KG-D6 projections-I: Expect no upturn in production for the next three years

May 1The KG D-6 block has been at the centre of attention for a long time now and no one really knows what is going on. Output has come down to mere 15 mmscmd and it is not known by how much more it will fall before it starts going up. The RIL-BP combine is unwilling to provide any information nor is the government very forthcoming. 
8All that everyone is therefore left to do is speculate. 
In this context, an unsigned background note in circulation in the petroleum ministry, that the website has had access to, claims that the average production in the D-6 block will hover around 15 mmscmd for four years, until 2016-17.

8Subsequently subsequently however the note draws up a rosy picture. 
8A $5 billion investment push by BP and RIL during the intervening years brings in dividends and output from new discoveries -- where 4 tcf of gas is supposedly locked up -- within the D-6 block jumps up to 60 mmscmd, taking the total up to 75 mmscmd.
8This is of course the best case scenario that neither BP or RIL is willing to couch for. 
8Nevertheless, some hard calculations are now being made within the government using these figures as benchmarks.
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KG-D6 projections-II: $8/mmbtu is assumed as the price of gas

May 1The background paper assumes that the Rangarajan Committee's recommendations will be accepted and the price of gas will go up from the current $4.2/mmbtu to $8/mmbtu from 2014-15 onwards.
8It is assumed that the price will remain at $8 for the next eight years up to 2021-22.
8Under this condition, a set of calculations have made that show project revenue for the next three three years -- at 15 mmscmd of gas -- at $1,588 million per year.
8At the current price of $4.2/mmbtu the revenue would amount to $821 million for 2013-14. 
8It is also assumed that a capex of $5 billion will be spent by the BP-RIL duo over a three year period --  sum of $2.5 billion in 2014-15 followed by $1.25 billion each in 2015-16 and 2016-17 -- to produce gas from the block. 
8The project revenue at a gas price of $8/mmbtu is expected to be about $7.94 billion during the year 2017-18, when output is assumed to jump to 75 mmscmd. 
8But come 2019-20, the model suggests an end to production from existing discoveries, and output from the new discoveries yielding a total of 60 mmscmd is taken into account. 
8At a gas price of $8/mmbtu the project revenue during the year is estimated to be about $6.35 billion.
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KG-D6 projections-III: Total project revenue estimated to be about $49 billion

May 1As per the model proposed, the total remaining project life cycle revenue from this model works out to be about $39 billion. After factoring in the historical revenues of about $10 billion which has been accrued from the project till date during its four years on production, the total project revenue is estimated to be about $49 billion.
8The project revenue will be split up into $26.3 billion by way of cost recovery,$3.7 billion as royalties and  $9 billion as profit petroleum.  
8Of the total profit petroleum of $9 billion, $7.9 billion will go to the contractor comprising of RIL-BP-Niko consortium while $1.1 billion will be the government's take.
8As per the model, the block is expected to be in production for the next nine years. Considering a royalty rate of 5% for three year and 10% for the remaining six years the cumulative royalty is estimated to be about $3.7 billion. 
8Thus the government's take based on Pre-Tax Investment Multiple (PTIM), including royalty and its share of profit petroleum adds up to $4.8 billion.
8For hypothetical purposes, if 33% corporate tax rate is included, ignoring all offsets available as per existing tax laws, then the government's take will be an additional $3 billion.
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KG-D6 projections-IV: Assumptions of the model

May 1The model submitted to the petroleum ministry assumes the following:
8Overall project life of 13 years has been assumed. Out of this, project has been in operation for four financial years. It has been attempted to incorporate four years of historical data into the model.
8The current set of discoveries which are already under exploitation have been assumed to have a life of nine years. These are modeled to produce at the rate of 15 mmscmd for another five years, including the current fiscal.
8The new set of discoveries for which capex outlay has been planned from next fiscal onwards, are assumed to yield a life of just five years. These are modeled to produce at the rate of 60 mmscmd from 9th year of the project life cycle. This is based on a reserve estimate of approximately ~ 4.0 TCF monetized over a period of five years.
8A capex outlay of $5 billion has been assumed starting from next year, 2014-15.
Comment: The background papers makes out a case for raising the price of gas to $8/mmbtu but then sustaining this rate for the subsequent years. The argument is that there is enough money to be made at this price of gas. However, according to RIL-BP sources, the gas output of 60 mmscmd from the new discoveries in the D-6 block is too optimistic, based on 4 tcf of gas. Clearly, the BP-RIL combine is looking for a higher price of gas, of around $10-$12/mmbtu. This will ensure a higher take home for the duo. 
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KG-D6 projections-V: Details of calculations made

May 1For reference purposes, the website carries here the following set of annual calculations for the period 2013-14 to 2021-22 made in the background paper:
8Production cost
8Government of India's share of Profit Petroleum (GOIPP)
8Investment Multiple (IM)
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