. Our strategy is to focus on discovered resources and quickly develop them so that we can increase production. So, if we look at our numbers than in 2015, we were producing around 500 barrels of oil equivalent per day and in the last quarter, we did about 9000 barrels of oil and oil equivalent gas, which means we have developed the projects in a fast-track manner to increase the production. With B—80 coming on stream, these 9000 barrels of oil equivalent gross production will go up to 17,000 barrels of oil equivalent. So, our focus is not really on exploration but development. On the CapEx, what we have done is that we have already chosen a strategy to focus on developing one asset at a time, as you know we started with the Dirok and have completed it. Dirok is doing extremely well. Then we put some money in PY-1 and increased the production, of course, we faced some challenges in PY-1. In the last couple of years, our focus has been on fast-tracking developing on B-80. The government has given us years to develop this field but our target originally was of doing it in two years, but it will be completed in three years’ period, we are one year ahead of the target. So, overall, at the joint venture level, we have invested about 45 million $ CapEx in drilling the wells and we will be spending another 15 million $ CapEx in all other facilities. HOEC at the group level, we have also invested in the MOPU, our subsidiary company has invested in the MOPU. And, we have also bought this FSO, which is floating storage, which can store almost six months of oil production. So, we will have no problem during the monsoon period because we can produce and store and sell it as we wish as such.   

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