Charter-hire of ultra deepwater rig for three years: All the big names in race for ONGC's Rs 3,500 crore contract
ONGC is on the hunt for an ultra-deepwater drilling unit capable of drilling in water depth of up to 3,000 metres -- along with integrated services -- for a period of three years. The company issued an ICB tender soliciting bids for the estimated Rs 3,547 crore contract.
Notably, ONGC had indicated a requirement for mobilisation of the rig by December 31, 2008, but subsequent to concerns raised by Transocean, Sedco Forex and Mercator over the tight availability of deepwater units during 2008, the bidders are now required to mobilise the drilling unit and integrated services in order to commence operations by December 31, 2009. Interestingly, unlike previous tenders which restricted the vessel's operation to the Indian Continental Shelf and Exclusive Economic Zone, the new contract provides that bidders should be ready to carry out deepwater operations internationally as well.
Activity a hundred leagues under the sea runs pretty deep. What runs deeper than the deepsea itself, is no less complex. That's because deepwater operations are a confounded business, quite different from operations conducted in shallow waters or inland areas. And, going by its experience in G-1 and G-15 fields in the Krishna Godavari Basin, ONGC is in the midst of discovering that the development of a deepsea field can be just as complicated as the discovery of oil and gas. That's largely because the project is ONGC's maiden attempt at tapping a deepwater prospect, aggravated further by the tight completion schedules (with a deadline of April 2006) which require the immediate deployment of a number of high-end installation vessels. It is, therefore, not surprising that an integrated bid for the development of ONGC's gas discoveries predictably threw up an altogether new set
of complications. For one, there was only one qualified bidder - Clough Engineering Ltd. (CEL) of Australia. In the straight jacketed world of public sector evaluation procedures, the presence of a single bid was further complicated by CEL's price quote -- $ 215.85 million, a whopping 26% higher than the internal estimate drawn up by ONGC's own consultants.
The total cost of the project, after taking into account the additional costs on consultancies, marine surveys and onland export pipelines, was spiralling to Rs 1265 crore, against an approved cost of a relatively-modest Rs 510 crore. CEL's high price bid, for all practical purposes, made the project unviable as the internal rate of return (IRR) was notching up to less than the "hurdle rate" of 10%.
ONGC's normal reflex action would have been to cancel the tender, especially given CEL's intransigence in reducing its price. But ONGC faced a Hobson's choice here. In case of a re-tender, the company would not have been able to ensure completion of the project by the scheduled date of April 15, 2006. Since work literally comes to a halt during the rough monsoon months, even the slightest delay would make the next completion window open only around April 2007. The other option for ONGC was to look for a viable and acceptable solution within the bid parameters submitted by CEL.
Seemingly, the management has been able to find a solution to the hurdle posed by the low IRR of the project by recalculating the gas price based on the significantly-higher free market price of gas rather than on the subsidised price taken into consideration earlier. This has been worked out on the rationale that ONGC will soon be allowed by the Union cabinet to raise the price of gas from new discoveries to market levels. Having solved the low IRR problem, the ONGC brass is now mulling over how to justify accepting CEL's high price quote. The Australian major has resisted repeated attempts by a negotiating committee to bring down the price, other than a few token discounts.
The only way out for ONGC seems to be in finding adequate justification for the higher price. On the face of it, the arguments justifying a higher price seem credible enough as there have been significant changes in fuel and steel prices in the last few months. Then again, because of the higher price of oil, more deepwater blocks are being taken up for exploration and, as a result, deepwater vessels, subseas equipment and experienced contractors are in short supply, thus pushing up deepsea development costs.
Even consultant Intec Asia Pacific, Malaysia -- whose price estimate formed the internal benchmark for the tender -- has now admitted that its earlier estimates were based on historical data. Given the recent 40-50% increase in fuel prices, a 50 to 60% increase in steel prices, higher insurance premia and heightened international competition, Intec Asia Pacific now maintains that a 25-30% upward revision in the project cost is justified. Clearly, a case is being built for accepting CEL's high quote. But, without doubt, the management has to be careful about taking a decision based entirely on a self-generated set of justifications.
There are some benchmark prices available -- for the Well Platform Project (WPP) in the BF and BG field, for instance, in which the price quotes are as much as 70% higher than internal estimates -- but a one-on-one comparison may not be possible in this instance.
The picture is not as crystal clear as it was in the case of the cantilever-type rig, the Transocean Nordic -- in which Tranocean Inc was the only bidder but the bid went in its favour because the benchmark price was the rate at which the rig was last hired by Reliance Industries Ltd. The tenets of public sector tendering, mired as they are in red-tape, are nonetheless sound for the most part. ONGC is clearly walking the tight-rope on this one. Should it be better late than never? Or never late than ever? That is the question!
ONGC is on the hunt for an ultra-deepwater drilling unit capable of drilling in water depth of up to 3,000 metres -- along with integrated services -- for a period of three years. The company issued an ICB tender soliciting bids for the estimated Rs 3,547 crore contract.
Notably, ONGC had indicated a requirement for mobilisation of the rig by December 31, 2008, but subsequent to concerns raised by Transocean, Sedco Forex and Mercator over the tight availability of deepwater units during 2008, the bidders are now required to mobilise the drilling unit and integrated services in order to commence operations by December 31, 2009. Interestingly, unlike previous tenders which restricted the vessel's operation to the Indian Continental Shelf and Exclusive Economic Zone, the new contract provides that bidders should be ready to carry out deepwater operations internationally as well.
Activity a hundred leagues under the sea runs pretty deep. What runs deeper than the deepsea itself, is no less complex. That's because deepwater operations are a confounded business, quite different from operations conducted in shallow waters or inland areas. And, going by its experience in G-1 and G-15 fields in the Krishna Godavari Basin, ONGC is in the midst of discovering that the development of a deepsea field can be just as complicated as the discovery of oil and gas. That's largely because the project is ONGC's maiden attempt at tapping a deepwater prospect, aggravated further by the tight completion schedules (with a deadline of April 2006) which require the immediate deployment of a number of high-end installation vessels. It is, therefore, not surprising that an integrated bid for the development of ONGC's gas discoveries predictably threw up an altogether new setof complications. For one, there was only one qualified bidder - Clough Engineering Ltd. (CEL) of Australia. In the straight jacketed world of public sector evaluation procedures, the presence of a single bid was further complicated by CEL's price quote -- $ 215.85 million, a whopping 26% higher than the internal estimate drawn up by ONGC's own consultants.
The total cost of the project, after taking into account the additional costs on consultancies, marine surveys and onland export pipelines, was spiralling to Rs 1265 crore, against an approved cost of a relatively-modest Rs 510 crore. CEL's high price bid, for all practical purposes, made the project unviable as the internal rate of return (IRR) was notching up to less than the "hurdle rate" of 10%.
ONGC's normal reflex action would have been to cancel the tender, especially given CEL's intransigence in reducing its price. But ONGC faced a Hobson's choice here. In case of a re-tender, the company would not have been able to ensure completion of the project by the scheduled date of April 15, 2006. Since work literally comes to a halt during the rough monsoon months, even the slightest delay would make the next completion window open only around April 2007. The other option for ONGC was to look for a viable and acceptable solution within the bid parameters submitted by CEL.
Seemingly, the management has been able to find a solution to the hurdle posed by the low IRR of the project by recalculating the gas price based on the significantly-higher free market price of gas rather than on the subsidised price taken into consideration earlier. This has been worked out on the rationale that ONGC will soon be allowed by the Union cabinet to raise the price of gas from new discoveries to market levels. Having solved the low IRR problem, the ONGC brass is now mulling over how to justify accepting CEL's high price quote. The Australian major has resisted repeated attempts by a negotiating committee to bring down the price, other than a few token discounts.
The only way out for ONGC seems to be in finding adequate justification for the higher price. On the face of it, the arguments justifying a higher price seem credible enough as there have been significant changes in fuel and steel prices in the last few months. Then again, because of the higher price of oil, more deepwater blocks are being taken up for exploration and, as a result, deepwater vessels, subseas equipment and experienced contractors are in short supply, thus pushing up deepsea development costs.
Even consultant Intec Asia Pacific, Malaysia -- whose price estimate formed the internal benchmark for the tender -- has now admitted that its earlier estimates were based on historical data. Given the recent 40-50% increase in fuel prices, a 50 to 60% increase in steel prices, higher insurance premia and heightened international competition, Intec Asia Pacific now maintains that a 25-30% upward revision in the project cost is justified. Clearly, a case is being built for accepting CEL's high quote. But, without doubt, the management has to be careful about taking a decision based entirely on a self-generated set of justifications.
There are some benchmark prices available -- for the Well Platform Project (WPP) in the BF and BG field, for instance, in which the price quotes are as much as 70% higher than internal estimates -- but a one-on-one comparison may not be possible in this instance.
The picture is not as crystal clear as it was in the case of the cantilever-type rig, the Transocean Nordic -- in which Tranocean Inc was the only bidder but the bid went in its favour because the benchmark price was the rate at which the rig was last hired by Reliance Industries Ltd. The tenets of public sector tendering, mired as they are in red-tape, are nonetheless sound for the most part. ONGC is clearly walking the tight-rope on this one. Should it be better late than never? Or never late than ever? That is the question!
Via| IndianPetro| By Santanu Saikia
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