A Primer On India Ep Valuations

Equity Research
January 11, 2010 INDIA
Exploration & Production

Oil&Gas and
Petrochemicals A primer on India E&P valuations
Theme report: Comparison of valuation methodologies for E&P assets
We present a primer on the India exploration & production (E&P) space,

comprising the most apt valuation methodologies. Owing to different tax
structure of E&P firms globally, valuing them on earnings and reserves multiples
delivers erroneous results. Moreover, since most Indian firms are in the early
stages of exploration & appraisal (ex ONGC and Oil India-OIL), we expect
significant earnings volatility for these companies going forward.
We illustrate that DCF and EV/reserves are the most prudent methodologies for
valuing an E&P firm in India. We also draw on the pitfalls in the EV/reserves-
based methodology that are mainly owing to time taken by a firm to bring
reserves to production. Further, we have valued India’s key E&P blocks, including
Reliance Industries’ (RIL) KG D6 (only gas reserves), MN-D4, KG-D3, KG-D9 &
NEC-25 blocks, Cairn India’s MBA Field (Rajasthan) and Gujarat State Petronet
Corporation’s (GSPC) Deen Dayal block (KG Basin). Additionally, we have
expounded relative valuations (both, adjusted for time difference as well as
current) of these blocks.
f Not logical to ascribe earnings and cashflow multiples, in our view. Though the
market may value E&P firms based on earnings- & cashflow-based multiples, we do
not believe it is prudent to use a multiple-based approach as earnings and cash are
volatile owing to investment multiple (IM)-based profit-sharing and production
declines.
f DCF, EV/reserves – Best valuation methodologies for E&P. Although DCF is the
best method for valuing an E&P block in India, it is time consuming, and projections
are difficult and may be erroneous, especially if the production schedule is not
known. On the other hand, EV/reserves (adjusted for time difference) is the most
precise method to value an E&P firm in India.
f RIL – Key promising eastern offshore blocks MN-D4, KG-D3, KG-D9 and NEC-
25 deserve lower value at present versus its KG-D6 block owing to: i) time-value
of money till commencement of production from these blocks; KG-D6 production
has already commenced, ii) significant development capex requirements of the
blocks that would further lower value; on the other hand, most KG-D6 capex is
already complete.
Comparative valuations of India’s key offshore blocks
KG-D6 KG-D3 MN-D4 KG-D9 NEC-25 GSPC DD
Commencement of production FY10 FY16 FY16 FY16 FY13 FY13
Peak production (mmscmd) 120 79 125 90 71 84
Gross recoverable reserves (tcf) 13.8 9.5 15.0 10.8 8.5 10.0
Amit Mishra, CFA NAV at FY10 end (US$ mn) 12,290 674 1,568 1,095 2,557 2,723
amit.mishra@icicisecurities.com NAV/recoverable reserves at FY10 end 0.89 0.07 0.10 0.10 0.30 0.27
+91 22 6637 7274 (US$/mcf)
Gagan Dixit NAV at production start (US$ mn) 11,107 8,034 13,152 9,687 7,463 8,253
gagan.dixit@icicisecurities.com NAV/recoverable reserves at production 0.81 0.85 0.88 0.90 0.88 0.83
+91 22 6637 7480 start (US$/mcf)
Source: I-Sec Research
Please refer to important disclosures at the end of this report
E&P Primer, January 11, 2010 ICICI Securities
TABLE OF CONTENTS
India E&P valuations .......................................................................................................3
DCF – Judicious valuation methodology.........................................................................3
EV/reserves – Works best for quick estimates ...............................................................3
DCF offers more advantages vis-à-vis other methodologies..........................................3
Applying EV/reserves- & DCF-based methodologies for valuing India E&P.............4
EV/reserves.....................................................................................................................4
Standardised measure of discounted cashflows ............................................................5
India E&P versus US peers – Not an apples-to-apples comparison ..........................8
E&P investor guide – Key parameters to track...........................................................11
Reserve Replacement Ratio (RRR)..............................................................................11
Finding & Development (F&D) cost ..............................................................................11
Production and Lifting costs..........................................................................................11
Exploration, Development plans ...................................................................................11
Key parameters impacting E&P valuation...................................................................12
Oil & gas pricing ............................................................................................................12
Taxes & royalties...........................................................................................................12
Profit sharing .................................................................................................................12
Reserves mix ................................................................................................................12
Quality of reserves ........................................................................................................12
Location of reserves......................................................................................................12
India Upstream ...............................................................................................................13
Policies ..........................................................................................................................14
Valuation of some of India’s key upstream blocks ....................................................17
KG-D6 ...........................................................................................................................18
KG-D3 ...........................................................................................................................19
MN-D4 ...........................................................................................................................20
KG-D9 ...........................................................................................................................21
NEC-25 .........................................................................................................................22
GSPC’s Deen-Dayal block............................................................................................23
Cairn’s Rajasthan block (RJ-ON-90/1)..........................................................................24
Annexure 1: Oil and Gas E&P basics ..........................................................................25
Answers to elementary questions .................................................................................25
E&P business – Various stages....................................................................................28
Understanding the definition & classification of ‘reserves’............................................33
Annexure 2: Key exploration risks...............................................................................37
Annexure 3: Oil & gas properties vital for valuation ..................................................38
Annexure 4: Domestic oil & gas pricing......................................................................39
Annexure 5: Glossary & abbreviations of key terms .................................................42
Annexure 6: Index of Tables and Charts .....................................................................50
2
India E&P valuations
Earnings of any E&P firm are inclined to be volatile owing to dry well write-offs and
other one-offs in its P&L statement. Moreover, earnings usually decline with time on
account of natural production decline in oil/gas fields, unless new fields/wells are
brought under production. Particularly in India, investment multiple (IM)-linked profit
sharing results in highly volatile earnings, making valuation of assets difficult.
We have explored various methods used for valuing an E&P firm and presented
relative shortcomings of these methodologies.
DCF – Judicious valuation methodology

We believe the most prudent method for valuing an E&P firm in India is the detailed
DCF model, which captures all nuances of variations in commodity prices, production
declines, IM-related profit sharing as well as variable royalty & tax structure. However,
key lacuna is lack of data availability for making detailed assumptions of production
and forecasting commodity prices accurately.
EV/reserves – Works best for quick estimates

The EV/reserves methodology is fairly simple and widely used for quickly valuing E&P
firms for reference, if detailed information about E&P assets is unavailable for DCF-
based analysis. EV/reserves-based value needs to be adjusted for time-value-of-
money, development capex requirements and some premium (or discount) for
favourable (or unfavourable) royalties, taxes and IM.
DCF offers more advantages vis-à-vis other methodologies

Except DCF, no methodology is able to capture significant earnings variability over
time due to changing government sharing on account of complex IM calculations
(Table 1).
Table 1: Advantages & disadvantages of various valuation methodologies
Methodology Advantages Disadvantages
Ideal for valuing Indian E&P as it incorporates complex
IM-linked government profit sharing, which is not Often, data non-availability for detailed DCF analysis is key drawback
captured by other valuation methodologies
DCF
Captures impact of all company-specific & other
Quick valuation is not possible
variables
Provides implied P/E, P/FCF, EV/EBITDA, EV/reserves
After DCF, the best for valuing E&P firms for quick Does not capture commodity price or other variables changes impact
reference on complex IM calculations, and subsequent impact on value
EV/reserves
Data availability is generally not an issue
Quick approach to value company reserves
Does not incorporate valuation impact of IM calculations,
Quick to apply
taxes/royalties benefits, production & cost profile etc
P/E
Does not factor earnings difference due to leverage & exploration
expenses
Not able to incorporate valuation impact from key variables such as
Quick to apply
IM calculations, taxes/royalties benefits, production & cost profile etc
EV/EBITDAX
Better than P/E as it accounts earnings difference due This method could incorrectly give similar values for similar earnings
to leverage & exploration expenses assets despite significant difference in quantity of reserves
Does not incorporate valuation impact from IM calculations,
EV/FCF Quick to apply
taxes/royalties benefits, production & cost profile etc
Better than P/E as it accounts earnings difference due This method could incorrectly give similar values for similar earnings
to leverage & exploration expenses assets despite significant difference in quantity of reserves
Note: EBITDAX – EBITDA before exploration expense; Source: I-Sec Research
3
Applying EV/reserves- & DCF-based methodologies

for valuing India E&P
EV/reserves
In this method, key variables for valuing an E&P firm in India are: i) reserve type (oil,
gas) ii) quality of reserve (calorific content of gas; API of crude) iii) capex requirement
iv) profit sharing formula v) time taken for commencement of commercial production
vi) risk to reserves accretion.
Methodology
Guidelines to value an E&P firm are:
Step 1: Calculate a benchmark EV/reserves multiple for oil, gas reserves –

EV/reserves for gas would be lower owing to regulated pricing.
Step 2: Of this EV/reserves multiple, some premium/discount should be ascribed,

based on quality of reserves, capex requirements and profit-sharing formula.
For example, blocks with higher government sharing for IM deserve discount on their
EV/reserves multiples versus KG-D6, owing to lower cashflows to E&P firms.
Similarly, EV/reserves multiple of blocks with higher per-unit capex requirements
should be lower vis-à-vis KG-D6. Likewise, higher quality reserves (i.e., higher
calorific content of gas, higher API of crude) merit a higher EV/reserves multiple owing
to better per-unit sales price that would lead to higher cash margins.
Step 3: Forecast the possible recoverable reserves in the block (adjusted for the risk
to recovery, if any) and multiply this number with the aforementioned EV/reserves
multiple to attain EV of the block in the year of commencement of production.
Step 4: The aforementioned EV of the block (at commencement of production) should

be adjusted for capex requirements and time-value-of-money till production
commencement for obtaining the block’s present value. Hence, this EV should be
discounted to the present date, and the NPV of capex in the interim should be
deducted.
Illustration: EV/reserves – Rough valuation for new discovery

Hypothetical event. Company A discovered 1,000mmbl estimated recoverable crude
reserves in an eastern offshore block. Production from this block will commence after
five years of development from discovery. The discovery requires US$4,000mn capex
to develop.
Assumptions
• Ascribe average EV/bl of crude weighted US E&P firm – US$16/bl
• 20% discount to EV/bl owing to risks involved
• Discount rate – 12.5%
• Working interest of Company A – 25%
4
Valuation
We value the discovery at US$1,221mn for Company A (Table 2).
Table 2: Quick EV/reserves estimates for a discovery

Comments
Gross recoverable reserves (mmbl) 1,000
Risk (%) 20
Risk adjusted recoverable reserves (mmbl) 800
EV/bl valuation multiple of similar oil weighted US E&P firms (US$/bl) 16

EV/bl * (Risk adjusted
EV of discovery post development (US$ mn) 12,800
recoverable reserves)
Less: Development capex (US$ mn) 4,000
EV of discovery pre development (US$ mn) 8,800
Time required to develop discovery (years) 5
Present value of discovery (US$ mn) 4,883 12.5% discount rate
Discovery value to 25% Company A share (US$ mn) 1,221

Standardised measure of discounted cashflows

We are introducing one of the most stringent techniques of E&P firms’ proved
reserves valuation called the standardised measure of discounted cashflow
(SMODCF)-based DCF. SMODCF-based DCF uses audited SMODCF data available
in a company’s annual filings. SMODCF data consists of cumulative future cashflow
from year-end proved reserves. It is provided by US- & Europe-based E&P firms as
per GAAP and the Society of Petroleum Engineers (SPE) respectively.
FY08-09 SMODCF data provided by ONGC (Chart 1) provides future – undiscounted

& discounted (at 10%) – cumulative cash inflow/outflow from revenues, capex,
operating expenses and taxes.
5
Chart 1: ONGC SMODCF data from its FY09 annual report
Source: ONGC Annual Report
Methodology
We have given a step-by-step approach to decode the SMODCF data into a DCF-
based value of proved reserves.
Step 1: Replicate SMODCF data cashflow profiles. First, we create future

undiscounted cashflow profiles from proved reserves, such that cumulative future
cashflows match with SMODCF data (revenue profile, cost profile, tax profile and
future capex). Various stages of creating cashflow profiles are:
• Create future production & revenue profiles through life of proved reserves,
such that cumulative undiscounted & discounted (at 10%) future revenues match
with those in SMODCF data, which assumes constant current year-end realised
oil&gas prices, as per reporting guidelines. Incorporate company guidance and
assumptions on annual production, assuming realistic natural decline rate and
new production in any year owing to prior development capex.
• Create future cost profiles, assuming unit production costs and their annual cost
escalation. Future cost profiles should be such that cumulative future
undiscounted & discounted operating cash outflow matches with that of SMODCF
data.
• Create required future capex profiles, such that cumulative undiscounted capex
cash outflow matches with that of SMODCF data. Use company guidance (for
next 2-3-year development capex) and then assume annual percentage decline in
capex going forward.
6
• Consider appropriate future cash tax rate, such that cumulative undiscounted
& discounted future tax cash outflow matches with that of SMODCF data.
Incorporate any tax benefits from available information.
• Prepare FCF (post capex) profiles, based on aforementioned future cashflow
profiles of revenues, operating expenses, capex and taxes – FCF post capex
stands for revenues less operating expenses, capex & cash taxes.
• Finally, calculate DCF value at 10% discount rate from FCF post capex profile,
which should tally with that of SMODCF’s ‘net future earnings from proved
reserves’.
Step 2: Exchange SMODCF data assumptions with your assumptions, as
mentioned below:
• Exchange constant year-end oil & gas price assumptions with expected future oil
& gas prices
• Incorporate delay in production, if any
• Incorporate risk to proved reserves recovery, if any, by reducing future production
via appropriate discount
• Calculate SMODCF-based DCF value at our discount rate ascribed to the
company instead of SMODCF’s 10% discount rate
7
India E&P versus US peers – Not an apples-to-
apples comparison
There are differences in the underlying value of Indian private E&P and US E&P peers
owing to policy differences for new discoveries under the New Exploration Licensing
Policy (NELP) which are:
• Seven-year tax holiday on crude oil production and lower royalties benefits in
initial years in India
• Minimal or nil government sharing till 100% cost recovery that increases in later
years of production
The aforementioned factors would result in higher India E&P earnings in the initial
years of production. On the other hand, in later years, India E&P earnings are lower
than US peers’ on account of higher government sharing and royalties & tax
payments, assuming similar crude prices, production profile, operating costs and
capex.
Illustration
We have attempted to illustrate impact of policies on value of Indian E&P companies
versus US peers, with similar assumptions for both, except their respective policies.
The illustration will clarify to the investor that pure comparison between Indian and US
peers based on reserves can be misleading.
Table 3: Assumptions for Indian and US E&P firm

Common assumptions for both US and Indian E&P firm
Discovery size or recoverable reserves (mmbl) 98.6
Crude prices (US$/bl) 85
Development capex (US$ mn) 1,000
Yearly maintenance capex (US$ mn) 10
Operating costs (US$/bl) 15
Discount rate to value future cashflows (%) 10
Assumptions specific to US E&P firm

Tax rate (%) 30
Royalties (%) 12.5
Assumptions specific to Indian E&P firm

Tax rate (%) Nil for initial 7 years and then at 30%
Royalties (%) 5% for initial 7 years and then at 10%
IM for government sharing for Indian E&P (%)

0.0 0
0.5 0
1.0 20
1.5 40
2.0 60
2.5 80
3.0 and above 80
Table 4 shows the cashflow as well as earnings profiles of a US E&P firm from the
aforementioned discovery.
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Table 4: Assumption – US E&P firm cashflow profile
(US$ mn)
Year 0 1 2 3 4 5 6 7 8 9 10
Daily oil production (bpd) 27,000 27,000 27,000 27,000 27,000 27,000 27,000 27,000 27,000 27,000
Yearly oil production (mmbl) 9.86 9.86 9.86 9.86 9.86 9.86 9.86 9.86 9.86 9.86
Crude prices (US$/bl) 85 85 85 85 85 85 85 85 85 85
Revenue 838 838 838 838 838 838 838 838 838 838
Less:
Operating expenses 148 148 148 148 148 148 148 148 148 148
DD&A 120 120 120 120 120 120 120 120 120 120
Royalties 105 105 105 105 105 105 105 105 105 105
Taxes 140 140 140 140 140 140 140 140 140 140
Net Income 326 326 326 326 326 326 326 326 326 326
Capex 1,000 10 10 10 10 10 10 10 10 10 10
FCFF (1,000) 436 436 436 436 436 436 436 436 436 436
EV 2,677
Table 5 shows the cashflow as well as earnings profiles of an India E&P firm from the
aforementioned discovery.
Table 5: Example of Indian E&P firm cash-flow profile

(US$ mn)
Year 0 1 2 3 4 5 6 7 8 9 10
Daily oil production (bpd) 27,000 27,000 27,000 27,000 27,000 27,000 27,000 27,000 27,000 27,000
Yearly oil production (mmbl) 9.86 9.86 9.86 9.86 9.86 9.86 9.86 9.86 9.86 9.86
Crude prices (US$/bl) 85 85 85 85 85 85 85 85 85 85
Revenue 838 838 838 838 838 838 838 838 838 838
Less:
Operating expenses 148 148 148 148 148 148 148 148 148 148
DD&A 120 120 120 120 120 120 120 120 120 120
Government share - - - 91 181 181 272 255 255 339
Royalties 42 42 42 42 42 42 42 84 84 84
Taxes - - - - - - - 69 69 44
Net Income 528 528 528 437 347 347 256 162 162 103
Capex 1,000 10 10 10 10 10 10 10 10 10 10
Cost recovery multiple 0.4 0.9 1.3 1.7 1.9 2.1 2.3 2.4 2.6 2.6
Govt share (%) 0 0 0 20 40 40 60 60 60 80
Govt share - - - 91 181 181 272 255 255 339
FCFF (1,000) 638 638 638 547 457 457 366 272 272 213
EV 3,014
India E&P earnings in initial years of production varies significantly from later years,
which entail higher royalties, taxes and government sharing (Chart 2). As P/E-based
India E&P valuations give ambiguous results owing to volatility in earnings, this
methodology fails in the India E&P context.
9
Chart 2: Earnings trend of India and US E&P
600 US E&P India E&P
500
400
(US$mn)
300
200
100
0
1 2 3 4 5 6 7 8 9 10
Years
10
E&P investor guide – Key parameters to track
Reserve Replacement Ratio (RRR)
RRR = {(Reserve additions) + (Improved recovery) + (Revisions)}/ (Production)
The RRR measures the amount of proved reserves additions by the company during
the year relative to the amount of oil & gas produced during the year. RRR around 1
signifies that the company is able to maintain its reserve base despite its current
production, and implies that company would be able to maintain its current production
level. RRR, in conjunction with Finding & Development (F&D) costs captures the
operating performance of the company.
ONGC’s RRR calculations on 3P instead of 1P reserves lead to

inflated RRR
ONGC calculates RRR using 3P reserves (Proved + Probable + Possible) which is not
a good indicator of reserve replacement ability because 3P reserves include less
certain probable & possible reserves, while reserves reduced through production were
highly certain proved reserves, resulting in inflated RRR value.
Finding & Development (F&D) cost

F&D costs = {Exploration cost + Development cost + Unproved asset purchase
costs}/{Reserve additions through discoveries, revisions and improved recovery}
F&D costs indicate the costs incurred by a firm to find, and then develop the reserves
for production. F&D costs are capitalised by the firm and flow through income
statement as DD&A expense.
Production and Lifting costs

One should keep track of the production and lifting costs for a firm, which signify the
cost of production from a developed field. These costs along with F&D costs would
constitute all the operating cost for the field.
Exploration, Development plans

Exploratory drilling could result in major upgrades to a company’s reserve or may
result in significant write-offs for the company. Hence, a closer look must be kept at
the firm’s exploration plans to keep track of its long-term potential.
Once proven, development of the fields would result in them coming onto production
and hence additional cash flows for the company. Closer scrutiny of development
plans provides better visibility on future cashflows for the company.
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Key parameters impacting E&P valuation
Oil & gas pricing
Oil & gas prices are factors that affect E&P firms’ profitability the most. However, in
the Indian context, since gas prices are regulated, global fluctuations in gas prices do
not impact Indian firms’ profitability.
Taxes & royalties

Indian government levies cess and royalty on crude oil and natural gas production on
all domestic fields. Royalty varies on crude oil or natural gas production as well as
offshore and onshore production. Moreover, Indian government provides lower royalty
rates in the first seven years of production from any field. Cess is uniform across the
years. Moreover, the government also provides 7-year tax holiday on oil production
from NELP blocks.
Profit sharing
Indian government has mandated profit sharing on all the NELP blocks and the
effective sharing depends on the IM for the particular field. The IM in any year is the
ratio of cumulative net cash income of the oil company to cumulative investments by
the oil company. With changes in IM, effective profit sharing with the government also
keeps on changing, leading to significant volatility in the firm’s earnings. Profit sharing
ratio as well as the movement of IM has to be closely tracked in order to forecast
company earnings.
Reserves mix
Due to market pricing for crude and regulated pricing for gas as well as differences in
taxation for Oil & Gas, oil reserves are far more valuable vis-à-vis gas reserves.
Moreover, similar reserves on land would command some premium to reserves
offshore due to lower cost of extraction for onshore reserves.
Quality of reserves
Quality of oil/gas reserves is also very important and could potentially impact
valuations. Calorific content of gas, C2-C3 concentration could impact valuations for
the gas reserves, while API content, sulphur content & viscosity of oil could impact
valuations for oil reserves.
Location of reserves
Location of the reserves and the nearest connectivity to the existing transportation
network could impact development cost for the new discovery and could materially
impact valuations of the field. Also, offshore discoveries take longer to develop
implying lower valuations vis-à-vis onshore discoveries.
12
India Upstream
India’s sedimentary basins are spread across 3.14mnkm2, consisting of 1.79mnkm2 of
onshore & shallow-water regions and 1.35mn mnkm2 of deep-water area. So far, 26
sedimentary basins are recognised by the Directorate General of Hydrocarbons-DGH
(Chart 3).
Chart 3: India sedimentary basins
Source: DGH
India’s upstream future prospects would be more gas-weighted instead of crude oil-
weighted on the back of significant discoveries during this decade in the eastern
offshore region. Accordingly, the Indian gas market is set to see 3x increase in
domestic gas supplies from KG-D6 and NEC-25 blocks as well as GSPC and ONGC
offshore blocks. Numerous domestic offshore blocks in KG Basin (D3, D4 & D9) and
Mahanadi Basin (D4) would offer further upside to domestic gas production going
forward. We estimate domestic gas supplies to see 11.8% CAGR through FY10-14E
to 224mmscmd from 144mmscmd.
In contrast to natural gas, except Cairn’s Rajasthan discovery, India has not
witnessed many crude oil discoveries of recent. Hence, we expect India to continue its
dependence on crude import (~two-third of demand).
13
Policies
India’s upstream activities were highly regulated in the past and primarily dependant
on two national oil companies (NOCs) – Oil India (OIL) and ONGC. Accordingly, the
domestic upstream sector witnessed low level of investment as upstream exploration
activities are very risky & capital intensive in nature; also, only two NOCs’ investment
was not sufficient for India’s vast exploration acreage. Given the increased
dependence on imported crude oil, the Government of India (GoI) has initiated
reforms on the domestic E&P front, to reduce crude import dependence via
deregulations and encouraging private/foreign participation and subsequently offered
many small/medium-size fields to private players during the pre-NELP rounds.
To accelerate domestic E&P activities, GoI initiated NELP in 1997, which entails more
incentives to attract private/foreign participation in domestic E&P.
Pre NELP
To attract private/foreign investments in domestic E&P business, especially
exploratory acreage/marginal fields, GoI has initiated many steps since 1993. Oil &
gas blocks awarded since 1993, but before introduction of clearly-defined NELP
(during 1997-98), come under the purview of pre NELP.
As per the DGH, GoI has signed production sharing contracts (PSCs) for 28
exploration blocks during the pre-NELP rounds; of these, 16 are already operational.
Salient features
• Tax incentives on revenue from commercial discovery on exploratory acreage
• NOCs’ option to take participation interest (PI) on the block, which varies
within the 0-40% range (depending on the block’s terms & conditions). Various
marginal fields were developed accordingly – e.g., ONGC has 40% PI in joint
ventures (JVs) with Panna-Mukta-Tapti and Ravva.
• NOCs’ carried-out interest. An NOC has 30% working interest since signing of a
contract subsequent to exploration activities, post which, it has option to take this
30% interest in the project in case of commercial discovery and, accordingly,
divide the capex and returns (except additional royalty burden of private-partner
share) on its respective interest – For example, ONGC has exercised this option
on Cairn’s Rajasthan discovery.
• Royalty benefits. Companies were exempted from royalty payments to GoI, with
their respective royalties to be borne by NOCs (ONGC/OIL).
However, there were many a lacunae on various fronts in the pre-NELP rounds that
were ironed-out in later NELP policies. Some missing incentives during pre-NELP
rounds were:
• No particular enticement for the high-risk, deep-water exploration
• Non-level playing field for NOCs as they bear the private partner’s share of royalty
payments
14
NELP
In 1997-98, the government formulated NELP for attracting foreign/private capital to
expedite domestic exploration activities, especially in deep-water/ultra deep-water
areas. NELP not only provides a level-playing field for awarding exploration acreage,
but also offers competitive contract & fiscal terms.
So far, there have been seven rounds of bidding with 210 blocks awarded under
NELP I-VII rounds, and another 36 blocks were bid by various operators under the
recently concluded NELP VIII round (Table 6).
Table 6: NELP awards – An overview

Proposed Incurred
Total Shallow Deep Acreage
Onshore capex capex 2
(nos) water water (’000km )
(US$ mn)* (US$ mn)^
NELP I 24 1 16 7 1,151 5,610 194.7
NELP II 23 7 8 8 776 442 263.1
NELP III 23 8 6 9 1,039 768 204.6
NELP IV 20 10 10 1,135 684 192.8
NELP V 20 12 2 6 917 398 115.2
NELP VI 55 25 6 24 3,317 87 306.2
NELP VII 45 26 7 12 NA NA NA
NELP VIII # 36 15 13 8 NA NA NA
Total 246 104 58 84
* Exploration capex; ^ Exploration and development capex; # Provisional results for NELP-VIII Round based on
data provided by bidders
Source: Infraline, I-Sec Research
NELP has been instrumental in promoting E&P activities in India over the past few
years. It has undergone seven rounds of bidding, including the recently concluded
NELP VIII (final awards for which are still pending). The overall awarded area for
NELP IV & V was substantial at 353,500km2 spread over 40 blocks; NELP VI with
352,200km2 was spread over 55 blocks and NELP VII had 57 blocks. The aggressive
programme has attracted the attention of global majors and is of strategic significance
to India’s oil security as imports form 70% of the domestic demand at present. India,
currently, has 5.7bnboe oil and 37.9tcf gas reserves, but this is based on just 20%
exploration of the country’s overall potential of sedimentary basins, which is pegged at
3.14mnkm2. Also, the gas discovery (P1 reserves of 5tcf recently upgraded to 11tcf)
made by RIL in its KG D-6 block (awarded in NELP I) is one of the largest, world-class
gas reserve finds, while discoveries by ONGC and GSPC in the east coast are also
expected to be of large size – this has enhanced domestic and global interests in
NELP.
Salient features
• Income tax breaks for seven years for crude oil production
• Foreign participation allowed up to 100%
• Cost recovery for up to 100%
• No customs duty on imports for equipment used in E&P
• Maximum exploration period of seven years (eight for deepwater) to be completed
in three phases. Each phase comprises three years at the most (four years for
phase I in case of deepwater)
15
• Maximum development and production period of 20 years for oil and 30 for gas,
which can be extended by another five years after mutual agreement between the
Government and the company
• Work commitment. The E&P firm has to provide a minimum exploration work
obligation for each phase while bidding. It may commit to just seismic operations
in the first phase. Any work in excess of the minimum commitment in any phase
may be carried forward to the subsequent phase and be offset against the
minimum work committed for such a phase.
• Royalty for onshore is 12.5% for oil & 10% for gas, while 10% for both oil & gas in
shallow offshore (less than 400isobath). For deepwater assets, it stands at 5% for
both oil and gas for the first seven years, and at 10% thereafter.
• Relinquishment. The E&P company has to relinquish 25% of the exploratory
acreage if it graduates to the second phase of exploration. The relinquishment is a
further 25% if it proceeds to the third phase. In the production phase, the company
has to relinquish all properties, which do not contain hydrocarbons.
• Production sharing. The percentage of annual production of petroleum expected
to be allocated for recovery of costs should be indicated by the company in the
bid. The sharing of profit petroleum shall be bid upon based on a sliding scale tied
to pre-tax multiples of investment recovered and shall be specified in the contract.
16
Valuation of some of India’s key upstream blocks

Table 7: Common assumptions for key offshore blocks’ valuations
Gas price realisation (US$/mmbtu) 4.2
Marketing margins (US$/mmbtu) 0.15
Unit operating costs (US$/mmbtu) 1.0
Exchange rate (Rs/US$) 45
Cost of equity (%) 12.5
Table 8: India’s key promising gas offshore blocks – A comparison

KG-D6 KG-D3 MN-D4 KG-D9 NEC-25 GSPC DD*
Total development capex (US$ mn) 12,021 8,195 12,750 9,360 7,526 8,580
Total exploration capex (US$ mn) 671 643 725 662 360 360
Total recoverable reserves (tcf) 13.8 9.5 15.0 10.8 8.5 10.0
Development capex/recoverable reserves (US$/mcf) 0.87 0.86 0.85 0.87 0.89 0.86
Exploratory capex/recoverable reserves (US$/mcf) 0.05 0.07 0.05 0.06 0.04 0.04
Total capex/recoverable reserves (US$/mcf) 0.92 0.93 0.90 0.93 0.93 0.89
Commencement of production FY10 FY16 FY16 FY16 FY13 FY13
Peak production (mmscmd) 120 79 125 90 71 84
NAV at FY10 end (US$ mn) 12,290 674 1,568 1,095 2,557 2,723
NAV/recoverable reserves at FY10 end (US$/mcf) 0.89 0.07 0.10 0.10 0.30 0.27
NAV at production start (US$ mn) 11,107 8,034 13,152 9,687 7,463 8,253
NAV/recoverable reserves at production start (US$/mcf) 0.81 0.85 0.88 0.90 0.88 0.83
* Deen Dayal block
Table 9: Key offshore blocks’ revenue-share terms with GoI, as per IM

Investment multiple (IM) KG-D6 KG-D3 MN-D4 KG-D9 NEC-25 GSPC DD
0 10 16 10 10 10 20
1.0 10 16 10 10 10 20
1.5 16 16 10 10 10 25
2.0 22 28 19 16 16 30
2.5 28 40 70 25 25 30
3.0 70 76 76 34 34 35
3.5 70 76 85 85 85 40
4.0 and above 70 85 85 85 85 40
% of revenue used to recover costs 90 90 80 90 90 100
17
KG-D6
18
E&P Primer, January 11, 2010

Valuation
As per our estimates, NAV of KG-D6 block gas reserves stands at Rs553bn (US$12.3bn), assuming that gross recoverable gas reserves from the
block are 13.8tcf with commencement of production FY10 onward.
Background
The offshore KG-D6 block, known for the largest domestic gas find, is spread across 7,645km2 lying approximately 20km offshore of the east
coast of India. RIL is the operator and has 90% working interest, with Niko Resources having the remaining interest in the block. Production from
the block’s MA oil discovery commenced in September ’08, and from Dhirubhai 1 & 3 gas discoveries in April ’09. Phase I field development plan
includes drilling and completion of 17 wells, construction of an offshore platform and onshore gas plant facilities.
As per Niko, a development plan has been submitted for nine additional natural gas discoveries, which are adjacent to the existing Dhirubhai 1 & 3
gas fields. It is proposed that these satellite discoveries be tied to Dhirubhai 1 & 3 facilities. Capex requirements and commercial production
commencement time will be finalised after approval of the development plan.
Table 10: KG D6 – Valuations

(Rs bn)
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Production (mmscmd) 45 75 105 120 120 120 120 120 90 80 50 25 15
Sales 97 158 226 234 234 234 234 234 166 144 76 34 20
Less:
Royalty 5 8 11 11 11 11 11 23 16 14 7 3 2
Production costs 25 39 55 62 62 62 62 62 47 42 26 13 8
Government share 1 2 3 9 22 24 25 40 28 23 11 4 2
Depletion 16 27 38 44 44 44 44 44 33 29 18 9 5
Interest paid/(earned) 9 16 14 10 5 (2) (8) (13) (17) (21) (24) (25) (27)
Tax 1 2 3 3 3 3 3 27 21 19 13 10 10
PAT 39 64 103 95 87 91 97 52 40 37 25 20 20
Capex profile
Exploratory 6 6 6 0 0 0 0 0 0 0 0 0 0
Development 79 47 48 46 3 4 0 0 0 0 0 0 0
During production 2 2 2 2 2 2 2 2 2 2 2 2 2
Capex during the year 87 56 56 47 5 5 3 3 3 3 3 3 3
ICICI Securities
FCFF (22) 52 100 102 131 122 124 64 43 36 16 5 2
NAV 553 521 533 480 392 299 194 140 102 69 56 52 53
KG-D3
Valuation
We estimate end-FY10 NAV of KG-D3 block gas reserves at Rs30bn (US$674mn), assuming gross recoverable gas reserves from the block at
9.5tcf, with commencement of production from FY16E.
Background
The D3 block is spread across 3,288km2 with 400-2,100-metre water depth and is located ~45km off the East coast. RIL has 90% stake in the
block, with the remaining stake held by Hardy Oil. There have been two successful gas discoveries in the block. RIL conducted a 3-D survey in
H1CY09 and plans to drill one exploration well in H2CY09 and two in CY10.

(Rs bn)
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Production (mmscmd) 0.0 0.0 0.0 0.0 0.0 0.0 25.4 50.8 63.5 79.4 79.4 79.4 79.4 79.4 79.4 55.6 33.3 16.7 8.3 4.2 2.1 1.0
Sales 0 0 0 0 0 0 65 131 163 204 204 204 204 204 204 143 86 43 21 11 5 3
Less:
Royalty 0 0 0 0 0 0 3 7 8 10 10 10 10 20 20 14 9 4 2 1 1 0
Production costs 0 0 0 0 0 0 15 30 38 47 47 47 47 47 47 33 20 10 5 2 1 1
Government share 0 0 0 0 0 0 1 2 3 3 11 23 23 22 38 26 16 11 5 2 1 0
Depletion 0 0 0 0 0 0 15 30 37 46 46 46 46 46 46 32 19 10 5 2 1 1
Interest cost 0 0 0 0 0 0 25 36 41 39 28 15 4 0 0 0 0 0 0 0 0 0
Tax 0 0 0 0 0 0 1 5 6 10 10 11 12 23 18 13 8 3 1 1 1 0
PAT 0 0 0 0 0 0 5 22 31 49 51 52 61 45 35 24 15 5 3 2 1 1
Capex profile
Exploratory 4 4 4 4 4 4 4 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Development 0 0 0 55 92 92 55 55 18 0 0 0 0 0 0 0 0 0 0 0 0 0
During production 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
Yearly capex 4 4 4 59 96 96 61 57 20 1 1 1 1 1 1 1 1 1 1 1 1 1
FCFF (4) (4) (4) (62) (104) (112) (41) (5) 48 94 96 97 106 90 80 55 33 14 6 3 1 (0)
NAV 30 39 48 118 234 362 438 483 477 426 373 316 242 170 102 52 22 9 3 1 (0) 0
ICICI Securities
19
MN-D4
20

Valuation
We estimate end-FY10 NAV of MN-D4 block gas reserves at Rs71bn (US$1,568mn), assuming gross recoverable gas reserves of 15tcf from the
block, with commencement of production from FY16E.
Background
Deep-water MN-D4 block, spread across 17,050km2, is located in the Mahanadi Basin. RIL is the operator of the block (85% interest) with Niko
Resources having 15% interest. As per Niko, it expects exploration potential in MN-D4 to exceed the potential of the D6 block, which is
understood to contain ~25tcf recoverable gas. The company plans to drill three wells in the block starting FY10.
Table 12: MN D4 – Valuations

(Rs bn)
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Production (mmscmd) 0 0 0 0 0 0 40 80 100 125 125 125 125 125 125 88 53 26 13 7 3 2
Sales 0 0 0 0 0 0 103 206 258 322 322 322 322 322 322 226 135 68 34 17 8 4
Royalty 0 0 0 0 0 0 5 10 13 16 16 16 16 32 32 23 14 7 3 2 1 0
Depletion 0 0 0 0 0 0 23 45 57 71 71 71 71 71 71 49 30 15 7 4 2 1
Interest cost 0 0 0 0 0 0 40 55 64 60 44 23 7 0 0 0 0 0 0 0 0 0
Tax 0 0 0 0 0 0 2 7 10 16 19 20 22 42 36 25 (0) 0 0 0 0 0
PAT 0 0 0 0 0 0 8 36 50 79 92 98 109 82 69 48 (1) 0 1 1 1 1
Capex profile
Exploratory 5 5 5 5 5 5 5 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Development 0 0 0 86 143 143 86 86 29 0 0 0 0 0 0 0 0 0 0 0 0 0
Yearly capex 5 5 5 91 148 148 93 88 31 2 2 2 2 2 2 2 2 2 2 2 2 2
FCFF (5) (5) (5) (94) (160) (172) (62) (7) 76 147 160 166 178 150 138 96 27 13 6 2 1 (0)
NAV 71 85 100 210 391 592 712 785 779 701 612 509 380 258 136 45 20 8 3 0 (0) 0
ICICI Securities
KG-D9
Valuation
We estimate end-FY10 NAV of KG-D9 block gas reserves at Rs49bn (US$1,095mn), assuming gross recoverable gas reserves of 10.8tcf from the
block, with commencement of production from FY16E.
Background
RIL is the operator of the block (with 90% interest), which is spread over 11,605km2 in the Bay of Bengal with water depth in the 2,300-3,100-
metre range. One exploratory well was drilled in CY09 that was dry. Three more exploration wells are planned to be drilled by end-CY10.

(Rs bn)
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Production (mmscmd) 0 0 0 0 0 0 29 58 72 90 90 90 90 90 90 63 38 19 9 5 2 1
Sales 0 0 0 0 0 0 74 149 186 232 232 232 232 232 232 163 98 49 24 12 6 3
Less:
Royalty 0 0 0 0 0 0 4 7 9 12 12 12 12 23 23 16 10 5 2 1 1 0
Depletion 0 0 0 0 0 0 17 34 42 52 52 52 52 52 52 37 22 11 6 3 1 1
Interest cost 0 0 0 0 0 0 29 41 47 44 33 17 5 0 0 0 0 0 0 0 0 0
Tax 0 0 0 0 0 0 1 5 7 12 13 14 16 30 27 19 9 5 2 1 1 0
PAT 0 0 0 0 0 0 6 26 36 57 62 67 77 58 52 36 18 9 5 2 1 1
Capex profile
Exploratory 4 4 4 4 4 4 4 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Development 0 0 0 63 105 105 63 63 21 0 0 0 0 0 0 0 0 0 0 0 0 0
Yearly capex 4 4 4 67 110 110 69 65 23 2 2 2 2 2 2 2 2 2 2 2 2 2
FCFF (4) (4) (4) (70) (119) (127) (46) (5) 55 107 113 118 128 109 103 71 39 19 9 4 1 (0)
NAV 49 60 73 154 288 436 526 580 576 521 462 392 302 218 129 65 30 13 5 1 (0) 0
ICICI Securities
21
NEC-25
22

Valuation
We estimate end-FY10 NAV of NEC-25 block gas reserves at Rs115bn (US$2,557mn) assuming gross recoverable gas reserves of 8.5tcf from
the block with commencement of production from FY13E.
Background
Shallow water NEC-25 block is located in the Mahanadi Basin in East India. RIL is the operator of the block (90% interest) with Niko Resources
having 10% interest. According to Gaffney, Cline & Associates, the project comprises six gas discoveries in the block in the Orissa coast, which
has in-place gas reserves of more than 8.3tcf. Recently, as per media, RIL received the Petroleum Ministry's approval to develop NEC-25 at
US$2bn. Eight significant gas discoveries have been made in the block and the approval will cover the development of six; twelve development
wells would be drilled in the six discoveries. The RIL-Niko consortium plans to drill 15 more exploration wells.
Table 14: NEC 25 – Valuations

(Rs bn)
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
Production (mmscmd) 0 0 0 23 45 57 71 71 71 71 71 71 50 30 15 7 4 2 1
Sales 0 0 0 58 117 146 183 183 183 183 183 183 128 77 38 19 10 5 2
Less:
Royalty 0 0 0 3 6 7 9 9 9 9 18 18 13 8 4 2 1 0 0
Production costs 0 0 0 13 27 34 42 42 42 42 42 42 29 18 9 4 2 1 1
Government share 0 0 0 1 1 1 2 6 13 21 19 27 19 14 7 3 1 1 0
Depletion 0 0 0 14 28 35 44 44 44 44 44 44 31 18 9 5 2 1 1
Interest cost 0 0 0 23 33 38 36 26 14 4 0 0 0 0 0 0 0 0 0
Tax 0 0 0 1 4 5 9 9 10 11 20 18 12 6 3 2 1 1 0
PAT 0 0 0 3 18 26 42 46 51 52 39 34 24 13 6 3 2 1 1
Capex profile
Exploratory 2 2 1 1
Development 51 85 85 51 51 17
During production 0 0 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
Capex during the year 53 87 86 53 52 18 1 1 1 1 1 1 1 1 1 1 1 1 1
FCFF (55) (94) (100) (35) (5) 43 84 89 93 95 82 77 53 30 14 7 3 1 (0)
NAV 115 221 336 404 446 443 398 350 293 228 164 98 50 23 10 4 1 (0) 0
ICICI Securities
GSPC’s Deen-Dayal block
Valuation
We estimate end-FY10 NAV of Deen-Dayal (DD) block gas reserves at Rs123bn (US$2,723mn), assuming gross recoverable gas reserves of
10tcf from the block, with commencement of production from FY13E.
Background
Deen Dayal, a shallow water eastern offshore block, was awarded to the GSPC-led consortium during NELP-III round, wherein GSPC holds 80%
stake. In the past, GSPC reported a major discovery of 20tcf in the DD block, which was later reduced by the DGH to 3.6tcf. India’s upstream
regulator, DGH, has approved the commerciality of four discoveries in the block. These discoveries are expected to begin production by ’12 and
would supply 8-10mmscmd gas initially. Other than commercially approved four discoveries in the block, GSPC has also discovered gas in three
exploratory wells and discovered oil in one prospect.
The DD block is divided into three parts – DD West, DD East and DD North. The field development plan of the western part of the block includes
development of 15 wells.
Table 15: GSPC’s Deen Dayal – Valuations

(Rs bn)
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
Production (mmscmd) 0 0 0 27 53 67 84 84 84 84 84 84 59 35 18 9 4 2 1
Sales 0 0 0 69 138 172 215 215 215 215 215 215 150 90 45 23 11 6 3
Less: 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Royalty 0 0 0 3 7 9 11 11 11 11 21 21 15 9 5 2 1 1 0
Production costs 0 0 0 16 32 40 49 49 49 49 49 49 35 21 10 5 3 1 1
Government share 0 0 0 0 0 0 0 29 31 38 36 43 30 18 9 4 2 1 0
Depletion 0 0 0 16 32 40 50 50 50 50 50 50 35 21 10 5 3 1 1
Interest cost 0 0 0 27 37 43 41 30 16 4 0 0 0 0 0 0 0 0 0
Tax 0 0 0 1 5 7 11 8 10 11 20 18 12 7 4 2 1 1 0
PAT 0 0 0 6 25 34 54 38 49 52 39 34 24 14 7 4 2 1 1
Capex profile
Exploratory 2 2 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Development 58 97 97 58 58 19 0 0 0 0 0 0 0 0 0 0 0 0 0
During production 0 0 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
Yearly capex 60 99 98 60 59 21 1 1 1 1 1 1 1 1 1 1 1 1 1
ICICI Securities
FCFF (62) (107) (114) (38) (3) 53 102 87 97 100 87 82 57 34 16 8 3 1 (0)
NAV 123 241 371 445 488 476 415 372 314 246 179 108 57 26 11 4 1 (0) 0
23
24
Cairn’s Rajasthan block (RJ-ON-90/1)

Valuation
We estimate end-FY10 NAV of Cairn’s Rajasthan block crude reserves at Rs624bn (US$13,889mn), assuming gross recoverable crude reserves
of ~1,100mmbl and 185,000bpd peak production from the block, with production already having commenced in Q2FY10.
Background
Cairn India, with 70% interest, is the operator of this pre-NELP block and ONGC holds the remaining 30% interest. Cairn struck one of the largest
domestic oil discoveries in recent times in Rajasthan in this block, where key fields are Mangala, Aishwariya, Saraswati & Raageshwari. Gross 2P
reserves from the block are 1,079mmboe. Production commenced in Q2FY10, with peak expected production of 185,000bpd from mid ’11.
Table 16: Cairn’s RJ-ON-90/1 – Valuations

(Rs bn)
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
Gross Production ('000bpd) 35 131 183 185 185 185 185 182 179 171 154 131 114 101 89 79 72 67
Net Cairn's Production ('000bpd) 24 91 128 130 130 130 129 128 125 119 107 91 80 71 62 55 51 47
Rajasthan P&L (net to Cairn)

Sales 539 2,043 3,066 3,108 3,109 3,109 3,099 3,060 3,001 2,862 2,575 2,189 1,905 1,694 1,487 1,328 1,213 1,124
Less:
Cess 24 92 131 133 133 133 133 131 128 123 110 94 82 73 64 57 52 48
Production and SG&A costs 88 246 335 339 348 378 448 506 532 531 488 415 363 328 288 259 239 225
Government share 0 0 0 0 473 467 451 649 834 786 879 747 649 575 504 450 409 378
DD&A 47 182 261 264 264 265 264 260 255 244 219 186 162 144 127 113 103 96
Interest cost 48 12 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Add: other income 28 20 36 48 55 71 82 95 109 125 156 171 185 198 209 218 227 234
Less: taxes 61 259 402 409 329 327 318 271 229 219 173 153 139 129 119 111 106 102
PAT 300 1,272 1,973 2,010 1,617 1,611 1,568 1,338 1,131 1,084 862 765 694 644 594 556 530 510
Capex profile (net to Cairn)

Development capex 523 517 459 249 249 187 156 124 86 62 62 31 31 31 31 31 30 30
Pipeline capex 186 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Yearly capex 709 517 459 249 249 187 156 124 86 62 62 31 31 31 31 31 30 30
FCFF (460) 1,172 1,891 2,016 1,662 1,628 1,645 1,015 873 864 677 564 516 452 393 346 312 287
NAV 8,557 8,480 7,700 6,693 5,908 5,054 4,071 3,589 3,186 2,739 2,421 2,174 1,943 1,745 1,581 1,442 1,319 1,204
ICICI Securities
Annexure 1: Oil and Gas E&P basics
Answers to elementary questions
Exploration & production (E&P) or the ‘upstream oil’ sector is a business where oil &
gas companies are involved in finding oil and gas reserves (through acquiring land
leases, surveying, prospects identification and drilling), verifying commerciality and
finally setting-up necessary infrastructure to begin oil & gas production.
We have introduced the preliminary description of some elementary queries about the
E&P business, for basic knowledge of the sector.
How oil & gas deposits are formed

Oil and gas are formed from the decayed remains of plants and animals (organic) that
lived millions years ago and accumulated under sedimentary rocks. With application
of heat and pressure, this decayed matter was converted into oil and gas. As soon as
a plant or animal dies, bacteria attack its remains. If oxygen is plentiful, as in soil,
bacteria will consume all the organic matter. But in very fine-grained muds deposited
on the sea floor, oxygen is limited and much of the organic matter escapes
destruction. As these muds are buried by successive layers of sediment, rising heat
‘cooks’ the organic matter, throwing off water, carbon dioxide and hydrocarbons.
Chart 4: Petroleum and natural gas formation
Source: EIA
Usually, oil & gas deposits are found in pools, where water is at the bottom and the oil
and gas layers lie at the top.
25
Chart 5: Oil, gas and water deposits in a reservoir
Source: OSRADP
Four essential conditions for oil & gas deposits

Oil and gas are found in sedimentary rocks that cover ~75% of the earth’s surface.
Limestone, dolomite, sandstone, shale and siltstone are sedimentary rock surfaces
where petroleum geologists search for oil and gas. It is within these layered
sedimentary rocks where geologists look for combination of four essential conditions
that need to be met for oil & gas possibility: i) source rock ii) migration iii) reservoir
rock iv) trap.
Chart 6: Oil formation mechanism
Source: NOAA
26
Source rock
Petroleum source rocks are usually thick, black sea shale, where decayed organic
matter was converted into petroleum millions of year ago. The source rocks are
characterised by low porosity and low permeability. For crude oil generation from
organic matter, temperatures and pressure must be just perfect. Temperature should
be between 49ºC and 177ºC, and depths of deposits between 5,000ft and 21,000ft. A
higher temperature range of the source rock results in formation of natural gas.
Migration
Movement of oil & gas deposits from source rock into reservoir rock is called primary
migration. Sometimes, reservoirs are filled of oil & gas that has migrated just a small
distance from nearby source rocks (shale). But, huge oil & gas pools are also found
hundreds of miles away from the original source rocks.
Reservoir rocks
Reservoir rocks are hosts for hydrocarbons. In contrast to the source rocks, reservoir
rocks have good porosity and permeability. Reservoir rocks are deposited in high-
energy conditions such as waves and currents, which take away mud particles and
most of the organic matter, resulting in open pores. Therefore, reservoir-quality rocks
– sandstone and limestone – initially include very little organic matter. It is the
migrated oil and gas that has deposited in these reservoirs.
Trap
Crude oil and natural gas, once formed in the source rock, constantly look for lower
pressures, leading to their upward movement through natural conduits in the earth’s
layers. If no blockade intercedes, these hydrocarbons will finally leak out of the earth’s
surface. However, migrating oil and gas often hits a sealing layer of rock which cannot
allow passing. These seals are sedimentary rocks with very small permeability that do
not allow oil and gas to migrate any farther upward. The entrapment of oil & gas due
to these seals is called the ‘trap’. Folded or faulted rock layers can form structural
traps, which are usually anticlines, domes or horst blocks. Stratigraphic traps form due
to changes within the rock layers, as porous rocks such as reefs or river-channel
sandstones are surrounded by nonporous rock. Combination traps, with both
structural and stratigraphic elements, are also possible. In a trap, oil, gas & water are
separated according to densities – gas rising to the top, oil in the middle and water at
the bottom. Shale and thick salt layers offer excellent trap.
27
E&P business – Various stages
Exploration stage
Exploratory acreage purchase and signing of PSCs
The exploration process starts with purchasing/acquiring rights as a lease to explore
the region for oil and gas. Some of the key terms of the lease which are agreed upon
with the government are:
• Minimum work programme (drilling commitments) for exploratory phases.

Minimum work programme (MWP) includes capex, drilling of exploratory wells and
minimum seismic surveys targeted for each phase of exploration – e.g., phase I
may require 13 line km of 2D surveys & 500km2 of 3D surveys; and phase II of
exploration may require 600km2 of 3D survey and drilling of three exploratory
wells.
• Duration of exploration decides time-period deadline of various exploration
phases, so that required MWP commitments are carried within that time-period. If
the contractor (E&P company) misses these deadlines without a valid (agreed
upon) contract, then penalty would be imposed in monetary terms or through
additional MWP requirements.
• Criteria to declare oil & gas find as discovery involves positive results from
running the required agreed-upon tests to declare results of exploratory well as
discovery or not.
• Signing of production sharing contract. A production sharing contract (PSC) is
signed with the government and includes agreed-upon fiscal terms such as royalty
& cess payment rates and tax incentives for production from future discovery.
PSCs also decide rules of revenue sharing with the government and oil company.
Some indicative features of a typical PSC are:
- Recovery of costs – All payments made to the government, except income
tax, are recoverable from oil & gas sales revenue. The recoverable costs
include production costs, exploration costs and development costs.
Unrecovered portion of these costs would be carried forward and recovered in
subsequent years, while the recovered portion of these costs in any year is
called cost petroleum.
(Note: Investment multiple – The profit petroleum in any year is computed as follows
– oil & gas revenue less cost petroleum in any year. This profit petroleum is shared
between the government and oil company on the basis of IM levels. The IM in any
year is the ratio of cumulative net cash income of the oil company to cumulative
investments by itself, where cumulative net cash investment includes exploratory
expenses, development expenditure, operating cash expenses and statutory
taxes/levies.)
Exploration & seismic studies and identification of prospects

After signing of a PSC, the oil company begins the exploration process by various
geophysical surveys such as gravity and magnetic surveys, seismic studies (2D, 3D)
and electromagnetic surveys. From combining various surveys data, geologists
attempt identifying the requirements for commercial quantities of oil & gas
28
accumulation beneath the earth’s surface. These surveys help identify the four
essential conditions for presence of hydrocarbons – source rock, migration, reservoir
rock and trap.
Then, on the basis seismic surveys results, geophysicists identify the most promising
exploratory well-drilling locations called ‘prospects’.
Drilling of exploratory wells

Though interpretation of seismic studies can indicate chances of presence of
hydrocarbons beneath the earth’s surface, it is not a guarantee about presence of
hydrocarbons. It is the drilling of a well that finally clarifies if hydrocarbons are actually
present.
For oil companies, whether a prospect merits drilling is a detailed evaluation exercise
of reward and risk. Companies put in a significant amount of effort for evaluating
presence of potential reserves volumes, hydrocarbons type etc. Risks such as
technical, political and estimated dry well costs are also taken into account. Usually,
oil companies maintain inventory of prospects ranked as per possible reserves upside
versus risks involved and plan their drilling programme accordingly. But many times,
oil companies drill a prospect independent of their risks owing to MWP drilling
requirements within the stipulated duration to retain the lease.
Among the various identified prospects, a region where no hydrocarbons were

discovered earlier is considered the most risky prospect and a well drilled in that area
is called ‘wildcat well’. Since drilling a deepwater well may cost US$30-100mn, and
accordingly, sometimes minimum 100mmbl of oil discovery required to justify
significant drilling & development expenditures are involved. Therefore, a deepwater
‘wildcat well’ is one of the most risky prospects and oil companies reduce this risk by
partnering (farm out) the prospect with other firms.
Oil companies are involved in exploratory drilling of less risky targets such as areas
nearby some producing fields and undeveloped discoveries. This is so as such firms
already have better subsurface knowledge of these areas, and can easily develop
small discoveries without incurring significant capex due to sharing of nearby
production facilities.
29
Chart 7: Oil & gas exploration drilling
Source: Geology.com
Results of exploratory drilling – Discovery well or dry well

An exploratory well that reveals presence of a hydrocarbon-bearing reservoir is called
discovery well; the exploratory well is called a dry well if required quantities of
hydrocarbons are not present.
Appraisal
A discovery from a single well itself would not justify the development economics, and
additional positive results from nearby appraisal wells drilling are required to asses the
extent and properties of discovered field.
After appraisal of the discovery, if a field contains sufficient quantities of recoverable

oil & gas reserves, then extensive development of the discovered field is initiated;
otherwise, the field is left unexplored as future prospect (e.g., higher oil prices or
better cost technology) would justify the field economics.
Development & production stages

Development of the field
Based on production & cost profile and recoverable reserves, a field development
plan (FDP) is prepared, comprising of detailed plan of engineering work, drilling of
development wells, setting up pipelines and installation of production & processing
facilities. The aim of an FDP is to maximise returns from the field, post which
development is initiated (as per FDP).
Development costs are capitalised and generally comprise over two-third of the
finding & development (F&D) costs. Development expenditure depends on field
location (onshore/offshore), field size, hydrocarbon properties, oil & gas mix, reservoir
properties and depth of hydrocarbons:
30
• Field location. Development cost of offshore fields is higher than that of onshore.
Usually, drilling costs of onshore well are US$50,000/day, of shallow-water
offshore wells are US$100,000-200,000/day, and of deep-water offshore wells are
US$300,000-500,000/day.
• Size of discovery. Higher discovery size reduces per-barrel fixed cost
(production/processing facilities) as more reserves share the common facilities.
• Hydrocarbon properties. If crude is waxy or of high pouring point (i.e.,
temperature at liquid converted to solid form), additional heating facilities are
required on the crude off-take pipelines so that crude remains in a liquid state and
flows smoothly through the pipeline. Moreover, additional wells for water/polymer
injection are required for more oil recovery that increases development
expenditure.
• Oil & gas mix. Development of only an oil-containing field is simple, while
presence of gas complicates the development process as additional gas offtake &
processing facilities are required, though presence of gas improves the oil
recovery.
• Reservoir properties. The lower the permeability (ease with which fluid passes
through) of reservoir, the higher the recovery of oil and gas and, hence, the lower
the number of wells required to recover the reserves. Highly porous reservoir
requires additional well completion costs such as more cementing of wells.
• Depth of hydrocarbons reservoir. The deeper the presence of hydrocarbons
beneath the earth’s surface, the more time and material required for drilling and
completion of wells.
Commencement of production, production ramp-up & peak/plateau production
Production commences post completion of development activities. Production facilities
are designed for plateau production rate. Plateau gas production rate is normally
linked to fulfil gas sales contract. On the other hand, plateau oil production rate
duration is shorter than plateau gas production rate as the target is to maximise oil
production owing to oil being easily transportable & sold in spot.
Chart 8: Typical oil & gas field production profile
Source: Ecosilly
31
When production is started from a field, the oil company focuses on reservoir
management in order to maximise oil & gas production over the life of the reservoir.
Though, 100% oil or gas recovery is not possible from the reservoir, better reservoir
management leads to higher oil & gas recovery and longer reservoir life.
Additional drilling and applying EOR/IOR to arrest field production decline

Production from a well exhibits the continuous decline in production rate, unless
secondary or tertiary oil recovery techniques, such as enhanced oil recovery (EOR)
and improved oil recovery (IOR), are applied. EOR/IOR either offsets or minimises the
production rate decline for sometime, leading to broader plateau production time. But
wells again start witnessing a declining production trend; therefore, additional wells
are required to be drilled in order to reduce production decline at overall field level, as
production from new wells would offset production decline from old wells.
Chart 9: ONGC arrests production decline through EOR/IOR campaign
Source: ONGC presentation
Oil companies take into account many alternatives to recover oil and gas from the
reservoir as, in most fields, only a portion of the oil can be produced by natural
reservoir pressure. Hence, an oil company may enhance recovery through techniques
that maintain the reservoir’s pressure and flow. This can be done through
secondary/tertiary (EOR/IOR) recovery techniques such as injection of heat, water,
CO2 gas, polymers and chemicals in the reservoir. A familiar EOR technique is
applied to onshore fields called ‘infill’ drilling, where the company drills a new well in
between producing wells to offset production decline from old wells.
Overall production decline at field level

Production decline at field level starts when there is no further scope to increase field
production due to additional drilling wells as most of the recoverable reserves would
be produced from the current production wells (Note: Reserves recoverable from such
wells, without any significant additional capex, are called ‘proved developed producing
reserves’ or PDP reserves).
32
Production becomes uneconomical – Plug & abandon well and field
When declining production rate from a well reaches such a low level that revenue
from the well is not sufficient to recover operating expenses, then the well is plugged
and abandoned after incurring site restoration expenditure as regulatory requirement.
Similarly, a field is abandoned after site restoration, when production from the field
does not provide economic returns and there is no further scope to economically
increase production.
Understanding the definition & classification of ‘reserves’

Chart 10: Petroleum reserves classification
Source: Society of Petroleum Engineers
In the Indian perspective, understanding the definition and classification of reserves is

vital as Indian E&P companies’ reserves disclosures are not comparable.
For example, ONGC discloses its ultimate reserves (also called 3P or

Proved+Probable+Possible) accretion to show reserve replacement ratio (i.e.,
reserves added per annual production). While ONGC discloses proved reserves (1P)
in its annual report, Cairn India discloses 2P reserves (Proved+Probable). Niko
discloses proved and probable reserves separately in its annual filings that are mainly
KG D6 reserves. If proved reserves data of Indian firms is not available, then 2P and
3P reserves of Indian firms are not comparable with developed E&P markets – e.g.,
US E&P firms disclose just proved reserves (1P), as per SEC requirements.
We have attempted to elucidate reserve classification, based on Society of Petroleum

Engineers (SPE) classification (Chart 10). Here, reserves classification is explained
on the basis of the degree of uncertainty of economical recovery as well as degree of
increasing maturity that categorises initially-in-place reserves as per improvement in
the economics of the field.
33
In Chart 10, the horizontal axis represents the range of uncertainty in the estimated
potentially recoverable volume for an accumulation, whereas the vertical axis
represents the level of status/maturity of the accumulation. Many organisations
choose to further sub-divide each resource category using the vertical axis to classify
accumulations on the basis of commercial decisions required to move an
accumulation towards production. In Chart 10, the low, best and high estimates of
potentially recoverable volumes should reflect some comparability with the reserves
categories of Proved, Proved+Probable and Proved+Probable+Possible respectively.
While there may be a significant risk, i.e., sub-commercial or undiscovered
accumulations will not achieve commercial production, it is useful to consider the
range of potentially recoverable volumes independently of such a risk.
• Total petroleum initially-in-place reserve is the quantity of petroleum that is

estimated to exist originally in naturally occurring accumulations. Hence:
Total petroleum-initially-in-place = quantity of petroleum estimated, on a given
date, to be contained in known accumulations + quantity already produced +
estimated quantity in accumulations yet to be discovered.
In the same manner, stock tank oil initially in place (STOIIP) and gas initially in
place (GIIP) are defined. Total petroleum-initially-in-place may be subdivided into
discovered petroleum-initially-in-place and undiscovered petroleum-initially-in-
place, with the former being limited to known accumulations:
- Discovered-initially-in-place reserve is the quantity of petroleum that is
estimated, on a given date, to be contained in known accumulations + quantity
already produced. Discovered petroleum-initially-in-place may be subdivided
into commercial and sub-commercial categories, with the estimated potentially
recoverable portion being classified as reserves and contingent resources
respectively, as defined below:
• Reserves are those quantities of petroleum that are anticipated to be
commercially recovered from known accumulations (discovered) from a
given date. Reserves are divided into three categories – proved, probable
and possible – that indicate low-to-high uncertainty of recovery. Hence,
proved reserves are most valuable reserves followed by risky probable and
more risky possible reserves. Investors require adjusting probable and
possible value for the uncertainty risk before valuing them.
¾ Proved reserves are those that are commercial in current economic
conditions, such as prices, technology, costs environment – e.g., a well
is drilled for production when reserves are commercially recoverable at
current crude prices and, thus, classified as proved reserves. But after
drilling the well and commencement of production, crude prices fall
such that revenue from oil production will not recover past
development capex, though oil production is still economically
profitable after incurring operating expenses as no further development
capex is required. Then, reserves will still be in the proved reserves
category. Overall, it is the low reserves recovery risk and
commerciality of the reserves to produce dictates whether reserves
would be classified as less-risky proved reserves or high-risky
probable/possible reserves. Proved reserves are classified as proved
developed and proved undeveloped reserves.
34
Proved undeveloped (PUD) are those that are expected to be
recovered from future wells and facilities, including future
EOR/IOR projects that are anticipated with a high level of certainty
in reservoirs.
Proved developed (PD) are those that are expected to be
recovered from existing wells and facilities. Among proved
reserves, PD reserves are more valuable as against PUD as most
development activities have already been completed for PD
reserves. PD reserves are classified as proved developed
producing (PDP) and proved developed non-producing (PDNP):
⇒ PDP are PD reserves that are expected to be recovered from
currently producing wells.
⇒ PDNP are PD reserves that are expected to be recovered
from: i) wells that are completed but have not started
production, ii) wells that are shut for market conditions or
pipeline connection work.
¾ Probable reserves are those unproved reserves that are anticipated
to be included in the proved reserves category: i) by additional drilling
nearby proved reserves areas, where access to these reserves is not
sufficient to classify them as proved reserves currently, ii) where
studies suggest that reserves appear to be productive but lack of some
required tests such as drilling does not justify them to be considered
part of the less risky proved reserves category, iii) reserves that can
not be accessed due to minimum well spacing requirements but can be
accessed if infill wells drilling between existing producing wells is
allowed, iv) reserves recovered through IOR/EOR methods that are
under pilot projects, v) reserves to be recovered from additional capex,
where current procedures on similar reservoirs do not provide
successful results.
¾ Possible reserves are those unproved reserves that are less likely to
be recoverable than probable reserves. Possible reserves may
comprise: i) reserves that possibly exist beyond probable reserves
areas, ii) log/core analysis suggests likely presence of petroleum-
bearing reserves, but might not produce at rates that justifies
commerciality, iii) other criteria similar for probable reserves definition,
but carrying additional risk such as commerciality and recoverability.
o Contingent resources are those quantities of petroleum that are
estimated, on a given date, to be potentially recoverable from known
accumulations (discovered), but are not currently considered to be
commercially recoverable. For example, RIL’s two discoveries in KG-
D3 blocks last year are currently considered contingent resources
because commerciality of those discoveries is subject to further
positive results owing to significant capex requirements in the offshore
block.
35
- Undiscovered-in-place reserve is that quantity of petroleum which is estimated,
on a given date, to be present in accumulations yet to be discovered. The
estimated potentially recoverable portion of undiscovered petroleum-initially-in-
place is classified as prospective resources.
o Prospective resources are those quantities of petroleum which are
estimated, on a given date, to be potentially recoverable from undiscovered
accumulations.
- Unrecoverable are those quantities of in-place-petroleum that are not
recoverable by any means using current technology. For example, if the recovery
factor of an oil field is 0.3, then 30% of the in-place hydrocarbons would be
recoverable and the remaining 70% unrecoverable.
36
Annexure 2: Key exploration risks
The exploration stage carries higher risks such as likelihood of negligible/nil
hydrocarbons presence, lower-than-expected reserves and possibility of non-
commercial discovery. The risks can be broadly divided in three types and should be
used to translate the unrisked reserves into expected risked reserves by ascribing the
appropriate probability for these reserves (process of computing risky reserves from
unrisked reserves is called reserve risking).
Risky Reserves = Unrisked Reserves x {1 – Probability (Commerciality risk)} x {1 –

Probability (Geology risk)} x {1 – Probability (Wrong well drilling risk)}
Commerciality risk
Commerciality risk entails that anticipated reserves from the exploratory prospect
might not be commercially developed due to reasons such as dip in crude prices,
lower hydrocarbons finds that would not justify development capex economics and
cost escalation.
For example, despite two discoveries in KG-D3 blocks, commerciality of the block has
not been established. Further positive drilling results from nearby/appraisal wells in
the block are required to prove commerciality. However, post two discoveries in KG-
D3 block, commerciality risk would become significantly lower.
Geology risk (on commercially proved acreage)

Assuming that commerciality of the discovered reserves has been proved, it is the risk
that upside of reserve accretion near commercially-proved reserves could be lower
than expected due to limited information on geology beneath the earth’s surface. In
other words, it is the risk that reservoir boundary could be smaller than expected
earlier, leading to risk of lower reserve accretion. This risk is relevant for commercially
proved blocks such as KG-D6; there are expectations of further reserve accretion
near D1 & D3 gas discoveries.
Risk of drilling dry hole

Wrong well drilled is called ‘dry hole’, which is an exploratory or development well
found to be incapable of producing either oil or gas in sufficient quantities to justify
completion as an oil or gas well.
Drilling a dry hole during wildcat exploration (a region where no hydrocarbons were
discovered earlier) raises concerns about the presence of sufficient in-place
hydrocarbons in the acreage and, therefore, increases the ‘commerciality risk’ or
lowers the ‘un-risked reserves’. Drilling a dry appraisal well near a discovery leads to
lowering of reserve estimates from discovery.
‘Wrong well drilling risk’ not only reduces the risky reserves (risk adjusted un-risked
reserves) that are used to value an E&P asset, but also increases F&D cost, leading
to lower returns expectations from exploratory E&P asset and, subsequently, lower
E&P asset value.
37
Annexure 3: Oil & gas properties vital for valuation
Crude oil characteristics
Light versus heavy crude
Crude oil is categorised by its density and is measured as API (American Petroleum
Institute) gravity in degrees. API gravity is a measure of relative density of various
crude oils against water and is widely used to compare relative densities of different
crude types. API gravity of fresh-water is 10, implying that water is heavier than crude.
Crude oil is classified as light, medium or heavy, according to its API gravity (Table
17). The lighter the crude oil, the higher its value as lighter variety crude gives higher
yield of more valuable lighter refinery products such as gasoline.
Table 17: Crude oil category, as per API
API gravity (degrees) Crude oil type
Less than 10 Extra heavy oil or bitumen
10 Fresh water
10 to 22.3 Heavy crude oil
22.3 to 31.1 Medium crude oil
More than 31.1 Light crude oil
Source: Wikipedia, I-Sec Research
API gravity = (141.5 / specific gravity at 60°F) – (131.5)

Sweet versus sour crude
Crude oil is also characterised as sweet or sour crude. Sweet crude contains less
than 0.5% sulphur, while sour crude contains more than 0.5% sulphur. Sweet crude is
more valuable than sour crude because it is less expensive to refine as it contains a
disproportionately large amount of fractions that are used to process gasoline,
kerosene, and high-quality diesel. On the other hand, sour crude requires additional
crude processing facilities to remove sulphur & other impurities to produce.
Wax content in crude
Viscosity (the measure of oil’s resistance to flow) of oil depends on its wax content.
The higher the wax content, the higher the resistance to flow. Viscosity decreases
with increase in temperature and pressure. Therefore, highly viscous oil needs extra
costs on additional heating facilities during pipeline transportations so that oil can flow
smoothly through pipeline. Higher wax content oil also requires additional refinery
facilities investments to remove wax content from oil in order to avoid choking of
refinery equipments from the oil. Hence, higher wax content oil is cheaper versus
lower wax content oil.
Natural gas characteristics
Sour versus sweet gas
Sour natural gas is a natural gas that contains sulphur and other impurities that should
be removed; sweet natural gas contains nil or minimal sulphur compounds such that
no gas processing requires. Therefore, sour gas is less valuable than sweet gas.
Dry versus rich gas
Dry gas or lean gas contains insufficient quantities of hydrocarbons heavier than
methane to allow their extraction for more value-added products production such as
LPG. Rich gas contains sufficient hydrocarbons to produce more valuable LPG.
Therefore, dry gas is cheaper than rich gas on basis of equivalent volumes.
38
Annexure 4: Domestic oil & gas pricing
Oil pricing
Pricing of domestically-produced crude oil is benchmarked against actively-traded
crude variety globally, usually by adjusting benchmark crude prices for gross product
worth (GPW) differentials and crude quality premium/discount. GPW is the value of
the weighted average price quotes of products such as LPG, SKO, naphtha and wax-
residue, as per the percentage yields of these products from the crude.
Therefore, for a particular month, the average price to be quoted for domestically
produced crude would be:
Average domestic crude price = A + B + C (1)

Where,
A = Average benchmark crude price
B = GPW differential over benchmark crude
C = +/- Quality Premium/Discount over benchmark crude
Illustration: RIL’s KG-D6 MA oil price calculation
RIL’s crude price is benchmarked to Bonny Light crude for GPW differential and 2%
quality differential premium.
As an illustration, we assume that for the month under consideration, average Bonny
Light prices are US$75/bl.
As per formula (1) above,
Average Bonny Light prices, A = US$75/bl
Based on this, we have calculated GPW in US$/MT of Bonny Light and KG MA oil
(Table 18).
Table 18: GPW calculation of crude

Weight yields (%) GPW per MT of crude (US$/MT)
Average Conversion Bonny Bonny
Products monthly price from MT to bl Light KG D6 Light KG D6
LPG 600 US$/MT 1.0 0.7 1.1 3.9 6.4
Naphtha 70 US$/bl 9.0 15.1 20.9 95.0 131.9
SKO 80 US$/bl 7.9 15.2 17.3 96.0 109.6
HSD 85 US$/bl 7.5 36.6 32.5 231.6 205.5
Wax Residue 60 US$/bl 6.7 32.5 28.2 130.7 113.4
Total 100.0 100.0 557.2 566.8
39
We then convert the GPW value of crude from US$/MT to US$/bl (Table 19).
Table 19: GPW conversion from US$/MT to US$/bl

GPW (US$/MT) Conversion – MT to bl GPW (US$/bl)
Bonny Light 557.2 7.31 76.2
KG MA oil 566.8 7.75 73.13
GPW differential (3.1)

For formula (1) above,

B = US$(3.1)/bl (as per Table 18 & Table 19)
C = 2% of average Bonny Light price = 2% of 75 = US$1.5/bl
Thus, average KG MA oil price = A + B + C = 75 – 3.1 + 1.5 = US$73.4/bl
Gas pricing
Currently, there are two types of gas pricing regimes in India – APM and non-APM.
APM gas is produced by national oil companies (NOCs) – ONGC and OIL – from the
blocks nominated to NOCs. Non-APM gas is domestically produced from private firms
or private firms’ JVs with NOCs. Non-APM gas also includes gas from imported LNG.
Domestically-produced, non-APM gas pricing is decided as PSC for the producing
field. On the other hand, imported LNG’s long-term pricing is mainly determined from
the sales & purchase contract between LNG seller (such as Qatar LNG) and LNG
purchaser. However, the government has intervened in long-term LNG pricing to LNG
purchasers through Petronet LNG by applying pooled LNG price (average LNG price).
For Spot LNG, pricing is determined by agreed-upon terms between the seller and
purchaser.
In FY09, 90mmscmd of natural gas domestically produced, of which 75% was APM
gas and 25% was obtained from private/JVs. But APM gas share in domestic gas
production is expected to decline in the next five years on account of ramp-up in RIL’s
KG-D6 gas production as well as production from other NELP discoveries.
APM gas pricing

APM gas is sold at significant discount vis-à-vis non-APM gas or free market gas.
APM gas is only available to priority sectors – Power, Fertilisers, consumers under
court directed order for APM gas supply, and consumers with <50,000scmd gas
allocation.
The price of APM gas does not vary among states, but for North East and rest of
nation customers. APM gas price also varies among sectors. The price at which
NOCs sell gas to GAIL is called ‘producer price’ and price at which GAIL sells APM
gas to customers is called ‘consumer price’. Difference between consumer and
producer prices is used to create a gas pool account, which is used to provide costly
non-APM gas to priority consumers at discounted APM price.
40
Table 20: APM gas producer and consumer prices
Price (Rs/mscm) Remarks
Producer price
Rest of nation 3,200
NorthEast 1,920 40% discount to rest of nation
Consumer price to rest of nation (ex NorthEast)

Power and fertiliser customers 3,200 Same as producer price
Other than power and fertiliser consumers 3,840 20% higher than power and fertiliser
consumers
Consumer price to North East

Power and fertiliser customers 1,920 40% discount to ex NorthEast power
and fertiliser consumers
Other than power and fertiliser consumers 2,304 20% higher North East power and
fertiliser consumers
Non-APM, pre-NELP gas pricing

Non-APM, pre-NELP gas is produced by private consortium or private JVs with NOCs
and gas pricing is governed as per PSCs. Table 21 shows prices of various non-APM
gas as per PSCs.
Table 21: Non-APM gas prices of various fields

Fields, buyers Price (Rs/mmbtu)
Panna Mukta
GAIL 5.73
PRVUNL 4.60
Torrent 4.75
Tapti
GAIL 5.57
Ravva
GAIL (for associated gas) 3.50
GAIL (for non-associated satellite gas) 4.30
Hazira
Multiple buyers 5.50
GSEG, FAEL, GSPC 5.00
CB OS/2
CGCL 4.60
GPEC 4.75
GSPC 5.50
Bheema
CB-ONN-2000/2 5.50
Source: Industry
NELP gas pricing

The price formula is approved by the government for pricing/selling RIL’s KG-D6 gas
is:
Selling price (US$/mmbtu) = 2.5 + (CP-25)0.15
where CP is crude price in US$/bl, with cap of US$60/bl. Therefore, for crude prices
above US$60/bl, the price formula gives gas price at US$4.2/mmbtu, which is uniform
across all sectors.
41
Annexure 5: Glossary & abbreviations of key terms
Glossary of terms used in the Energy Information Administration (EIA) and the
Directorate General of Hydrocarbons India (DGH) websites:
Acreage: An area measured in acres that is subject to ownership or control by those

holding total or fractional shares of working interests. Acreage is considered
developed when development has been completed. A distinction may be made
between ‘gross’ acreage and ‘net’ acreage:
• Gross – All acreage covered by any working interest, regardless of the percentage
of ownership in the interest.
• Net – Gross acreage adjusted to reflect the percentage of ownership in the
working interest in the acreage.
API gravity: API measure of specific gravity of crude oil or condensate in degrees. An
arbitrary scale expressing the gravity or density of liquid petroleum products. The
measuring scale is calibrated in terms of degrees; it is calculated as follows:
Degrees API = (141.5 / specific gravity at 60°F) – (131.5)
Appraisal programme: A programme, carried out following a discovery in the

contract area for the purpose of appraising discovery and delineating the petroleum
reservoirs to which the discovery relates in terms of thickness and lateral extent and
determining the characteristics and the quantity of recoverable petroleum within.
Appraisal well: A well drilled pursuant to an appraisal programme.
Approved work programme: A work programme that has been approved by the
Management Committee pursuant to the provisions of this contract.
Arms length sales: Sales made freely in the open market, in freely convertible
currencies, between willing and unrelated sellers and buyers and in which such
buyers and sellers have no contractual or other relationship, directly or indirectly, or
any common or joint interest as is reasonably likely to influence selling prices and
shall, inter alia, exclude sales (whether direct or indirect, through brokers or
otherwise) involving affiliates, sales between companies which are parties to this
contract, sales between governments and government-owned entities, counter trades,
restricted or distress sales, sales involving barter arrangements and generally any
transactions motivated in whole or in part by considerations other than normal
commercial practices.
Associated natural gas: Associated natural gas or ‘ANG’ means natural gas
produced in association with crude oil either as free gas or in solution, if such crude oil
can by itself be commercially produced.
Associated-dissolved natural gas: Natural gas that occurs in crude oil reservoirs
either as free gas (associated) or as gas in solution with crude oil (dissolved gas).
42
Barrel: A quantity or unit equal to 158.9074 litres (equivalent to 42 US gallons) liquid
measure, at a temperature of 60ºF (15.56ºC) and under one atmosphere pressure
(14.70 psia).
Basement: Any igneous or metamorphic rock, or rocks or any stratum of such nature,
in and below which the geological structure or physical characteristics of the rock
sequence do not have the properties necessary for the accumulation of petroleum in
commercial quantities and which reflects the maximum depth at which any such
accumulation can be reasonably expected in accordance with the knowledge
generally accepted in the international petroleum industry.
Coal bed methane (CBM): Methane is generated during coal formation and is
contained in the coal microstructure. Typical recovery entails pumping water out of the
coal to allow the gas to escape. Methane is the principal component of natural gas.
Coal bed methane can be added to natural gas pipelines without any special
treatment.
Commercial production: The production of crude oil or condensate or natural gas or

any combination of these from the contract area (excluding production for testing
purposes) and delivery of the same at the relevant delivery point under a programme
of regular production and sale.
Condensate: Condensate means those low vapour pressure hydrocarbons obtained

from natural gas through condensation or extraction and refers solely to those
hydrocarbons that are liquid at normal surface temperature and pressure conditions
provided that in the event condensate is produced from a development area and is
segregated at the delivery point or transported to the delivery point after segregation,
then the provisions of this contract shall apply to such condensate as if it were crude
oil.
Cost petroleum: The portion of the total value of petroleum produced & saved from
the contract area which the contractor is entitled to take in a particular period, for the
recovery of contract costs as provided in the PSC.
Cubic foot (cf), natural gas: The amount of natural gas contained at standard
temperature and pressure (60ºF and 14.73lb/sq inch) in a cube whose edges are 1ft
long.
Deepwater area: Deepwater area (for deepwater blocks/areas) means area falling
beyond four hundred (400) metre isobaths, provided, however, that for the purposes
of this contract, the contract area as on effective date, as described in the PSC.
Development area: The part of the contract area which encompasses one or more
commercial discovery and any additional area that may be required for proper
development of such commercial discovery and established as such in accordance
with the provisions of the PSC.
Development costs: Costs incurred to obtain access to proved reserves and to

provide facilities for extracting, treating, gathering, and storing the oil and gas. More
specifically, development costs, depreciation and applicable operating costs of
support equipment and facilities, and other costs of development activities, are costs
incurred to:
43
• gain access to and prepare well locations for drilling, including surveying well
locations for the purpose of determining specific development drilling sites;
clearing ground; draining; road building; and relocating public roads, gas lines,
and power lines to the extent necessary in developing the proved reserves.
• drill and equip development wells, development-type stratigraphic test wells, and
service wells, including the costs of platforms and of well equipment such as
casing, tubing, pumping equipment, and the wellhead assembly.
• acquire, construct, and install production facilities such as lease flow lines,
separators, treaters, heaters, manifolds, measuring devices, production storage
tanks, natural gas cycling and processing plants, and utility waste disposal
systems.
• provide improved recovery systems.
Development plan: A plan submitted by the contractor for the development of a
commercial discovery, which has been approved by the management committee or
the government pursuant to the PSC.
Development well: A well drilled within the proved area of an oil or gas reservoir to
the depth of a stratigraphic horizon known to be productive.
Directional (deviated) well: A well purposely deviated from the vertical, using
controlled angles to reach an objective location other than directly below the surface
location. A directional well may be the original hole or a directional "sidetrack" hole
that deviates from the original bore at some point below the surface. The new footage
associated with directional "sidetrack" holes should not be confused with footage
resulting from remedial sidetrack drilling. If there is a common bore from which two or
more wells are drilled, the first complete bore from the surface to the original objective
is classified and reported as a well drilled. Each of the deviations from the common
bore is reported as a separate well.
Discovery: Discovery means the finding, during petroleum operations, of a deposit of

petroleum not previously known to have existed, which can be recovered at the
surface in a flow measurable by petroleum industry testing methods.
Discovery area: That part of the contract area about which, based upon discovery
and the results obtained from a well or wells drilled in such part, the contractor is of
the opinion that petroleum exists and is likely to be produced in commercial quantities.
Drilling: The act of boring a hole to: i) determine whether minerals are present in
commercially recoverable quantities and ii) to accomplish production of the minerals
(including drilling to inject fluids).
• Exploratory – Drilling to locate probable mineral deposits or to establish the nature

of geological structures; such wells may not be capable of production if minerals
are discovered.
• Developmental – Drilling to delineate the boundaries of a known mineral deposit
to enhance the productive capacity of the producing mineral property.
• Directional – Drilling that is deliberately made to depart significantly from the
vertical.
44
Dry hole: An exploratory or development well found to be incapable of producing
either oil or gas in sufficient quantities to justify completion as an oil or gas well.
Dry natural gas: Natural gas which remains after: i) the liquefiable hydrocarbon
portion has been removed from the gas stream (i.e., gas after lease, field, and/or plant
separation); and ii) any volumes of non-hydrocarbon gases have been removed
where they occur in sufficient quantity to render the gas unmarketable. Notably, dry
natural gas is also known as consumer-grade natural gas. The parameters for
measurement are cubic feet at 60ºF and 14.73lb per square inch absolute.
Equity crude oil: The proportion of production that a concession owner has the legal
and contractual right to retain.
Exploration drilling: Drilling done in search of new mineral deposits, on extensions

of known ore deposits, or at the location of a discovery up to the time when the
company decides that sufficient ore reserves are present to justify commercial
exploration. Assessment drilling is reported as exploration drilling.
Exploratory well: A hole drilled: i) to find and produce oil or gas in an area previously
considered unproductive area; ii) to find a new reservoir in a known field, i.e., one
previously producing oil and gas from another reservoir, or iii) to extend the limit of a
known oil or gas reservoir.
Extensions, discoveries, and other additions: Additions to an enterprise's proved

reserves that result from: i) extension of the proved acreage of previously discovered
(old) reserves through additional drilling in periods subsequent to discovery and ii)
discovery of new fields with proved reserves or of new reservoirs of proved reserves
in old fields.
Flared natural gas: Gas disposed of by burning in flares usually at the production
sites or at gas processing plants.
Footage drilled: Total footage for wells in various categories, as reported for any
specified period, includes: i) the deepest total depth (length of well bores) of all wells
drilled from the surface, ii) the total of all bypassed footage drilled in connection with
reported wells, and iii) all new footage drilled for directional sidetrack wells. Footage
reported for directional sidetrack wells does not include footage in the common bore
that is reported as footage for the original well. In the case of old wells drilled deeper,
the reported footage is that which was drilled below the total depth of the old well.
Foreign access refers to proved reserves of crude, condensate, and natural gas
liquids applicable to long-term supply agreements with foreign governments or
authorities in which the company or one of its affiliates acts as producer.
Geological and geophysical (G&G) costs: Costs incurred in making geological and
geophysical studies, including, but not limited to, costs incurred for salaries,
equipment, obtaining rights of access, and supplies for scouts, geologists, and
geophysical crews.
Gross working interest ownership basis: Gross working interest ownership is the
respondent's working interest in a given property plus the proportionate share of any
royalty interest, including overriding royalty interest, associated with the working
interest.
45
Hydrocarbon: An organic chemical compound of hydrogen and carbon in the
gaseous, liquid, or solid phase. The molecular structure of hydrocarbon compounds
varies from the simplest (methane, a constituent of natural gas) to the very heavy and
very complex.
Improved recovery: Extraction of crude oil or natural gas by any method other than
those that rely primarily on natural reservoir pressure, gas lift, or a system of pumps.
Investment multiple: Investment multiple means, the ratio of accumulated net

income to accumulated investment by the contractor, as determined in the PSC.
Lease operations: Any well, lease, or field operations related to the exploration for or
production of natural gas prior to delivery for processing or transportation out of the
field. Gas used in lease operations includes usage such as for drilling operations,
heaters, dehydraters, field compressors, and net used for gas lift.
Lifting costs: The costs associated with the extraction of a mineral reserve (oil and
gas) from a producing property.
Liquefied natural gas (LNG): Natural gas (primarily methane) that has been liquefied
by reducing its temperature to -260ºF at atmospheric pressure.
Multiple completions well: A well equipped to produce oil and/or gas separately
from more than one reservoir. Such wells contain multiple strings of tubing or other
equipment that permit production from the various completions to be measured and
accounted for separately. For statistical purposes, a multiple completion well is
reported as one well and classified as either an oil well or a gas well. If one of the
several completions in a given well is an oil completion, the well is classified as an oil
well. If all of the completions in a given well are gas completions, the well is classified
as a gas well.
Natural gas liquids (NGL): Those hydrocarbons in natural gas that are separated
from the gas as liquids through the process of absorption, condensation, adsorption,
or other methods in gas processing or cycling plants. Generally such liquids consist of
propane and heavier hydrocarbons and are commonly referred to as lease
condensate, natural gasoline, and liquefied petroleum gases. Natural gas liquids
include natural gas plant liquids (primarily ethane, propane, butane, and isobutene).
Natural gas marketer: A company that arranges purchases and sales of natural gas.
Unlike pipeline companies or local distribution companies, a marketer does not own
physical assets commonly used in the supply of natural gas, such as pipelines or
storage fields. A marketer may be an affiliate of another company, such as a local
distribution company, natural gas pipeline, or producer, but it operates independently
of other segments of the company.
New field: A field discovered during the report year.
New field discoveries: The volumes of proved reserves of crude oil, natural gas,
and/or natural gas liquids discovered in new fields during the report year.
New reservoir: A reservoir discovered during the report year.
46
Offshore: That geographic area that lies seaward of the coastline. In general, the
coastline is the line of ordinary low water along with that portion of the coast that is in
direct contact with the open sea or the line marking the seaward limit of inland water.
Permeability: The ease with which fluid flows through a porous medium.
Petroleum: A broadly defined class of liquid hydrocarbon mixtures, including crude

oil, lease condensate, unfinished oils, refined products obtained from the processing
of crude oil, and natural gas plant liquids. Notably, volumes of finished petroleum
products include non-hydrocarbon compounds, such as additives and detergents,
after they have been blended into the products.
Pipeline quality natural gas: A mixture of hydrocarbon compounds existing in the

gaseous phase with sufficient energy content, generally above 900 British thermal
units (btu), and a small share of impurities for transport through commercial gas
pipelines and sale to end-users.
Pool: In general, a reservoir. In certain situations, a pool may consist of more than
one reservoir.
Pre-discovery costs: All costs incurred in an extractive industry operation prior to the
actual discovery of minerals in commercially recoverable quantities; normally includes
prospecting, acquisition, and exploration costs and may include some development
costs.
Primary recovery: The crude oil or natural gas recovered by any method that may be
employed to produce them where the fluid enters the well bore by the action of natural
reservoir pressure (energy or gravity).
Probable reserves: Estimated quantities of energy sources that, on the basis of

geologic evidence that supports projections from proved reserves (see definition
below), can reasonably be expected to exist and be recoverable under existing
economic and operating conditions. Site information is insufficient to establish with
confidence the location, quality, and grades of the energy source. Notably, this term is
equivalent to ‘indicated reserves’ as defined in the resource/reserve classification
contained in the US Geological Survey Circular 831, 1980. Measured and indicated
reserves, when combined, constitute demonstrated reserves.
Production costs: Costs incurred to operate and maintain wells and related
equipment and facilities, including depreciation and applicable operating costs of
support equipment and facilities and other costs of operating and maintaining those
wells and related equipment and facilities. They become part of the cost of oil and gas
produced. The following are examples of production costs (sometimes called lifting
costs): costs of labour to operate the wells and related equipment and facilities; repair
and maintenance costs; the costs of materials, supplies, and fuels consumed and
services utilised in operating the wells and related equipment and facilities; the costs
of property taxes and insurance applicable to proved properties and wells and related
equipment and facilities; the costs of severance taxes.
Depreciation, depletion, and amortisation (DD&A) of capitalized acquisition,

exploration, and development costs are not production costs, but also become part of
47
the cost of oil and gas produced along with production (lifting) costs identified above.
Production costs include the following subcategories of costs: well workers and
maintenance; operating fluid injections and improved recovery programs; operating
gas processing plants; ad-valorem taxes; production or severance taxes; other,
including overhead.
Profit petroleum: Profit petroleum means, the total value of petroleum produced from
the contract area in a particular period, as reduced by cost petroleum.
Proved reserves: Estimated quantities of energy sources that analysis of geologic

and engineering data demonstrates with reasonable certainty are recoverable under
existing economic and operating conditions. The location, quantity, and grade of the
energy source are usually considered to be well established in such reserves. Note:
This term is equivalent to ‘measured reserves’ as defined in the resource/reserve
classification contained in the U.S. Geological Survey Circular 831, 1980. Measured
and indicated reserves, when combined, constitute demonstrated reserves.
Reserve additions: The estimated original, recoverable, saleable, and new proved
reserves credited to new fields, new reservoirs, new gas purchase contracts,
amendments to old gas purchase contracts, or purchase of gas reserves in-place that
occurred during the year and had not been previously reported.
Reserve revisions: Changes to prior year-end proved reserves estimates, either

positive or negative, resulting from new information other than an increase in proved
acreage (extension). Revisions include increases of proved reserves associated with
the installation of improved recovery techniques or equipment. They also include
correction of prior year arithmetical or clerical errors and adjustments to prior year-end
production volumes to the extent that these alter reserves estimates.
Reservoir: A porous and permeable underground formation containing an individual

and separate natural accumulation of producible hydrocarbons (crude oil and/or
natural gas) which is confined by impermeable rock or water barriers and is
characterized by a single natural pressure system.
Service well: A well drilled, completed, or converted for the purpose of supporting
production in an existing field. Wells of this class also are drilled or converted for the
following specific purposes: gas injection (natural gas, propane, butane or fuel-gas);
water injection; steam injection; air injection; salt water disposal; water supply for
injection; observation; and injection for in-situ combustion.
Sidetrack drilling: This is a remedial operation that results in the creation of a new
section of well bore for the purpose of: i) detouring around junk, ii) redrilling lost holes,
or iii) straightening key seats and crooked holes. Directional ‘side-track’ wells do not
include footage in the common bore that is reported as footage for the original well.
Stratigraphic test well: A geologically directed drilling effort to obtain information

pertaining to a specific geological condition that might lead toward the discovery of an
accumulation of hydrocarbons. Such wells are customarily drilled without the intention
of being completed for hydrocarbon production. This classification also includes tests
identified as core tests and all types of expendable holes related to hydrocarbon
exploration.
48
Undiscovered recoverable reserves (crude oil and natural gas): Those economic
resources of crude oil and natural gas, yet undiscovered, that are estimated to exist in
favourable geologic settings.
Wellhead: The point at which the crude (and/or natural gas) exits the ground.
Following historical precedent, the volume and price for crude oil production are
labelled as ‘wellhead’, even though the cost and volume are now generally measured
at the lease boundary. In the context of domestic crude price data, the term ‘wellhead’
is the generic term used to reference the production site or lease property.
Wellhead price: The value at the mouth of the well. In general, the wellhead price is
considered to be the sales price obtainable from a third party in an arm's length
transaction. Posted prices, requested prices, or prices as defined by lease
agreements, contracts, or tax regulations should be used where applicable.
Abbreviations
The following are the abbreviations contained in the glossary in the Energy
Information Administration (EIA) website:
bbl: barrel(s)
bbl/d: barrel(s) per day
bcf: billion cubic feet
BOE: barrels of oil equivalent
btu: British thermal unit(s)
mcf: One thousand cubic feet
mmblpd: One million barrels of oil per day
mmbtu: One million British thermal units
mmcf: One million cubic feet
49
Annexure 6: Index of Tables and Charts
Tables
Table 1: Advantages & disadvantages of various valuation methodologies ........................3
Table 2: Quick EV/reserves estimates for a discovery .........................................................5
Table 3: Assumptions for Indian and US E&P firm ...............................................................8
Table 4: Assumption – US E&P firm cashflow profile ...........................................................9
Table 5: Example of Indian E&P firm cash-flow profile.........................................................9
Table 6: NELP awards – An overview ................................................................................15
Table 7: Common assumptions for key offshore blocks’ valuations...................................17
Table 8: India’s key promising gas offshore blocks – A comparison ..................................17
Table 9: Key offshore blocks’ revenue-share terms with GoI, as per IM ............................17
Table 10: KG D6 – Valuations ............................................................................................18
Table 12: MN D4 – Valuations ............................................................................................20
Table 14: NEC 25 – Valuations ..........................................................................................22
Table 15: GSPC’s Deen Dayal – Valuations ......................................................................23
Table 16: Cairn’s RJ-ON-90/1 – Valuations........................................................................24
Table 17: Crude oil category, as per API............................................................................38
Table 18: GPW calculation of crude ...................................................................................39
Table 19: GPW conversion from US$/MT to US$/bl ..........................................................40
Table 20: APM gas producer and consumer prices ...........................................................41
Table 21: Non-APM gas prices of various fields.................................................................41
Charts
Chart 1: ONGC SMODCF data from its FY09 annual report................................................6
Chart 2: Earnings trend of Indian and US E&P...................................................................10
Chart 3: India sedimentary basins ......................................................................................13
Chart 4: Petroleum and natural gas formation....................................................................25
Chart 5: Oil, gas and water deposits in a reservoir.............................................................26
Chart 6: Oil formation mechanism ......................................................................................26
Chart 7: Oil & gas exploration drilling .................................................................................30
Chart 8: Typical oil & gas field production profile................................................................31
Chart 9: ONGC arrests production decline through EOR/IOR campaign...........................32
Chart 10: Petroleum reserves classification .......................................................................33
50
I-Sec investment ratings (all ratings relative to Sensex over next 12 months)
BUY: +10% outperformance; HOLD: -10% to +10% relative performance; SELL: +10% underperformance
ANALYST CERTIFICATION
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research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is,
or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might
not be an associated person of the ICICI Securities Inc.
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reporting to analysts and their dependent family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts
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A Primer On India Ep Valuations

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Equity Research

January 11, 2010 INDIA

Exploration & Production

We present a primer on the India exploration & production (E&P) space,

DCF – Judicious valuation methodology

EV/reserves – Works best for quick estimates

DCF offers more advantages vis-à-vis other methodologies

Applying EV/reserves- & DCF-based methodologies

Step 1: Calculate a benchmark EV/reserves multiple for oil, gas reserves –

Step 2: Of this EV/reserves multiple, some premium/discount should be ascribed,

Step 4: The aforementioned EV of the block (at commencement of production) should

Illustration: EV/reserves – Rough valuation for new discovery

Table 2: Quick EV/reserves estimates for a discovery

EV/bl valuation multiple of similar oil weighted US E&P firms (US$/bl) 16

Discovery value to 25% Company A share (US$ mn) 1,221

Standardised measure of discounted cashflows

FY08-09 SMODCF data provided by ONGC (Chart 1) provides future – undiscounted

Source: ONGC Annual Report

Step 1: Replicate SMODCF data cashflow profiles. First, we create future

Table 3: Assumptions for Indian and US E&P firm

Assumptions specific to US E&P firm

Assumptions specific to Indian E&P firm

IM for government sharing for Indian E&P (%)

Table 5: Example of Indian E&P firm cash-flow profile

Source: I-Sec Research

ONGC’s RRR calculations on 3P instead of 1P reserves lead to

Finding & Development (F&D) cost

Production and Lifting costs

Exploration, Development plans

Taxes & royalties

Chart 3: India sedimentary basins

Table 6: NELP awards – An overview

Valuation of some of India’s key upstream blocks

Table 8: India’s key promising gas offshore blocks – A comparison

Table 9: Key offshore blocks’ revenue-share terms with GoI, as per IM

E&P Primer, January 11, 2010

Table 10: KG D6 – Valuations

Table 11: KG D3 – Valuations

E&P Primer, January 11, 2010

Table 12: MN D4 – Valuations

Table 13: KG D9 – Valuations

E&P Primer, January 11, 2010

Table 14: NEC 25 – Valuations

FCFF (55) (94) (100) (35) (5) 43 84 89 93 95 82 77 53 30 14 7 3 1 (0)

Table 15: GSPC’s Deen Dayal – Valuations

Cairn’s Rajasthan block (RJ-ON-90/1)

E&P Primer, January 11, 2010

Table 16: Cairn’s RJ-ON-90/1 – Valuations

Rajasthan P&L (net to Cairn)

Capex profile (net to Cairn)

How oil & gas deposits are formed

Chart 4: Petroleum and natural gas formation

Four essential conditions for oil & gas deposits

Chart 6: Oil formation mechanism

• Minimum work programme (drilling commitments) for exploratory phases.

Exploration & seismic studies and identification of prospects

Drilling of exploratory wells

Among the various identified prospects, a region where no hydrocarbons were

Results of exploratory drilling – Discovery well or dry well

After appraisal of the discovery, if a field contains sufficient quantities of recoverable

Development & production stages

Chart 8: Typical oil & gas field production profile