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Crude oil slump hits Indian shores

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The plunge in global oil prices may have brought cheer to consumers, but it is hurting the companies involved in oil exploration and production locally.

Cairn India, country’s second-largest private sector oil & gas explorer, has de-hired majority of its developmental oil rigs from its operating Barmer basin in Rajasthan over the past one year. A company spokesperson claimed that production is on – crossing 300 million barrels — but the developmental rigs, used for digging new wells, were de-hired as they were turning out to be too expensive in the present scenario.While senior company officials claim that de-hiring a few rigs will not halt production, experts said this shift can potentially affect oil production targets. With oil trading at an average of $45 per barrel, going down as low as $40 in the past fortnight, lowest in six-and-a-half-years, this move is seen as an exercise in hedging oil.

Cairn India, a subsidiary of Vedanta Group, owns the Barmer block that has an area of around 3,111 sq km. A key asset in the company’s portfolio, oil from the Barmer block accounted for 27% of the country’s crude oil production in the last fiscal. Oil production from this block has not only been a profitable venture but has also reduced India’s dependence on imported crude oil.

Over the past one year, at periodic intervals, Cairn India de-hired at least six developmental rigs despite years of lease remaining on the contract, incurring losses in millions of dollars for several rig suppliers. Each rig – used for drilling of the wells that contain oil – are capable of producing one new well per week. On an average these rigs – some just 6-7 years old and in prime condition – drilled an estimated 250 oil wells in a year.

India-based Quippo, and US-based Weatherford, leading companies that rent equipment for production, were directly affected. “By February 2015, all four of our rigs that were operational in the Barmer block were de-hired by Cairn India,” said Mrinal Vohra, managing director, Quippo.

Vohra attributed the decommissioning of the rigs — despite two years remaining on the lease for two of the rigs — to the low prices oil commands at the moment. Quipp stands to lose $15,000 per rig per day. Gerrit Meijvogel, country manager – Rigs India, Weatherford, concurred. “We came to India in 2013 when we were hired by Cairn India. In a way our entire budget was based on this deal.” After the rigs were de-hired, Weatherford incurred losses amounting to (on average) $1 million per month per rig.

ONGC, the country’s largest oil and gas exploratory and production company, however, claimed the fall in oil prices has not affected its production. “We are a public sector unit, and as such we are obliged to continue production irrespective of the rise and fall of oil prices,” said Ved Prakash Mahawar, director – onshore, ONGC. “Most production companies use the ‘Enhanced Oil Recovery’ (EOR) technique to extract oil. If one stops production, it is sometimes more expensive to restart the process, hence it is advisable to continue production despite the fall in the crude oil price,” he said.

At present, no developmental rigs have been contracted by Cairn India, according to industry sources. The fall in oil prices has not only affected rig contractors, but also small industries that serviced the employees on the fields. “In the past couple of weeks we have had to let go of a number of employees including service contractors like caterers and medical staff who took care of the engineers on the field in Barmer,” said Meijvogel. The steep fall in oil prices will majorly affect the price a rig will now command for future tenders. “We will have to be more competitive in our rates if we have to survive,” Meijvogel said.

“We are responsible to the general public and their consumption needs, hence we consider it a duty to continue production,” Mahawar said. He said, “In fact we have been directed to hire additional exploratory rigs to look for new and undiscovered oil fields.”

Since 1965, India’s oil demands have increased 15-fold and the country is largely dependent on oil imports to meet its domestic requirement. The central government introduced 100% foreign direct investment (FDI) in oil & gas sector to attract investment. Till 2013, ONGC accounted for 60% of the total oil output. In a recent move by the oil ministry, the Cabinet cleared the approval for the auction of 69 blocks held by ONGC and OIL India for private and foreign firms. Despite repeated attempts, officials from the Directorate General of Hydrocarbons, the regulatory body that oversees oil production, were unavailable for comments.

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