India - Krishna - Godavari Petroleum Exploration Project

Document of The World Bank FOR OFFICIAL USE ONLY Repat No. 9170 PROJECT COMPLETION,REPORT INDIA KRISHNA-GODAVARI PETROLEUM EXPLORATION PROJECT (LOAN 2205-IN) NOVEMBER 30, 1990 Transport and Energy Operations Country Department IV Asia Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Rupee (Rs) At Appraisal US$1.0 = Rs 9.0 At Completion (1989) USSl.O Rs 15.0 MEASURES AND EQUIVALENTS 1 Metric Ton (mt) = 1,000 Kilograms (kg) 1 Metric Ton (mt) = 2,204 Pounds (llb) 1 Meter = 3.28 Feet 1 Kilometer (km) = 0.62 Miles 1 Cubic Meter (m3) = 35.3 Cubic Feet (cft) 1 Barrel (Bbl) = 0. 159 Cubic Meter 1 Metric Ton of Oil (390 API) = 7.60 Barrels 1 Normal Cubic Meter (Nm3) 2 33.42 Standard Cubic Feet of Natural Gas 1 Kilocalorie (kcal) = 3.97 British Thermal Units (Btu) MW 2 1,000 kilowatts kWh 2 kilowatt-hour BBL/d = Barrels per day MMCFD = Million Cubic Feet per Day TCF = Trillion Cubic Feet toe - Ton of Oil Equivalent tpy = Ton per year PRINCIPAL ABBREVIATIONS AND ACRONYMS USED BOP - Bombay Offshore Project D-P - Dynamically Positioned GOI - Government of India IOC - Indian Oil Corporation LPG - Liquefied Petroleum Gas OIDB - Oil Industry Development Board OIL - Oil India Limited ONGC - Oil and Natural Gas Commission WGEP - Working Group on Energy Policy FISCAL YEAR April 1 - March 31  TNE WORLD SANK FOR OFFMCIAL USE ONL WSS10on.OC 20433 U.S A Office of Direotor-Oeral Operations 3lvauaeti November 30, 1990 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on India Krishna-Godavari Petroleum Exploration Proiect (Loan 2205-IN) Attached, for information, is a copy of a report entitled "Project Completion Report on India - Krishna-Godavari Petroleum Exploration Project (Loan 2205-IN)" prepared by the Asia Regional Office with Part iI contributed by the Borrower. No audit of this project has been made by the Operations Evaluation Department at this time. Attachment This asument hu a rmsmad dstbuuon and may ib ued bY MMOwnu Only 1n UN rWfrwaMe of their olkami 1m hi oeoteamU May not othrwm be dMioned whojt World Dana swutorn.  FOR OFFICIAL USE ONLY INDIA KRISHNA-GODAVARI PETROLEUM EXPLORATION PROJECT (LOAN 2205-IN) PROJECT COMPLETION REPORT Table of Contents Page No. PREFACE . . . . . . . . . . . . . . . . . . . ... . . . . . . EVALUATION SUMMARY . . . . . . . . . . . . . . . . . . . . .ii PART I - PROJECT REVIEW FROM THE BANK'S PERSPECTIVE . . . . .1 Project Identity . . . . . . . . . . . . . . . . . . . . .1 Background . . . . . . . . . . . . . . . . . . . . . . . .1 Project Objectives and Description . . . . . . . . . . . . 2 Project Design and Organization . . . . . . . . . . . . . 3 Project Implementation . . . . . . . . . . . . . . . . . . 4 Project Results . . . . . . . . . . . . . . . . . . . . . 4 Project Sustainability . . . . . . . . . . . . . . . . . . 5 Bank Performance . . . . . . . . . . . . . . . . . . . . . 6 Borrower's Performance . . . . . . . . . . . . . . . . . 6 Project Relationships . . . . . . . . . . . . . . . . . . 6 Consulting Services .... . . . . . . . . .. . 7 Project Documentation and Data . . . . . . ... . . . . . . 7 PART II PROJECT REVIEW FROM BORROWER'S PERSPECTIVE . . . . 8 PART III - STATISTICAL INFORMATION . . . . . . . . . . . . 11 Related Bank Loans .... . . . . . . . . . ...... . 11 Project Timetable .... . . . . . . . . . ...... . 11 Loan Disbursements .... . . . . . . . . . ...... . 11 Project Implementation . . . . . . . . . ... . . . . . . . 11 Project Cost and Financing . . . . . . . . . . . . . . . . 11 Project Results . . . . . . . . . . . . . . . . . . . . . 16 Economic Impact .... . . . . . . . . . .. . 17 Status of Covenants . . . . . . . . . . . . . . . . . . . 18 Use of Bank Reso-rc3s . . . . . . . . . . . . . . . . . . 19 Staff Inputs .... . . . . . . . . . . . ...... . . 19 Missions .... . . . . . . . . . . . . .. ..... . . 20 1. Disbursement Profile 2. Drilling Results - Bank Financed Wells 3. Drilling Results - Wells Solely ONGC Financed 4. Petroleum Reserves Discovered 5. Economic Analysis This document has a restricted distribution and may be used by recipients only in the performance of their official duties, Its contents may not otherwise be disclosed without World Bank authorization.  i INDIA KRISHNA-GODAVARI PETROLEUM EXPLORATION PROJECT (LOAN 2205-IN) PROJECT COMPLETION REPORT Preface This is the Project Completion Report (PCR) for the Krishna-Godavari Petroleum Exploration Project for which Loan 2205-IN in the amount of US$165.5 million to India and onlent to the Oil and Natural Gas Commission (ONGC) was approved on October 19, 1982. The original loan closing date of March 31, 1986 was extended three times to March 31, 1989. It was fully disbursed on September 20, 1989. The PCR was prepared by the Transport and Energy Operations Division of Country Department IV of the Asia Regional Office (Preface, Evaluation Summary, Part I and Part III) and by ONGC (Part II). Preparation of this PCR was started during the Bank's final super- vision mission of the project during March 1990 and is based, inter alia on the President's Report, the Loan and Project Agreements, supervision reports and internal Bank memoranda.  ii KRISHNA-GODAVARI PETROLEUM EXPLORATION PROJECT (LOAN 2205-IN) PROJECT COMPLETION REPORT Evaluation Summary Objectives The principal objectives of the project were to (i) focus and accelerate ONGC's activities in those specific areas of the Krishna-Godavari basin where past exploration had identified highly promising potential for commercially exploitable oil and gas reserves; (ii) assist ONGC in verifying this potential through further seismic surveys and exploratory drilling; and (iii) enhance ONGC's exploration capabilities under the very difficult geological and environmental conditions in the Krishna-Godavari project area. Implementation ExReriences Project implementation took three years longer than had been planned. At least half of the delay was due to an increase in project scope to utilize eligible Bank funds which otherwise would have had to be cancelled. (The number of wells was increased from 28 to 50, and there was a correspond- ing increase in the seismic work.) Ex:essive procurement difficulties, a chronic ONGC problem, and the time required to resolve the eligibility of Bank financing of certain drilling operations were other major delaying factors. A serious implementation shortcoming was due to poor coordination between the availability of seismic results and drilling equipment. To keep drilling equipment engaged, it often became necessary to start drilling in locations not fully covered by the latest seismic data (Part I, para. 5.1). Two important decisions were made during implementation: (i) to add to the number of exploration wells as indicated above and (ii) to decline to add costly deepwater "outer continental shelf" wells, recognizing that the initial appraisal drilling results did not indicate sufficient reserves for economic development in this costly environment (Part I, para. 5.3). Results The project, with the help of che expanded project scope, achieved its principal objectives. The pertinent results were: (a) The exploration and appraisal drilling had a success rate of 32% and 68% respectively and exceeded industry worldwide experience (Part I, para. 6.2 (a); (b) The finding cost of new reserves is estimated to be US$2.50 per equivalent barrel of oil which is slight ., bove the current average in frontier areas, but significantly below the purchase price of in- ground reserves in developed areas (Part I, para. 6.2 (b); and  iii (c) The internal economic rate of return from the project is 10% based on yearend 1989 recoverable zeserves estimates and production fore- casts. Since then, recoverable reserves estimates have been increased by 30% and production rates by 20-25%. These increases along with the increased utilization of existing development and infrastructure investments are expected to improve the economic rate of return significantly. Sustainabilitv Prospects are good that the production of new petroleum resources will be sustainable and profitable. The country will benefit from the foreign exchange savings and ONGC should make an adequate rate of return on its forward investments. To maximize these benefits i s important for ONGC to temporarily curtail its exploration and appraisal invuotments until the results of the project are fully assimilated and evaluated. A prudent and cost effective plan should be adopted for the cc-itinued exploration and development of the Krishna-Godavari ba-in (Part I, para. 7.1). Lessons Learned The main lessons learned from the project are: (a) The heavy front end exploration and development investment cost associated with the finding of new petroleum reserves makes it essential to be highly selective in exploratory drilling, i.e. in drilling only those wells which will contribute most to the program and in appraising and developing commercial discoveries expeditiously (Part I, para. 6.2 (c); and (b) Project planning must include adequate lead time for the acquisition ard processing of essential seismic data to avoid costly standby charges for idle drilling equipment or drilling in locations without adequate seismic support (Part I, para. 5.1).  1 INDIA KRISHNA-GODAVARI PETROLEUM EXPLORATION PROJECT (LOAN 2205-IN) Project Completion Report PART I - Proiect Review from Bank Perspective 1. Project Identitv Project Name Krishna-Godavari Petroleum Exploration Loan No. : 2205-IN RVP Unit Asia Country India Sector Energy Subsector : Petroleum 2. Background 2.1 Despite rapid development of its giant Bombay High oil field, India was importing 56% of its petroleum requirements at the time of project appraisal. The increasing demand for petrol?um products coupled with the high international crude oil prices was imposing a heavy burden on India's 'oreign exchange position and on its ability to fund internal development. Thus, it was a matter of considerable urgency to accelerate the pace of exploration for additional petroleum resources. From seismic surveys and preliminary exploratory drilling at the time, the Krishna-Godavari basin appeared to be the most prospective area with the best potential of becoming the next new petroleum province in India. 2.2 The Krishna Godavari Petroleum Exploration Project covered an area of some 17,000 km2 both onshore and offshore Southeast India in the State of Andhra Pradesh. Prior to initiation of this project ONGC had drilled five wells in the project area: one onshore deep high pressure well was lost to a blowout, and four wells in the offshore outer continental shelf resulted in an oil discovery with one well and the loss of the other three due to unstable sea bottom conditions. Two onshore deep high pressure gas prospects were being drilled at time of appraisal. The high cost and technical problems associated with both the onshore high pressure gas and deep water drilling offshore caused ONGC to request Bank assistance. Bank policy was to support India's strategy of accelerating exploration of its petroleum prospects by obtaining foreign oil company ir,vestments and by focussing and strengthening the activities of the state-owned oil companies. Considering the sizeable investment already made by ONGC and the encouraging results obtained, it could not be expected that this area would be turned over to foreign oil companies. The Bank agreed to participate in the project because of the potential for finding significant petroleum reserves and because of the assistance it could offer ONGC in dealing with the adverse geological and environmental conditions encountered in the area. The project area was restricted to that part of the onshore end and offshore areas (about half the basin area) where ONGC already had made considerable investments. Nearby areas were subsequently included in exploration acreage offered to the foreign oil companies.  2 2.3 The Oil and Natural Gas Commission (ONGC) was the loan beneficiary and implementing agency for the project. The Commission is a government-owned statutory body created in 1959 by an act of Parliament to plan, promote and implement the development of petroleum resources and the production and sales of the products it produces. Over time ONGC has evolved into a full-fledged oil company with in-house capabilities which are kept current through a policy of keeping abreast of technological developments in the international oil industry. Operational staff are divided among four regior.al offices (Central, Western, Southern and Eastern) for onshore operations and the Bombav Offshore Project (BOP) group for offshore operations. The Southern Region and BOP were initially responsible for implementation. Later the Southern Region in Madras was ass gned full implementation responsibility, offshore and onshore. 3. Project Obiectives and Description 3.1 The principal objectives of the project were (i) to focus and accelerate ONGC's activities in those specific areas of the Krishna-Godavari basin where past exploration has identified highly promising potential for commercially exploitable oil and gas reserves; (ii) to assist ONGC in verify- ing this potential throu further seismic surveys and exploratory drilling; and (iii) to enhance ONGC's exploration capabilities under the very difficult geological and environmental conditions in the Krishna-Godavari project area. The project would constitute about a quarter of ONGC's exploration activities during the project period. During appraisal, the project atea was carefully delineated, and limited to less than half of the Krishna-Godavari offshore basin, comprising the areas where ONGC has already made substantial explora- tion investments which have resulted in discoveries, and which ONGC could explore further and develop efficiently in the future with available resources and technology. 3.2 The project consisted of the 1982/83-1985/86 time slice of ONGC's exploration prouram ill the project area. Its components were: (a) Onshore (i) about 1,700 line-km of seismic surveys, of which about 1,000 line-km would be high-resolution seismic lines centered on tl.e most prospective delta and marsh areas around the mouth of the Godavari River; (ii) drilling of 12 exploratory wells, of which 5 would be in deep high-pressure gas prospects; and (b) Offshore (i) about 3,500 line-km of special shallow water seismic surveys and up to 4,000 line-km of infill seismic surveys in the remaining offshore area of the project; (ii) drilling of 16 exploratory wells, of which 5 would be on the outer shelf; and (c) Technical Assistance. External support to ONGC for the supervision of drilling, testing and completing of wells in the onshore high pressure gas areas and in the outer shelf areas; and, as required,  3 for the improvement of quality control of geophysical data acquisi- tion, processing and integration. 4. Proiect Design and Organization 4.1 The project was innovative from both a Bank and Borrower perspective in that it was one of the first and to date the largest Bank project wholly devoted to petroleum exploration. There was an initial concern that the Bank loan might tend to keep out the entry of international oil companies interested in exploring for petroleum prospects in India. However, this was not the case. India made petroleum exploration and devalopment licenses available to the international industry on three occasions during the course of the proiect with the encouragement and unofficial assistance of the Bank. The Bank clearly recognized the investment required in petroleum exploration in India was of such a magnitude which could accommodate foreign investment. multi-lateral, bi-lateral, and indigenous funds alike. The first public offering to the international industry occurred in 1982 when both onshore and offshore areas were offered. One license was awarded in the first offering, but it was subsequently relinquished following seismic surveys and three dry exploratory tests. The second offering in 1984 included only selective offshore areas and no contracts were consummated. The third offering took place in 1986 when a larger part of the offshore area, excluding the established Bombay productive area but including substanti&! portions of the Krishna-Godavari area, was included. Seven licenses were awarded in this round, four of which were within or adjacent to the Krislna-Godavari Project Area. To date seismic surveys plus two exploratory holes and one --ploratory well currently drilling have resulted from the 1986 license round. One cf the dry holes was drilled on a block adjacent to the Krishna-Godavari project area. However, the two licenses awarded within this area are yet to be drilled and will benefit from prior ONGC exploration activities including those financed by the Bank. A fourth round of bidding has been pending; it -s currently postponed to end-1990 to give the inew government time to review India's petroleum programs including results of the third round. 4.2 The project was designed to be highly flexible particularly with regard to well locations since most of the potential drilling sites were not identified at appraisal and most were dependent on results of seismic surveys to be conducted as part of the project. This concept of flexibility in components was shared by the Bank and ONGC alike. 4.3 The number of wells and geophysical work included in the project were not sufficient for a comprehensive and detailed evaluation of the project area's prospects. This is tnderstandable considering the uncertainties associated with exploration and the tendency to be conservative and not over- invest if initial expectations turn out to be too optirristic. Fortuitously, however, the sharp drop in the price of oil field services and goods during the early part of the project made it possible for the Bank to support an additional 22, mostly appraisal, wells. Thus, the exploratory drilling could be more effectively and accurately evaluated. It also can be seen in retrospect that the geophysical content of the project made a major contribution to the successful results.  4 5. Project Implederitation 5.1 As is evident from the disbursement profile (Annex .), project implementation took three years longer than planned. At least half of this completion delay can be attributed to the extra wells and seismic work added to the scope of the project to enable the original project objectives to be achieved. Excessive procurement difficulties and time needed to resolve the eligibility for Bank financing of drilling operations were the other major delaying factors. A serious implementation shortcoming was due to poor coordinatiou between the avaiiability of saismic results and drilling equipment. To keep drilling equipment engaged it was often necessary to start drilli.ig in locations not fully covered by the latest seismic data. It can be seen in retrosDact that the Bank should have insisted on a longer implementation period with more emphasis on planning. It would also have been helpful if the project could have provided a braking mechanism to slow down ONGC's "rig driven" drilling program. The 50 wells drilled under the project adequately defined the hydrocarbon potential of the project area. Additional activities preferably should have awaited the assimilation and evaluation of the results of this drilling. The thirty odd wells drilled by ONGC in the project area in parallel with the project budget did not materially affect project results. This tencency to overdr.ill is common oii exploration projecus. It can be avoided by strict adherence to a priority system of selective drilling and the timely availability of s-ismic results. In the absence of adequate seismic support, a decision must be made between the possible cost of driiling a dry hole versus the drilling equipment standby cost while waiting for the seismic results.l/ 5.2 It was recognized that implementation of the drilling program faced serious technical risks due to difficult operating conditions and a complex geological environment. These risks were mitigated through careful prepara- tion and limitation of deep water drilling and through the employment of consultants to advise on drilling and testing deep, high-pressure formation and to assist in supervising outer shelf operations. These measures have been successful. Although there were three blowouts (two on wells solely financed by ONGC), there have been no serious personnel inJuries nor advecse effects on the physical environment. 5.3 'wo important decisions were made during implementation: (i) to add to the original number of wells (particularly appraisal wells) when funds become available, thus making .t possible to reach the project's exploration objective; and (ii) to decline to add costly deep water "outer continenital shelf" wells in the expanded drilling program, recognizing that the initial results from appraisal drilling did not indicate sufficient reserves for economic development in this costly environment. 6. Proiect Results 6.1 Except for the three-year completion delay, the project can be considered an overall success. It was completed at a cost only about 10% higher than the amount budgeted for the original reduced project scope, and it accomplished its principal objectives to (i) explore the project areas to a 1/ ONGC does not agree with this view which represents the considered opinion of Bank St ff. (See Part II, page 8).  5 sufficient level to evaluate its hydrocarbon potential and provide focus for follow-up exploration as and if required; (ii) appraise discoveries to a degree which permits evaluation of their economic value; and (iii) enhance ONGC's operational capabilities in seismic acquisitioii and processing and the drilling and testing of wells under severe reservoir and surface conditions. 6.2 Hydrocarhons were found in ninr distinct geological conditions i:. cazbonate, volcanic and sandstone reservoirs in a variety of structural and stratigraphic traps ranging from lower Cretoceous to Pliocene in geologic age. Annex 2 tabulates the results from the 50 wells (25 exploration wells and 25 appraisal wells) drilled with Bank financing. The pertinent results are summarized below: (a) The 25 e Dloration wells resulted in 8 discoveries (2 oil and 6 gas) and the 25 appraisal wells resulted in 17 producers (9 gas and 8 oil). The respective 32% and 68% success ratio are acceptable and exceed industry worldwide experience. (h) Five of the discoveries were determined to be commercially exploitable, containing an estimated 105 million Bbi