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Interview

with Prashant Modi, Great Eastern Energy Corporation Ltd.

29.11.2010 / Energyboardroom

One of GEECL’s main achievements since its foundation in 1992 was its entrance in the London Alternative Stock Exchange in 2005 as India’s first company to do so, and now its entrance in the standard list. What was the significance of such steps for GEECL and how did them affect your ambitious investment plan?

As a family-owned business, from 1992 to 2005 my family funded all the initial operations of GEECL. We funded the initial pilot well explorations through our own resources and in 2005 we raised a small amount of private equity in order to keep the process going. During that time, we met several people from whom we learned that there are platforms available in London (AIM) and in Toronto (Venture exchange) from where you can list even early stage companies.

By then, GEECL had already found gas; and we were in a market like India, where you have a supply driven demand. That’s why we successfully entered the AIM, raised about one and a half year working capital to drill another twenty wells, and when we saw how they behaved we were confident enough to acquire some debt to further explore them. In 2005 we had only 3 wells drilled in our Raniganj coal-field, now we have 77. Then we had the idea of making GEECL a fully integrated company, now we have already built the necessary pipeline grid – making ourselves probably the only CBM company in the world active in upstream, midstream and downstream.

What were the main challenges to start the company from scratch in an area where no one else had explored before in India?

Indeed, GEECL was the very first CBM enterprise in India. Back in 1993, we had an agreement with Coal India, but then we moved to the petroleum ministry, which took a couple of years so the necessary agreements could be made. Initially, the main obstacle was the lack of service providers to CBM available in India. They were available to the oil and gas industry, but not to us. So to get the necessary equipments for pilot wells was quite a challenge. As you can imagine, service providers were not interested in coming all the way to India to drill only three pilot wells. But GEECL managed to overcome these initial challenges and, as we started developing the field, more and more companies became interested in partnering with us.

Nowadays, GEECL is spending millions of dollars per month through our partnerships and people know that CBM works and is profitable. When the oil went down to $40 it did not help, neither it did when it shoot up to $140, because service providers were either not available or they were too picky. Luckily now we have an interesting balance. Those were issues faced maybe to a lesser extend in CBM because you don’t need million dollar a day rigs, a rig costs you around $10,000 a day. Also at that time everything needed to be imported, from equipments to manpower. The only place where CBM was happening was the USA and, to a lesser extent, Australia. Now GEEECL has a local team of experts who adapted very quickly and are able to implement the project successfully.

GEECL recently raised more than £28 million and its revenues’ growth has shot up to more than 290% compared to last year. How did you invest these resources and what explain such a high growth?

In the oil and gas business you cannot create the downstream infrastructure before knowing your production volumes. Therefore, in CBM you have to first test your wells and check what each of them can produce, that’s when your pipelines get designed.

Until the pipeline infrastructure was in place, which was fully integrated in the beginning of this year, we could not really sell our gas in full quantities. Before, GEECL was selling its gas through truck-mounted caskets for CNG, and for industrial customers which was developed for the first time ever for this purpose. So we had only a limited amount of revenues. Once the pipeline got fully operational, we started pumping all produced gas. Whereas before 95% of the gas was flared, now we don’t flare anything. That explains the drastic jump in our revenues. In November this year we have declared that the company has started to make profits on an EBTDA level. Obviously, GEECL still needs to be funded, but there is enough cash on the balance.

GEECL keeps on investing in new wells so that our production in the long run is maintained and increased. Every month we have a couple of wells starting production. That gas keeps on getting pumped up into the pipeline; this is how the growth will take place. We expect to complete the exploration of our field in the next five to seven years.

GEECL has drawn very ambitious development plans to its Raniganj field, how are these plans being implemented?

GEECL bought its own rigs so that we can drill the 300 wells planned on time and we will further expand now that we have acquired the new Mannargudi block. By next year we should finish with the first 100 wells and move on to the second phase. But you have to be aware that CBM is a very different animal than oil and gas: once you find the gas, you never have a dry well, every well produces. So you have to be sure that you’re using the right technology as in whatever best is available in the world, that’s why we at GEECL don’t cut corners.

We also partner with Halliburton as our supplier for cementing and fracturing, they have done over 200 fractures already on our fields and will continue to do so. Actually, we have deployed a new technology of fracturing that has increased considerably the fracturing rate. GEECL has also leading American engineering companies employed to give us recommendations on how to optimize each well. This is how GEECL is carefully developing its assets so we can explore them to their fullest potential.

As you mentioned, GEECL has recently acquired a new block on the 4th round of CBM. How would you define the company’s strategy to maintain and increase its reserves and production rate in the coming years?

In India, after acquiring the block you have to get the petroleum exploration licenses and then get two or three other clearances in order to start exploring. This process is already taking place, which takes about one year. We are expecting to have all these in place some time towards the end of next year.

As far as investment is concerned, with every block one of the biggest parameters you bid for is the minimum work program (MWP). In the Mannargudi block case, we have bid for 50 coal wells and 30 pilot production wells. That should happen in a period of five years from the time the petroleum exploration license is signed.

GEECL expects to invest in those activities around $20 million. So it is not a big amount of money we are talking about. And of course the rhythm of investments will depend on the initial results. If the MWP is successful, it could mean investments of around $600 million to $800 million, but it’s too premature to estimate it today.

What’s your perspective on how the Indian Government is carrying out policies to nurture the local alternative hydrocarbons sector?

The CBM policy is pretty simple and effective, as it is a based on royalty contracts. There is no cost recovery in our sector. Companies are taking the risk from day one and if you make the money the government gets its share, if you don’t, you are the one who looses. Furthermore, CBM is under tax incentives, something very positive for the sector.

The Mannargudi block was the block that attracted the maximum amount of bids in the CBM IV round, six, as opposed to two or three in all other blocks. We naturally believed in its potential and this was the only block for which GEECL bid. For its exploration we pay no import taxes, the tax incentives are there, the DGH is monitoring all the projects and they have done a very proactive job in understanding the industry’s concerns. So because of all that, I believe the government is very focused on developing the sector. They are aware that the demand for energy in India is increasing considerably. The more they can promote domestic production, the less India needs to import. GEECL is doing its share in providing the country an ever bigger amount of CBM.

You mentioned that the success of your strategy was to integrate the upstream activities to midstream and downstream. How did you manage to guarantee the demand for GEECL’s gas in the medium and longer term?

Most of the demand for our gas comes from the industrial belt around where GEECL’s fields are located. CBM is a low pressure gas, hence, to transport it to long distances is unviable. In our case, the first costumer is only two miles away to a maximum of 40 miles away from the fields. So we set up a network of 50 to 60 miles of pipelines where we are supplying gas as CNG for vehicles and mainly to industrial consumers who were burning other kinds of fuels and are now converting to our gas. GEECL provides them a much better option – with security of supply, environment friendly fuel, efficiency, and many other factors that come at play. GEECL has been selling its gas to our costumers for more than 3 years now and our clients are asking for even bigger quantities. On top of that, more costumers are coming in and new industries are planning to set up plants based on our gas.

How would you portrait GEECL as the partner of choice of local companies and investors that are willing to enter the Indian market in a niche with great potential but with not many companies active?

In India, GEECL is the first commercial producer of CBM gas present in the market for over 3 years now. People have witnessed how we have grown from a concept to a reality stock. Obviously, there is still a lot to come; we are looking at a potential production of over 100 million cubic feet per day, which for CBM is very substantial. GEECL has gone from being an E&P company to a D&P one, eliminating the exploration risk.
Investors see that GEECL has deployed the best technologies available, that we have the experienced manpower, and that we are operating with whatever is best available to increase recovery, well rates, production rates, and expedite the drilling in a balanced way, always keeping in mind that the technical and geological aspects of the field are central to our success.

When you look towards the future, how do you see GEECL evolving and what role will it play in the Indian oil and gas industry?

GEECL will play a prominent role in CBM. In the next five years we will be nearing full development in our Raniganj field and the Mannargudi block will have advanced substantially to getting onto the kick-off stage of production. Naturally, the cash-flow produced from our current fields will surely finance our future development in India and abroad, wherever the opportunities are. GEECL is gaining expertise from the fields we have and will capitalize it elsewhere. To develop new fields takes time, that’s why we are keen to have a new block at this stage so that in the next 5 years horizon, when our current Raniganj field is maturing, we have a new area of growth.

What is your final message to the readers of the Oil and Gas Financial Journal about the opportunities they can find in the Indian market?

The great advantage of the Indian oil and gas industry is that demand is growing at phenomenal rates. The law exists, it might be a little slow in some cases, but it works. Investors have their legal rights respected, they have a big gas market, demand is ramping up, and society is becoming conscious of the importance of clean energy. The growth of 9% a year is translated directly into energy demand. So if you’re looking for places where to invest in the energy sector, India is the place

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