Hindustan Oil Exploration Company Limited (500186) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 FY22 Earnings Conference Call of Hindustan Oil Exploration Company Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to [ Mrs. Vinita Pandya ] from Valorem Advisors. Thank you, and over to you, Mrs. Pandya.

Thank you, Margaret. Good morning, everyone, and a warm welcome to you all. My name is [ Vinita Pandya, ] AVP of Valorem Advisors. We represent the Investor Relations of HOEC Limited. On behalf of the company, I would like to thank you all for participating in the company's earnings conference call for the second quarter of financial year '21-'22. Before we begin, I would like to mention a short cautionary statement. Some of the statements made in today's con call may be forward-looking in nature. Such forward-looking statements are subject to risks and uncertainties, which cause -- which could cause actual results to differ from those anticipated. Such statements are based on management's beliefs as well as assumptions made by and information currently available to management. Audiences are cautioned not to place undue reliance on these forward-looking statements in making any investment decisions. The purpose of today's earnings conference call is purely to educate and bring awareness about the company's fundamental business and financial quarter under review. Now I would like to introduce you to the management participating in today's earnings conference call and give it over to them for their opening remarks. We have with us Mr. Elango, Managing Director; and Mr. R. Jeevanandam, Executive Director and Chief Financial Officer. Without much delay, I request Mr. Elango to give his opening remarks. Thank you, and over to you, sir.

Thank you, Vinita. Good morning, everyone. Happy to connect with you all on this Q1 FY '22 earnings call. Jeeva, our CFO and Whole-Time Director, is with me; and Valorem Advisors, our Investor Relations advisors, are also on the call. I hope you all have received our updated earnings presentation. We've also uploaded the same on our website for your reference. Let me start by giving an update on B-80. We have identified an Indian flat DP vessel to complete the remaining works of Calm buoy installation and awarded the contract to an international offshore construction company with relevant experience and competence to execute the works. Safe completion of Calm buoy requires a calm weather with suitable wave height and swell. As on today, sea conditions are still rough, and the forecast is for conditions to turn conduces by end November or early December. Since the DP vessel identified for the job is already in Mumbai we are mobilizing the rest of the men and materials required, targeting to commence the work subject to weather by end November, early December 2021. Estimated duration of the work is about 4 weeks and actual duration depends on site and weather conditions. We will make every effort to complete the work and commence the production as early as possible, and will keep you all updated. To store the oil, our own floating storage and offload vessel Prem Pride has been mobilized to India after successfully completing the dry dock in Singapore, FSO will be mobilized to B-80 locations to connect with the Calm buoy post its successful installation. Gas production and sales will commence in parallel since the gas pipeline from KGB Offshore Installation has already been connected with the gas export pipeline of ONGC. Using ONGC pipeline, B-80 gas will be transported to Hazira terminal in Gujarat. We have shortlisted the panel agencies and will be launching the e-auction later this month and conclude the gas sales arrangement in December. As advised earlier, we will initially store the oil produced from B-80 to carry out the assay of settled group to discover the best market prices and selling the oil at the delivery point in FSO. Overall, we are singularly focused on bringing B-80 on production more safely and are monitoring the weather conditions on a daily basis. On the regulatory front, we are getting the required support both from the DGH and from ONGC as every stakeholder is equally keen to expedite production from B-80. At Dirok, we have continued uninterrupted operations and average daily gas offtake during Q2 has been 41 mmscfd, demonstrating a robust demand. Effective October 1, 2021, government notified gas prices have gone up to $2.90 per MMBtu from $1.78 per MMBtu. Based on the e-auction conducted in June 2021, we have executed direct gas sales contract with 3 customers and contracts with remaining customers are under various stages of finalization. Terms and arrangements for gas transportation, measurements and delivery through Oil India facilities have been agreed with Oil India. First, direct supply of gas and the e-auction has commenced to NRL, Numaligarh Refinery Limited who are drawing about 3.5 mmscfd by paying a premium of $1 over the government notified prices. Assam Gas Company too, is drawing gas directly from Dirok based on demand by paying a premium price. Balance volume is continuing to be supplied to Oil India at government notified prices. Dirok field is now well positioned to meet peak demand of multiple customers directly at a premium price while protecting daily based volumes through the current contract with Oil India. Over the next few months, direct supply to more customers at premium prices are expected to commence and Dirok, our strategy of value over volume is now being executed at the field level. [indiscernible] continues in PY-1, where the only way to increase production is to drill additional wells. The next drilling campaign in PY-1 will be planned after first oil from B-80. As indicated earlier, final investment decisions will be taken after the independent technical assessment and derisking. In our Cambay assets, we have initiated the environmental clearance process to drill additional wells and the execution of R2 PSC in our Palej block has now received the approval of ONGC Board and reached the final stages of execution. Similarly, the draft PSC Amendment to reflect the increase in HOEC's participating interest from 50% to 60% has been agreed by all the parties, including the Government of India, and it is also in the final stages of execution. At the macro level, prices of both oil and gas have gone up, reacting to sharp rise in demand signaling revival of economic growth. I now invite Jeeva to share the financials.

Thanks, Elango. We report that the company made a revenue of INR 37.23 crore in the current quarter against INR 27.56 crore in the previous quarter. In the consol accounts, it is INR 45.14 crore against INR 31.79 crore in the previous quarter. Increase in revenue is mainly from increase in sales gas in Assam and higher realization for condensate due to the increase in oil prices. The profit on stand-alone is INR 17.4 crore against INR 11.71 crore in the previous quarter. In the consol accounts, the profit after tax is INR 17 crores against INR 11.11 crore in the previous quarter. The total expenses of stand-alone, including the DDA was INR 19.83 crore comparing INR 15.88 crore in the previous quarter. Operating costs are not linear and however, the statutory royalty and sales are as relevant. In the consol accounts, it is INR 27 crores comparing INR 21 crores in the previous quarter, including the adjustment of prudent stock. Operating cash flow stand-alone for the 6 months before the working capital changes is INR 37 crores and in the consol account is INR 40 crores. During the quarterly loan of INR 125 crores were raised from Axis Finance limited to meet the capital expenditure of B-80. This rupee loan of 10.75% is backed with the U.S. dollar at 8.1% per annum. We have also availed a loan of INR 150 crores from HDFC Bank, at 10% with the RAs currency swap at 6.25% to refinance a loan of INR 150 crores from Vyoman India Private Limited. We have the support of 2 Indian banks Axis and HDFC to support the growth of the business. With the borrowings, the company delivered by about 33% on the book value of the assets with the market cap which is above 15% as on. With the expected cash flow from B-80, we would be able to liquidate the debt at a faster mode than the tenure agreed with the banks. We would like to become the debt free with gains. And cash in the company is INR 109 crore in the stand-alone and INR 129 crore in the consol accounts, this will enable us to complete the B-80 project in a timely manner and to put the field on our revenue more. If you look at the books, only 30% of the investment in oil and gas are revenue mode and 70% in capital work in progress. Investment in B-80 as on date is about INR 733 crore consist of field investment for oil wells, flowline, umbilicals and oil and gas export lines. Mobile also processing unit, floating storage offshore and single point mooring system are quite operated through our subsidiaries. On commencement of B-80 production, all these 3 assets will be on a revenue mode, which will move from capital work in progress to oil and gas-producing assets. Better numbers would reflect on the commencement of cash flow from these assets, which will provide new impetus to the business. Thanks. Elango?

Thank you, Jeeva. Let me now open the forum for questions, please.

[Operator Instructions] The first question is from the line of Riddhesh Gandhi from Discovery Capital.

Just a couple of questions. On this B-80, given we're expected to start with end of November, early December, how long is it expected to take until actual production of oil and gas actually, is this starts on a commercial basis?

We are expecting the works to take about 4 weeks' time. Our first priority was to secure an Indian vessel so that both the -- on the cost and schedule trend we are under control. That we have achieved. So the current expectation is depending on whether we're mobilized by end November or early December. And the estimated duration of the work is about a month. In parallel, the activities in MOPU will also happen. And certain activities can -- commissioning activities will happen once the SPM is installed. So if all goes well, then we should come into production in January.

Got it. And just to understand, obviously, because of reasons outside our own control, like say COVID and undertow happened, obviously delays have happened. But is there any other slippage risk expected you think between this or -- I mean, January is seeming like a conservative estimate for when we'll sort of be able to start.

No. We really don't expect further slippages. But the -- both the weather conditions as well as the site conditions will determine the duration of completing the work. The major task is really installing this heavy single point mooring equipment with installing that. That's a task which really requires to complete in safety, requires a very calm weather, depending on the weather movement, the duration and the site condition, the duration will be taken. The contractors estimate us to do that in about 4 weeks. And we've built incentives in the contract to get it done sooner as well as rates that will not allow delay as such. But I think really to do it safely.

Got it. And just to understand, how much are the ongoing rates right now and the good charge for built in gas where we are expecting to reduce supply to.

No. I think earlier, our expectation was about $4 per MMBtu at the market rate. But with the current prices, we are expecting the market to be at least $5 plus with the current hardening mark for gas prices. That's what we expect. And we will know once complete the auction but that's our expectation.

Good sir. And is there any update on actually kind of actually kind of Kharsang as well?

On Kharsang, which is Kharsang is currently producing about 600 barrels of oil. It is on a dock extension mode. Some of the cost recovery issues are being addressed by the operator with the DGH to reach a mutually acceptable solution. Once that is resolved, then the PSC extension will be granted on a 10-year basis, post which the drilling and further development activities will take place. But the oil price is stronger, we expect those things also to be completed maybe in a couple of months' time.

Okay. Got it, sir. Sir, and just a last question on Assam. Just to understand effectively, so given this affected e-auction where we're getting a small amount of premium on how much of volume would we be getting the premium?

So roughly between currently 10% to 20% of our volume is getting the premium. But over the period, whenever there is a peak demand, we'll be first addressing the premium customers while protecting the base volume.

Got it. Understood. So I mean, net-net, on a blended basis, given the quantities, et cetera, how much of a premium compared to the normal would be the...

So overall, we are targeting a realization of about $4 per MMBtu, on a mixed basis. Right now, it's 2.9 on a gross colorific value and 3.2 on a net colorific value for existing, and the premium will be about $1.

The next question is from the line of Nirbhay Mahawar from N Square Capital Advisors.

I just wanted to understand what would be the time required from first oil production to first 12 years? What would be the duration?

Sorry, first oil production to first -- so we expect about the storage capacity is about 900,000 barrels. So even if you look at barrel production per day, is about $150,000 a month. So normally, we look at after 2 months, we will like to make an offtake of about 150,000 barrels. So after that it will be a continuous uptake and first uptake will take 2 months.

So when we are saying that we'll be able to do first oil sales in FY '22, we are expecting production definitely to begin by first early January. Would it be correct?

Yes, that's right. Correct, yes.

Yes. Another follow-up was -- the longer-term outlook, we have mentioned that earlier, we had mentioned that our B-80 will take our net oil production to 7,000 barrels. And then we have scope of taking this to 14,000 barrels by our existing fields. So what would be the time frame? And if we can give some sort of direction on like how this will move from 7,000 to 14,000 by which field and when?

Yes, what we are kind of targeting is -- what we're targeting is, first of all, is 7,000 barrels of oil equivalent, including oil and gas components. That's one. And what we've stated is maybe our existing discovered resources in Dirok, PY-1 as well as fields and minor fields in Cambay together, they will be able to contribute to this doubling of production. And our target is to do that in about 24 months after first oil. So to that extent, we have initiated the environmental clearance processing across all these 3 assets. Both Dirok, we've already secured the environmental clearance. PY-1 and Cambay environmental clearance process is already initiated and progressing well.

So would it be fair to, let's say, project an exit run rate of, let's say, FY '22 exit run rate of net oil production of 7,000 barrels, which in FY '23 will become probably 10.5% and then 14%. Is that flat correct?

Directionally, yes. We will give you an asset wide update post the B-80 but it is said to project and exit and date of 7,000 barrels of oil equivalent at the end of this financial year. After that, our B-80 will be to -- between the 3 assets where we get the -- where we are ahead as far as the DRAF is concerned in terms of the regulatory clearances, PY-1 is also our priority, Cambay also. So our plan is to run multiple campaigns at the same time by beefing up the organizational capacity. And we'll give you update surprise after that.

Congratulations for the excellent scale up.

The next question is from the line of Dixit Doshi from Whitestone Financial Advisors.

My question is answered. Just a couple of clarification. Firstly, so my basic understanding is that monsoon has already been over. So is it only the weather because of which we are targeting to start the work from December or is there any other reason as well?

It is purely weather because this installing this Calm buoy will require a particular -- the wave height to be below 1 meter that we are forecasting by end of November. So we will be very mobilized by end of November and wait for a couple of days to see weather conditions are stable and to move. Because the vessel is already in India, and it is available for mobilization. We are in parallel mobilizing to -- but we get advanced focus on weather conditions, particularly the wave condition in our location. Based on that, we are planning end of whether November will be suitable because mobilizing areas would involve heavy risk.

Okay. I mean, second thing is now you have been earlier in the May last year May month you were saying only 8 to 10 days work is left. And now we are targeting that the work will last for almost 4 weeks. So what has changed?

Yes. I think last year, when we left the job undone, if we had a continuous 7, 8 days, we could have finished the job. But now when we have to restart the whole thing, so another survey need to be done as soon as they're spread post. So we've engaged with the best consultants and the contractor. And this is the best estimate that we buy. So unlike this is not -- if you have continued the job in the previous campaign, it have taken only 7, 8 days. But now they need to go position themselves at the appropriate places, et cetera, et cetera, make sure all the tools are required are rig dab, et cetera. So it's about continuing the job and when you are fully mobilized between starting remobilization. That's the difference.

Okay. And just one last thing. You mentioned, just a clarification. Did I hear correctly that, let's see, the first oil comes out in Jan, the revenue in the P&L will start from March after 2 months?

Actually, it is -- when I have a stock in trade is mark-to-market, so it will be reflected in the revenue, but cash realization comes up after 2 months.

Cash realization will come after 2 months. Okay. And for both oil as well as gas.

Gas can be even that revenue cycle would be a little earlier for gas, but because gas cannot be stored, it will be sold as such, but we'll be taking a month realization earlier. Oil will take 2 months, this will take a month.

The next question is from the line of [indiscernible] Securities.

So we are hearing that through media that Petroleum Ministry is keen that ONGC should involve private and foreign partners to develop, especially the small discovered fields in Bombay High and Basin region. So how big is this opportunity for companies like us? And who else do you think can be the potential bidders domestically or foreign if you can share that? And my second question is linked to the first one that what is the probability of these kind of discussions moving in the right direction because so far, we have seen a lack of desire from ONGC and giants like PSUs like ONGC, it is really very rarely seen that logical things to happen swiftly or at least, they have very different thought process. So what are your views on these 2 things?

See in terms of the opportunity set, I think the government has been quite vocal and clear that because 90% of the ONGC's production is contributed by 10% of its feed and 10% of its production come from the 90% of the field. The government is very keen that it involves private sector, both international as well as domestic private sector players. Now as far as the international scenario is concerned, that you see that we're not seeing a trend in which companies are entering any new countries. Existing players may look at the opportunity. That's one part. In terms of the opportunity set within ONGC, both there is onshore and offshore. Onshore, there are multiple smaller players in India who can look at these opportunities. In offshore, we see there are only very limited players with the offshore production experience other than Vedanta, Reliance and HOEC, nobody else has got the experience of producing from offshore. Therefore, the competition for offshore would be generally limited, onshore is slightly more. As far as HOEC is concerned, as we said, our focus is first is to bring B-80 on production. And immediately, after that, to look at expediting the drilling campaigns across Dirok, PY-1 as well as Cambay basin within our existing resource potential. And then as we build, look at other opportunities. And we believe that we are well positioned because of our experience in offshore, both in Western and East Coast to look at these opportunities. But on the second part of your question, yes, there would be -- there is the government stated objective and how much of it gets into real action from what we have seen in the past, this enhanced -- contract for enhanced recovering oil has not gone down too well, because the commercial terms are not attractive. So unless it is -- but we do find attractiveness in the discovered small field route, which the government is auctioning directly. Since the government ultimately decides to take the fields -- nomination field back to its fold, and roll it out as a discovered small field, maybe that will ensure a faster execution. That's my personal take.

That was very helpful, sir. Just a quick follow-up. So how, according to you would be this opportunity in terms of volume, that -- what you have mentioned is the 10% of the ONGC's production is from 90% of the small discovered field. So how much that will be -- the volume or the size of that opportunity? That's one. And second is, if the government is auctioning the fields directly, then what is the percentage of the total discovered fields, which government can directly auction to players like HOEC?

See, what is happening is ultimately, all the fields belong to the government. Some are being...

Even the ONGC ones?

No, no, including ONGC, ONGC also gets the license to explore or produce from the field from the government. So ultimately the government issues the license to both ONGC. There are 2 regimes; the ONGC gets it under -- used to get it under, what is called nomination regime, directly from government. And subsequently, you have [indiscernible] as such. So the point I was making is, so far ONGC directly taking partner, that route has not been very effective, that's the track record so far. But when the government auctioned it out, it has set policies and procedures, and you've seen that doing it much better. That's a point, a limited point I was making, that the government takes over or takes back the fields and auction it out, from an execution point of view, that has a much better clarity, that's one. In terms of the size of the fields, it's very difficult to say. But typically, any field, which has got potential to produce more than 10,000 to 20,000 barrels of oil per day, I'm sure ONGC will be focusing and developing them. Typically a field, which is below 5,000 barrels or below 10,000 barrel range, are the ones which have not got the adequate attention, particularly in offshore. Because it is challenging to develop small fields in offshore. It is not easy, but it's not something that everybody can play. Our own experience has been, despite our best efforts, we could not completed it at once, that's a fact, because some things are in your control, some things are out of your control. So I would typically expect fields of 10,000 barrels at site. That's one. The second thing is, what is the undiscovered potential in the block -- in these blocks, is something to be looked for. Our own experience will be, it has been quite interesting that, in addition to the known areas, we are able to identify more resources, which we would be targeting in future. But the overall point is to remain very sharply focused for any company to be successful. At the moment, you acquire more than what you can handle, you'll see -- you'll end up losing the focus.

Much appreciated sir, much appreciated. So clearly what we think is that, the opportunity is very big, and how well we can execute it and how fast these things move, is the only things that needs to be watched out for, that's may be the key.

Yes.

Thank you so much, sir. Thank you so much for taking the effort, and wish you all the best for the B-80A-1 and other projects.

The next question is from the line of Rohit Suresh from Samatva Investments.

Good afternoon, sir. Thank you for the opportunity. So my first question is on PY-3...

Sorry to interrupt you. Mr. Suresh, may I request you to come closer to the phone or speak a bit louder. Your voice is slightly low.

I am audible now?

This is better. Thank you.

Yes. My first question was on PY-3. So are we still associated with the development process of that field? Just wanted a clarification on that.

Rohit we are -- our stake in the production sharing contract is intact. We are a party to that production sharing contract, our stake is very much intact. As far as the current development is concerned, we had not supported the development, as was being presented by the operator. We have not contended to that method, I don't want to get into detail, but we have not given our consent to proceed on that basis. But the other 2 parties in turn, decided to proceed, which is both ONGC -- and the remaining parties are proceeding, in terms of deciding few tenders, et cetera. So that's where it stands. We have a right to get back to the block, depending on what progress, on certain terms and conditions. So what we had decided is to really stay focused on B-80 for the time being, complete that, and look at what way the field is being developed and then take a decision on that basis.

Okay. So because I read somewhere that, the new FBP for PY-3, they were planning to increase the production from 4,500 to around 11,000. So just wanted to get an understanding, because whether we will benefit from that, if it's successful or not. That's it.

Thank you.

The next question is from the line of Brijesh Shah from Unique Stock Broking Limited.

Yes. Can we understand what is the cost over that we have done on that B-80 project since your INR 150 crore is already utilized and you have taken another INR 125 crore loan, and you already had a cash balance of some INR 75 crores to INR 100 crores. So what is the total cost overrun that we are having on this project right now?

This cost overrun in this project is in the order of about INR 100 crores, and that is the reason we look for additional resources of INR 125 crores, to put the field back on production. So with the increase in volume support and this cost overrun is into the business, which we had in subsidy development. So it's not quite alarming, which is within the manageable limits.

Okay. And can you understand what is the amount of oil we are looking at from B-80, and amount of gas, and if you can quantify it in terms of rupees, means let's say INR 100 crores will be oil or INR 50 crores will be gas. If you can give some? And what is the base average price realization that we are looking at?

The price we cannot determine, that will be determined by the market as such. So we are looking...

Overall market only -- overall market scenario only we are looking average prices.

That's right. We are looking at the gas at $5 in Gujarat and about $70 to $80 oil price for the volume of oil, which we will be selling on it, and this will make us -- our net cash flows to about INR 25 crores to INR 30 crores per month. So with that, we will be able to repay all the debts and everything within a year. So we'll be back on business with no debt, at least within a year or less.

Overall, we are targeting INR 100 crores bottom line from the B-80 or per quarter?

I told you, this is INR 25 crores to INR 30 crores per month at the current rate scenario.

That will include oil and gas both?

Both.

The next question is from the line of [indiscernible] from Milestone Capital Management.

Sir, I guess I have a bookkeeping question. So the profit from your associates for this quarter, you have shown a loss of around INR 2 crores, can you please show some light on it please.

Because we have taken the -- they have not closed the books of accounts as on 31st March, when we have given our accounts, and subsequent to it, they wanted to make some tax adjustments, which will help them on the cash flow, we said okay. So with that process, there is a loss on the previous year, on the audited accounts, which had got accounted in the current year.

So basically it was -- perhaps a bookkeeping entry from previous year, am I right?

That's right. Yes, and that will improve the cash flow of the associates.

By associate I'm assuming, the operating in your first half?

That's right.

The next question is from the line of Rohit Balakrishnan from iThought PMS.

Yes. Am I audible? Sorry.

Yes, you are audible.

Sir, just one clarification, I joined a bit late in the call.

I'm sorry to interrupt you, Mr. Balakrishnan. I would just request you to please speak on the handset mode, your audio is not very clear.

Is it better now?

Slightly better. Yes. Please go ahead.

Yes. Sir, I joined a bit late in the call. I just wanted to know for the B-80 in terms of our gas price, what is it that you are looking at, if you can just share that?

We said we are looking at about $5 per MMBTU, the current market price, $5 per MMBTU.

Got it. And sir, you mentioned I think in the last question's answer, that we are looking at INR 25 crores to INR 30 crores of monthly, from B-80 at the current price levels, as a final net profit or net back final. This is for us, right for HOEC, or the field you are talking about?

For HOEC.

The next question is from the line of Pradyumna Dalmia from Lansdowne Investments.

I just wanted some clarification on the refinancing of debt that was mentioned, could you just maybe repeat that once more? And you know also, there were some loan taken from related party, so are you saying that that has been refinanced and paid back as well?

Yes. So we have taken about INR 150 crores loan from related party, Vyoman, and with that, we have secured additional 10% of the participating interest and some other capital expenditures requirement, at a 12% interest rate. Now this is getting refinanced by HDFC Bank at 10%, with cross currency swap, getting around 8% net to the company. So that is why, we refinanced the entire INR 150 crores. The additional debt we added is about adding INR 125 crores Axis Finance to meet the capital commitments. So effectively, the INR 150 crores is refinance, INR 125 crores for additional capital.

Okay. And the additional INR 125 crores is at what rate?

It is about 10.75%, with the cross currency swap, it is about 8%, 8.1%.

Okay. Okay. And the entire INR 150 crores has been paid back?

Yes, it has been fully paid back.

Okay. And the primary reason for this was the -- but with the refinancing was done, was to save the interest?

Interest rate, yes.

Okay. Okay. The money was not called from the related party or it was not that they wanted to...

That's right. Now, no more related party investments in the company, particularly on the loan side.

The next question is from the line of D. Prasad from Equity Strategists.

Sir firstly, congratulations, Mr. Elango and for the very good achievement in B-80 gas and oil production. My question is now that I think we are very sure that the oil will be out in late December -- late November or early December. The only thing I want to understand from you is, in terms of risk assessment. In actual oil production scenarios, what is the risk level at the final stage? I mean you end up getting more gas instead of oil? Or it could be a total disaster also, that your whole studies have gone wrong, in terms of risk happening, in term -- probability could be very less, it would be 1%. But still, what are the risk elements, that once actual oil comes, the scenario could be totally different than what you anticipated earlier?

Mr. Prasad, in our business, the disastrous scenario has really occurred at the exploration stage, that you spend millions of dollars to drill a well. Let's say you look at a deepwater well, we are investing $100 million or $50 million to drill a well, and you may find it dry, and that's a disaster situation. Typically, once you go into development drilling, you are very sure about the existence of the resources, because that has already been established. In B-80 case specifically, ONGC had drilled the well, and tested the oil, based on which they had assets, such as resource base, which further we studied, and we drilled the well and tested the oil as well. Right now, from our MOPU, we cannot see the oil, but we can feel the oil, in terms of the pressure profile, right. We've got a special instrument. We can monitor the pressure right now. Therefore, the risk of opening the well and the well not producing is zero. Now, because we have done extensive testing before determining the rate of oil, as well as gas, we expected to -- pretty close to our estimate, which is 5,000 barrels of oil per day and about 12 million cubic feet of gas -- drilled gas per day. Now what -- post drilling, what we identified for the work, is this field is more oil prone field than a gas prone field. So if at all, a scenario will emerge, where the oil production may go up slightly, and we will also be prioritizing in future development on oil. So that scenario of -- this field not producing, does not take place as such. I want to clarify, we are only going to mobilize the spread by end November, not come into production by end November, and the work that we have to take, we have estimated to be about 4 weeks, that we said we are targeting production after the installation only.

Okay, got it. And can you also throw a light on all your future wells, the possibility of getting oil is more or less established apart from -- you have, I mean very clearly stated in all the presentations. But where the next big find could be, after B-80, what are you targeting? Which is the most lucrative one, the low hanging fruit after B-80?

Our whole business strategy is to focus on low-hanging fruits. Therefore, we have not really taken any exploration risk. All our portfolio of block, except 2 of them -- one of them, everything has a discovered resources. But each block will have different size profile, as well as the risk profile. Our priority, as we said earlier, is to focus on -- our next focus would be after B-80, is on Dirok, PY-1 and Cambay, as well as based on about 1.5 years of -- 18 months of production from B-80, further the drilling in B-80 as well.

The next question is from the line of Rikesh Parikh from Barclays.

Sir, just a small -- wanted to understand, now we are -- the oil production from the B-80 has been postponed by another 1 month or so, so when we will start that bidding for the gas distribution or pricing for it, deferring the price for it?

No we will be -- we'll be launching it by -- in this month, so that we will conclude the sales arrangement by December. That's it.

By December. And previously you had been mentioning about that -- oil production will start, but we will be able to realize by the March. So can you just clarify means, we will be exploring it in MOPU, and then selling it or how? That's why I mentioning up to March?

We have a floating storage vessel called Prem Pride, which has a capacity to store 900,000 barrels of oil, which is equivalent to 6 months of production. What Jeeva is explaining is, we would initially take the oil to that storage yourself, store it, and then we'll take a sample of settled crude through a crude assay, and by the time in -- about 2 months' time, we would have enough volume to sell it to the market as such. And the first month itself should have about 150,000 barrel, which we can sell it to the market and realize the price.

Okay, so then it will be -- post that it will be every 2 months, we'll be able to sell one...

Yes, typically the parcel size is about 240,000 barrels. But there are vessels, which can take smaller barrels parcel size as well. But normal standard size is about 240,000, what the Indian refineries use. So we would -- they would be sending the vessels, picking up from our tankers. The delivery point will be our FSO.

Okay. And just from your experience, what would be the discount -- the standard price one can expect, for our brand of crude?

Our crude, in terms of its quality, this is low-sulfur and light crude, and typically quite close to Brent. But we will do a proper crude assay, and then come up with a discount to Brent, and then engage with the buyers. Obviously, the buyer would be looking at to ensure that we do it correctly, we wanted to initially start the production, take the sample from settled crude, not really from the testing period crude. And because we have -- there are multiple refineries which can use this crude, we could do almost like an e-auction mode to identify buyers and as the refineries get used to the crude, its valuation will improve.

Okay. And sir, now this B-80, I will say next one month or so will be behind us. Very immediate, what will be the next plan to -- which site we will be planning to get it live at first?

In terms of the regulatory process, we are ahead in Dirok and the offtake has also been good. We will give priority to Dirok, and PY-1 being a 100% owned by HOEC, will also get the priority. So we would be -- in a post B-80, I think the important thing to understand is, the size of the organization would -- we will strengthen the organization capabilities further, to ensure that we are able to take multiple projects at the same time. So far, our strategy has been to do 1 project at a time. Post B-80, we should be able to simultaneously handle 2, 3 projects at a time. The 3 key projects will be in Dirok, PY-1, as well as in Cambay, onshore.

In our presentation, sir, this PY-1 has its approval, clearance is still awaited for the renewal. So do we see any risk over there? PY-1, one more field there...

What is happening is the government has taken a position, before they grant the renewal for tenure, they would like to reach settlement on their -- whatever there is outstanding claims from their point of view, royalty or fast recovery issues et cetera, and different blocks have got some issue. As far as the PY-1 the issue has been deferred to the dispute resolution committee. Therefore, we don't see any problem in factoring the extension, once we resolve that issue. So until then, the government is granting ad hoc extension to both fields -- to all the fields. But there is not a single field in which the extension has been denied.

And sir with Dirok, the e-auction offtake has been as per the what has been committed, or how we are seeing? Because it's in the first quarter where the auction for gas we would have sold in the market?

Yes. See, in the auction, we got about 0.3 million cubic meters on a firm basis and the remaining about 1 million cubic meters on fallback basis. The fallback basis, whenever there is a peak demand with the customers, we will have arrangement to sell the gas to them. So among the 3 customers who got firm basis, 2 of them have started taking the gas and over the next quarter, we're expecting more to join, and what we need to keep in mind is, when we went for the auction, government gas notified prices was 1.7, right now it's already 2.0 -- so the customers will take that into account also. But whatever -- the arrangement we have is quite nice, that every day we look at what is the demand for premium gas, which is government notified prices, plus $1 at least, and then we will meet that demand first. The balance gas goes to Oil India. So currently, as I told, about 10% to 20% of our volume are going in the premium mode, and the balance is going to Oil India. Our effort would be to increase the premium more, that's purely is determined by the market factors and demand factors.

And sir, just last question, this Dirok phase II, so when do we see -- means sir, probably are we targeted to be delivered as such?

So see in Dirok, Rikesh as I mentioned, our focus was really to -- on getting more value, than focusing on the volume side. And with that only, we launched the e-auction. e-auction has been executed successfully. Now we are going through a phase, in which we need to ensure, we will check the demand at different price points as such. So so far the feedback has been good. In parallel we are moving ahead with phase 2, the only thing they are waiting is the forest clearance, to lay the pipeline of 38 kilometer, that we have not yet secured. We should be getting it in about couple of months' time. So that fits in pretty well with our B-80 completion, post that, we will start the work. And the entire project there, you know, the longest lead, critical path item is laying that 38 kilometer pipeline, which could take about 18 months to 24 months.

The next question is from the line of Hitesh Doshi from Nirzar Securities.

Sir, what kind of ROC we can generate from B-80, as per current estimate of volume and say reasonable oil and gas price of say $50 and $5. So that is number one. And...

Our fundamental basis is we don't get on any oil and gas for others, if the return on capital is less than 21% post tax.

25%.

21% post tax. Okay. So this will be well with within that.

This would be well...

With within that, at any oil price.

But can we reach as high as 35%, 40% ROE, you know, at $50, $55 rate?

It depends on the price. See, we cannot increase the volume below the ground, but if the price increases, we will be able to increase our return.

No. Assuming oil is at $50, $60?

That's what I told you no, at $35 we look at that 21% post tax.

The next question is from the line of Rohith Potti from Marshmallow Capital.

Thank you once again for a very detailed commentary in the conference call. My first question is on something that you mentioned on the monthly revenue of INR 25 crore to INR 30 crore on B-80. Is it including the asset base and subsidiary that would be giving it on lease, the entity for production of -- production and storage? Or is it excluding, it's purely the sale of oil and gas alone.

It's purely on the sale of oil and gas. The 2 subsidiaries will turn revenue on its own for the charter rates which we agreed with the joint venture. That means we have the concept of -- outsource at the block level, and resource at the corporate level.

Okay. So that technically would be additional to the INR 25 crore to INR 30 crore per month that you mentioned, right?

Absolutely it is fine. That should at least give us a $1 million per month, that should be about INR 7.5 crores to INR 8 crores.

Okay. And one additional question on B-80 again is, let's say, you mentioned $70 to $80 oil price. So in that assumption, what would be the government take on revenues on a per day basis? Would it be around 35% of revenues produced per day?

Actually, this is a progressive model, which the government has, that is the one called LRL, that is a base rate, that is up to 11%, 12%, then the highest is at 55% over the $1 million. So any revenue which is 12% plus what is between 12% to 55%, which would be proportionate to the extent of -- the numerator would be the actual sales and the denominator would be the $1 million. So in that case, if you look at, we are always getting into a revenue mode of $400,000 per day, we would be in the order of around 22% to 25% on the revenue share to the government.

Okay. So the target is to generate around $400,000 a day?

That's right. That's right, because that will keep my volume back into the reservoir, and in the low price regime, I can make more volumes, and the less price regime I can -- less price regime, we can increase the volume, on high price regime, I can lower the volume.

Understood, understood. That was helpful, sir. And on -- sorry on B-80, again the question I had was, we are looking to drill additional wells after checking the performance in the field for how long? Is it 6 months, 12 months? I didn't get that number correctly.

Actually what happens, this is the field, which is having about, we identified 5 sands, and we are producing from the 2 sands, additional 3 sands we need to drill additional 3 wells. These 3 wells we will be targeting after minimum of period of about 17 months to 18 months -- 16 months to 18 months. With the 18 months with the production, we will know the field potential in a clear manner. Then accordingly, we target to drill 3 wells, additional wells. We have got 2 slots in the -- rises already in the MOPU which we can connect, and the third one we have to work it out, the ways and means to connect it. Then we are also looking at the -- any opportunity for the water injection to enhance the field recovery itself. That is also study is going on. So unless we put the field on production for 6 months to 12 months, our material balance would be literally difficult to assume it. So we are targeting drilling 3 wells firmly after 2 years.

Okay. So that was helpful. And will the lead time for additional production from B-80, be as long as it goes for bringing it on stream like today or will -- I mean, regulatory and material procurement and all -- with the timeline be much shorter next time around?

No. Next time around we have got everything as such. Now we have to be -- we have got an experience of what we have done for the 2 wells. That would be in the order of say, less than a year for 3 wells together. But the point of the issue is actually, we don't want to clock the field in such a manner, that goes out to substantial volume, and we will be maintaining our volume level at the order of say around 400,000 barrels. So that will increase the field life for about 15 years to 20 years. That's our target as such. That will give a sustenance revenue to the company for a longer period.

Yes. That point is well understood. And, otherwise regulatory MBP or are any approvals will not be required for the additional drilling, right? It's..

No. No regulatory approvals are required, because this is actually a revenue sharing mode actually, then, they cannot be forced on us. Because the committed well is one well, we have already drilled 2 wells, there won't be any commitment on this. This is purely a discretionary capital, which we'll be spending on.

And sir, the additional 3 wells, will it be -- the revenue from that be part of this particular sharing that we have, or will it be again from zero, we do the formula of 12...

No. It will be -- it will be within the sharing. Now whatever the wells we are increasing, the capital expenditure to increase the life of the field. That is our fundamental basis. So any well which will be start depleting after some period in time, so whatever the depletion it takes, will be put on the new well that will get arrested the decline. In a way the plateau of that field goes up to substantially a longer period. So that will give a good sustenance to the company as such. That's what we are planning at the moment.

Okay. Oh, understood, sir. So overall, we are trying to maintain the 400,000 barrels for as long as possible, even with the addition of it, that's the idea. Understood, sir.

That's correct. That's the idea.

The next question is from the line of Samir Patel from Savvy Capital Advisors.

Sir, I just want to dwell on the volume offtake from Dirok through the e-auction route. You said that 10% to 20% is what is currently happening. But how do you see that number going ahead say in next 6 months to 1 year? How much volume, do you think can go through the premium pricing?

Yes. I think, generally what we have seen Samir is the offtake in Assam is generally seasonal, and really the demand from the power sector and fertilizer sector would kind of determine the increase in volume offtake as such. So definitely, we expect the mix to increase at least to 50% in about 3 to 6 months timeframe. And, you will have occasions where if the demand -- peak demand, we have got a flexibility to also increase the production. We've done about 42 million cubic feet per day, we have the capacity to do that. So the whole idea is whatever is the demand in the market from various customers, we will be able to -- we'll be able to meet that as such. So therefore we've gone into this arrangement where there is a firm uptake for 0.3 million where they will -- 0.3 million is about 30% of the total production of capacity today. So that 30% is firmly committed by 3 customers. They will have to either take or pay for it. Therefore, that will -- that will happen. Now the remaining customers are on callback basis, which means on a particular day they need more gas, they can always send the demand and we'll be able to meet that, as such. That is something our current expectation is, we should be able to touch the overall 50% mark in about 3 to 6 months' time.

Okay, got it. So that's for the current production. And whatever we are targeting is the second phase, there you think all additional volumes should go to the premium or it is the same mechanism that will work?

There is a key thing in Assam as the -- with the major customers, remember Numaligarh Refinery, was going for an expansion -- is going through an expansion, and to meet their additional demand the government was planning to bring in imported LNG from Paradip through a pipeline network, all the way to Numaligarh Refinery, that was -- you all remember, the Eastern Gas Network is being built to bring in gas outside of Assam in to meet some of the demand in Assam, particularly in Numaligarh Refinery, as well as the fertilizer plant and it goes for expansion. In a demand constrained -- in a supply constrained scenario which was prevailing, it was like a situation, where the companies could not expand their plant, because gas was not available, or gas could -- production could not increase, because demand was not there. So our target is with the Dirok and followed by us, there are a few other private players have come in. Oil India is also increasing its production. Therefore, we see a situation where the demand of Assam Gas could be met through domestic production, by and large. Now, another thing we wanted to control was the, the key infrastructure of that pipeline from Duliajan which connects from Kusijan to Duliajan that gives us the additional strength. So let me put it this way. So we will control the production in a manner to achieve the premium demand, as we portray, and we will maintain the productivity.

So almost for all the volume? For the all new volume generated?

That will be my target. But I can't, today commit, because a lot of things need to fall in place.

And one more last question. So this e-auction, when you do, it must be for a particular period, right? And then you will have -- you too have an option of doing it again or how does it work?

No. We've -- for this we have done a 2-year contract for this auction, and we have got an option to extend the contract under the same regime, or go for new. But typically, the major customers are really the same number of people, there are refineries, there are few couple of power sector players, there is fertilizers, there is a petrochemical plant. So these are the 4, 5, -- and all of them are public sector units. So for them also, this is a very major shift to first of all take gas from a private company, and second to participate in an e-auction, and third, they have, you know, so please understand, we have not built our own infrastructure. Today, we are using the entire facilities of Oil India to deliver the gas for the single-meter. So the first priority would always be the -- for Oil India to meet the base demand, the premium demand will be met by Dirok Gas. That's how we have kind of positioned as such.

The next question is from the line of Vaibhav Badjatya from H&I Investment.

Sir, in FY '23 basically from April 2022 to March 2023, what would be -- based on the current pricing scenario that you earlier highlighted. On a consol basis, what would be the profit before tax that we can generate, assuming that our B-80 is completely operational?

The caveat you mentioned about the price, as well as the production on line. The bottom line should at least triple that, whatever we are having right now. That is about 30% of the value, now it will increase at least by 2x more than that. So we'll be targeting somewhere around additional INR 200 crores. If everything goes well, it will subject to the production online, production offtake and the price as such, in the current environment, put these as variable factors, we should be able to reach to additional INR 200 crores.

Okay. And you're talking on a profit before tax basis, right?

No. Because we have any tax credit already with us. So couple of years we don't have any problem as such.

Okay. So the tax credit will continue for 3 years, 4 years, or how many years, it will continue?

If it continue -- we have about some – INR 800 crores, that will continue for about 3 years, 2 to 3 years.

And then this additional INR 200 crore, basically you are seeing additional, so it will be around INR 300 crore, what would be the -- given that there is large CWIP which -- portion of which will be capitalized, what would be the depreciation that you are taking in which estimate?

What is the...

The depreciation that you're taking in which estimate.

Depreciation, as such, it will be in the order of about -- net cash is about some INR 70 crores to INR 80 crores.

Okay. Additional or you're talking about the total now?

See now with the additional, see we are looking at actually about say INR 70 crore investment --- $70 million, our volume is about say $20 million. So it's about $3 per barrel. So depending on the actual production, it will be around in the -- roughly in the order of about INR 70 crores, INR 80 crores.

Ladies and gentlemen, due to the time constraint that was the last question for today. I now hand the conference over to Mr. Elango for closing comments.

Thank you, everyone. And I just want to reiterate that our first priority is to bring B-80 on production mode safely, as soon as possible. And we are monitoring the weather very closely. Once first oil from B-80 is achieved, our focus will be to drive production growth by monetizing the discovered resources in our existing fiscal year. To achieve this, we've already filed an application to secure environmental clearances to undertake development drilling campaigns in Dirok, PY-1 and Cambay assets. Thank you all for joining our call today. Thank you.

Thank you. On behalf of Hindustan Oil Exploration Company Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.