On Slippery Grounds

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[Long View: Bigger E&amp;P players look at oil prices on a 20 - year horizon. Not everybody is enthused by the crashing international crude prices. As prices dip below the strategically-significant $60 per barrel mark, recent investments made in exploration and production (E&amp;P) activities in India could come under a cloud. Investments in E&amp;P have gained momentum since 2006, while crude prices touched a high of $147 earlier this year. The present situation, coupled with the global liquidity crunch faced by several oil downstream PSU companies, may push E&amp;P activities of new entrants on the back burner. Says Shri Mathur, president and CEO of Adani Welspun, &ldquo;While the existing blocks may continue to be explored, there is every possibility of a slowdown in future E&amp;P projects.&rdquo; Oil marketing companies that have committed huge funds for E&amp;P could bear the brunt. Hindustan Petroleum Corporation (HPCL), which set up a new E&amp;P division last year, already has a loss of over Rs 36 crore in the past two years under E&amp;P in its books. Bharat Petroleum Corporation (BPCL), which has planned E&amp;P investments of Rs 6,000 crore over the next two years, has operating losses of Rs 80 crore in the E&amp;P segment. Mathur believes that the bigger E&amp;P players will continue with their activities as they look at oil prices on a 20-year horizon. So explorers such as ONGC and Reliance Industries (RIL) may pull along. ONGC with 11 discoveries in oil and 17 in gas in its kitty has announced an investment of Rs 71,000 crore for the 11th five-year plan period. RIL had announced an investment of Rs 25,000 crore prior to the KG basin discovery and has spent Rs 13,400 crore so far. RIL has plans to drill 100 wells. It has already deployed five rigs and also contracted another four rigs. Till date, RIL has made 42 discoveries in its domestic acreage from 66 exploration wells drilled. But even for the bigger players, the rising cost of exploration could pose a tough challenge. The cost of drilling at sea and mining on ground has gone up considerably since 2007 due to shortage of rigs and other equipment. One estimate says the cost of exploration today just about equals the price of crude at $60 per barrel. According to oil analyst Harshad Borawake of Motilal Oswal, most of the future earnings of Indian companies from E&amp;P activities are being estimated assuming that price of Brent crude will sustain at $90/bbl in 2009-10 and at $75/bbl in the long term for profitability. &ldquo;Rate of recovery (RR) from existing and new wells would be crucial for long-term investment plans,&rdquo; says M.R. Pasrija, chairman of Oil India. He adds that OIL has a higher RR among PSUs at over 65 per cent. In the seventh round of NELP in April, 96 firms submitted 181 bids for 45 exploration blocks. If crude oil prices remain at current levels, this enthusiasm of companies could dwindle and the government&rsquo;s hopes of raising domestic crude oil production by over 30 per cent in the next five years could remain a distant dream. s(dot)menon(at)abp(do)in (Businessworld Issue 04-10 Nov 2008) &nbsp;