Stepping on the gas

No one really expected it to be the first. After all, it was a small and unknown company in the race to develop a relatively new source of energy. With oil and gas industry bigwigs like ONGC, Reliance Industries and Essar Oil in the fray, it came as a complete surprise in 2007 when Great Eastern Energy (GEE) became India’s first company to start commercial production of coal bed methane (CBM). More than four years later, it is still the only company that’s commercially producing natural gas trapped between coal seams. What happened to the other awardees of CBM exploration rights? 

Reliance Industries (RIL) was awarded the Sohagpur (East & West) blocks in Madhya Pradesh back when CBM was first auctioned in 2001. Like GEE, RIL announced its CBM discovery in 2005 but the industry behemoth is yet to begin commercial production. In fact, at its 2005 annual general meeting, RIL chairman Mukesh Ambani said he hoped to begin commercial production by 2009-10 but he is looking at 2013 now. Essar Oil, which won the Raniganj CMB East block in West Bengal round one auction, is still making “progress towards full commercial production”. How did GEE get so far ahead of its competitors? 

Pioneer explorer 

India’s total CBM reserves are estimated at 92 trillion cubic feet (tcf). Of this, 8.9 tcf has been established. CBM gas production from the 33 CBM blocks awarded till date is expected to touch 7 million metric standard cubic metres per day (mmscmd) over the next three to four years, and stands at under 300,000 scmd for now. GEE’s tryst with natural gas goes back almost two decades. “Power was too regulated and we did not have the money to get into traditional oil and gas exploration,” explains YK Modi, chairman. “CBM seemed like a good option.” A partnership with the US-based McKinsey Methane brought in the necessary know-how and, in 1993, GEE tied up with Coal India. “In 1994, we paid Coal India ₹1 crore to let us explore their fields and if we discovered gas, we had to pay them royalty, too,” Modi says. 

In 2001, GEE signed a PSC (production sharing contract) with the Ministry of O&G for exploring the Raniganj (West) CBM block, spread over an area of 210 sq km with 2 tcf of reserves. Of this, 1.2 tcf has been established as recoverable. The following year, it started a production programme with three pilot wells and announced its discovery in 2005. Currently, it has dug 104 wells, of which 86 are operational and produce close to 220,000 scmd.In comparison, Essar Oil produces only 22,000 scmd. “We are awaiting statutory approvals before commencing commercial production,” avers Ifty Nasir, CEO, exploration and production, Essar Energy. “We will ramp up production soon after.”   

Small is better

Modi says that continuous involvement and focus are the key to GEE’s success. He points out that it is independent companies like his, not diversified groups, which have succeeded in the CBM business worldwide. For a company like Reliance with multi-billion operations, developing a CBM field with an investment of ₹400-500 crore is a lot of hassle for lower returns. “It is not like striking oil where production begins immediately,” he points out. A CBM well could start producing from day one but could also take two months or even up to nine months to do so. It also depends on how much water you are able to suck out. “We have to be involved on a day-to-day basis. Unlike traditional oil and gas, where you dig 15-16 wells for the entire field, we dig 300 wells,” Modi adds. Also, the size of the business could mean that a large company may not necessarily put its best people on the job. “CBM is our core business and it is important that we make it successful,” he says. 

The constant focus ensured that GEE dedicated itself to finding solutions. For starters, working in an open space was a challenge. “We had to guard equipment worth millions of dollars, ensure safety for people and tackle local issues and politics,” says Modi. West Bengal never had gas and there were no regulations to govern it. When GEE asked permission for drilling from the local bureaucrat, he did not know what to do. Obtaining the various permits was a hassle. “The explosives licence for all of India is given from Nagpur,” Modi says. “We had to figure these things out. Companies that have entered the business later now need to go through this learning curve.”

With no precedence of CBM drilling in India, all technology issues had to be solved from scratch. They were expensive to boot. “We use only American and Australian technologies as they are the best in the CBM field,” says Modi. For just one American expert, GEE pays up to $2,000 a day, money other companies often don’t want to spend. Coal’s heterogeneous nature is a problem, too. A company can find gas at one spot and discover no gas just 500 metres away.  “We dug 30-40 wells along the north of the Damodar River, but the coal block absolutely changed towards the south of it,” says Modi, adding that GEE has now developed the expertise to understand these factors.  

The company is now able to dig a well in just 10-12 days as compared to the two or three months it took earlier. Also, it has learnt the pattern for digging wells to maximise gas flows in its coal field type. Now, GEE’s focus is on minimising costs and speeding up operations. The company recently bought another rig for ₹50 crore, with which it can dig four wells in a month instead of two and still save money. A hired rig charges rentals of  ₹10-12 lakh for every day it is used — even idle time is charged at ₹2-3 lakh a day. GEE has plans to dig another 200 wells, so the rig will pay for itself. 

Pipe dreams

Reaching the consumer and creating demand have also proved a challenge. Most CBM blocks in the country, whether in Madhya Pradesh, Odisha, West Bengal, Andhra Pradesh or Jharkhand, are in places where there are no existing pipeline networks. Most trunk pipelines are in West India and irrelevant to CBM producers. “The only way for a CBM producer to sell gas is to invest its own money into developing a network,” says Arvind Mahajan, partner, KPMG India. GEE has invested close to ₹150 crore for digging over 77 km of pipeline to reach its consumers. A CBM field takes an average of seven or eight years to hit peak production and remains active for nearly 30 years. No CBM producer can ensure there’s enough gas flow before putting in seven or eight years of work, Modi remarks, adding that his own pipeline carries only 7% of its capacity at present.  

In areas near Raniganj, industries had no prior experience of using gas and were reluctant to migrate to a new fuel. GEE had to educate the customer. “We went to a biscuit manufacturer who used furnace oil,” Modi recalls. “His factory was filthy. We told him that we would make sure he did not lose money.” The same factory is clean today, and finishes production in just 15 days as compared to the month it took before. “The burners do not have to be cleaned repeatedly. It does not need to stock liquid fuel and money is saved on inventory.” Slowly, as word spread, customers converted to CBM. 

At present, all of GEE’s gas is snapped up by local industries in Durgapur and the nearby areas in Asansol. The company has also signed franchisee agreements with Indian Oil and Bharat Petroleum for the supply of compressed natural gas or CNG as vehicle fuel.  

Fuel of the future 

More production has meant more sales. For the six months ended September 30, 2011, GEE grossed ₹57 crore, an 89% increase over the same period in 2010. “We had a net profit of ₹10 crore,” says Modi. The company has invested close to ₹1,000 crore in the project. This primarily comes from a 2005 listing on UK-based AIM (₹200 crore), a loan from State Bank of India (₹350 crore), an ECB raised via ICICI Bahrain (₹220 crore) and internal accruals. Over the next five years, GEE will invest close to ₹2,000 crore, which will be funded by a mix of internal accruals, debt and a public issue. A bulk of the capex will go toward drilling and developing fields (it costs about ₹6 crore to drill a well). Modi adds that he will bid for more blocks as and when the government offers them. ONGC, he says, has approached GEE to develop its unexplored blocks. By FY19, it expects to hit a peak production of 3 mmscmd. 

Meanwhile, in 2010, the company acquired a licence for the Mannargudi CBM block in Tamil Nadu. The block covers 691 sq km and has an effective operating area of 667 sq km (with probable reserves of 0.98 tcf). Operations are expected to start in June 2012. “The second drilling and fracturing units should support strong production, while the start of work on Mannargudi is expected to generate further positive newsflow,” says UK-based Investor Chronicle while commenting on GEE’s GDRs as being “good value”. GEE moved its GDRs from AIM to the London Stock Exchange in 2010. It also plans to list on the Indian bourses soon. For now, GEE remains an example of the potential for CBM gas in India.