How ONGC valued KG-DWN-98/2 and CB-OS/2

Vol 7, PW 21 (14 Jan 04) Exploration & Production

Once it decided to look seriously at Cairns India assets, ONGC hired a team of consultants to evaluate prospects.

DeGolyer & MacNaughton, JM Morgan Stanley and Denton Wilde Sapte were hired to carry out the technical, financial and legal due diligence. ONGC also set up an internal team to carry out a consolidated appraisal.

The results were encouraging. At KG-DWN-98/2, five of the six wells drilled by Cairn showed either oil or gas.

Cairn estimates the block holds 26m barrels oil and 216bn cubic feet gas with further estimated potential of 100m barrels of oil and one trillion cubic feet of gas in the discovery area with an upside potential in the unexplored parts of the block. Cairn has completed the minimum work programme for the entire exploration phase on this block.

DeGolyer said the block holds about 311bn cubic feet of contingent gas equivalent resources and risked prospective gas equivalent resources of 305bn cubic feet. The probability of success, ONGC was told, varied between 12.6% and 24.5%.

Based on these assessments and an oil price of $18 per barrel, ONGCs consultants valued KG-DWN-98/2 at $90.5m, with an implied discount rate of 10%. This valuation came quite close to ONGCs own estimate of between $90m and $101m.

At CB-OS/2 (awarded to the Cairn-led consortium in 1998) Cairn has reported four discoveries: Lakshmi, Gauri, Ambe and Parvati. Of these, Lakshmi and Gauri have been declared commercial.

Lakshmi gas began flowing in November 2002 while Gauri gas is expected to begin flowing sometime in May this year. According to Cairn, this block holds 332bn cubic feet gas and more than 20m barrels of oil.

We are told theres a further potential of more than 141bn cubic feet gas in the discovery areas. ONGC is Cairns partner at CB-OS/2.

JM Morgan Stanley made two valuation estimates. One: $189m-$272m (base value $230m) was based on DeGolyers inputs.

The second: $217m-$299m (base value $259m) was based on data provided by the CB-OS/2 joint venture.