Welcome to this week’s edition of TOPICAL WEDNESDAY! This week, we will discuss the journey of KG-98/2 block on Krishna Godavari Basin.
India’s reliance on imported oil continues to weigh heavily on the economy. Between February 2024 and January 2025, India spent ~€49 Bn (~Rs. 4.4 lakh crore) on oil imports from Russia alone. With 88% of crude oil and 50% of natural gas needs being met through imports, reducing this dependency has become a national priority.
While India has domestic oil and gas reserves that fulfill about 12–13% of its total needs, these reserves are depleting rapidly. Aging infrastructure further hampers production capacity. Among India’s domestic reserves, the Krishna Godavari Basin—particularly the KG-DWN-98/2 block—has been a focal point due to its significant potential for both oil and natural gas extraction, which is relatively high, compared to other reserves.
However, the journey from exploration to production in emerging economies is rarely smooth, and KG-DWN-98/2 epitomizes this struggle. Now, after more than two decades of delays caused by mismanagement, legal disputes, and technical challenges, this asset is finally starting to deliver results.
So, let’s explore how KG-DWN-98/2 evolved over the years, the obstacles it faced, and its current progress.
The Beginning: New Exploration Licensing Policy (NELP)
In 1999, India introduced the New Exploration Licensing Policy (NELP) to attract private and foreign investment in hydrocarbon exploration. This policy allowed both domestic and international companies to bid for exploration blocks based on revenue-sharing agreements with the government.
The Krishna Godavari Basin saw major players like Reliance Industries, Cairn Energy, and Gujarat State Petroleum Corporation (GSPC) win blocks under NELP. Cairn Energy initially acquired KG-DWN-98/2 but sold it to ONGC in 2005 due to very high development costs.
We will cover Reliance in a minute. But let’s continue with the current flow.
ONGC Takes Over: Reserve Estimates Spark Disputes
After acquiring KG-DWN-98/2, ONGC conducted geological studies that estimated recoverable reserves at:
- 161 million barrels of oil over ten years.
- 146.99 billion cubic meters (BCM) of gas, with Cluster 3 holding ~80 BCM.
However, Cairn Energy disputed these estimates, claiming they were based on flawed studies conducted by Schlumberger in 2007. Cairn had previously deemed the reserves marginal due to ultra-deepwater conditions and low gas prices. Despite calls for independent verification, ONGC proceeded with a $5 Bn investment plan based on its own estimates—a decision that remains contentious.
Development Challenges at Every Stage
Exploration Stage
The block spans a vast area of 7,294 sq. km with ultra-deepwater conditions (depths of 2,400–3,200m). Technical failures such as power outages and casing issues forced ONGC to abandon several wells. Extreme conditions at UD-1, a deep sea gas reserve delayed development due to high costs and technical difficulties.
Impact: Delayed reserve assessments and increased costs due to abandoned wells.
Drilling Phase
Geological uncertainties led to frequent changes in well locations. Severe complications during drilling caused some wells to yield suboptimal productivity or be abandoned altogether. ONGC also faced penalties for failing to complete Minimum Work Programs (MWPs) under its Production Sharing Contract (PSC).
Impact: Increased project costs due to penalties and rework; delayed production timelines.
Infrastructure Mismanagement
To develop infrastructure for exploration and drilling, ONGC split the project into over 35+ work packages. This led to:
- Interface mismatches between subsea systems and platforms.
- Poor coordination between consultants handling different project phases.
- Cost overruns of $100 Mn due to design inconsistencies.
Impact: Delays in execution; additional forex losses (~Rs. 5,500 crore) due to international sourcing of equipment.
COVID-19 Disruptions
The pandemic further delayed critical equipment deliveries.
Waxy Crude Oil Handling
The block’s waxy crude required innovative “Pipe-in-Pipe” technology for flow assurance. This was big deal actually because this innovative technology was a first-of-its-kind initiative in India, with some subsea hardware sourced internationally while most fabrication was done domestically to support the “Make in India” initiative.
Production Delays
Gas production began in March 2020 (originally planned for June 2019), while oil production started only in January 2024 instead of March 2020. Revised estimates reduced output targets from:
- 78,000 barrels/day to 45,000 barrels/day for oil.
- 15 MMSCMD to 10 MMSCMD for gas.
The revision of estimates highlighted the concerns raised by Cairn Energy regarding the overestimation by ONGC. These delays resulted in an estimated Rs. 18,000 crore in foreign exchange losses for India, highlighting the significant economic impact of deferred oil and gas production.
ONGC faced challenges at nearly every stage of the project, struggling to meet its targets due to a combination of technical hurdles, mismanagement, and external disruptions. While it’s hard to say whether another entity could have handled things better, experts agree that many of these issues could have been mitigated with more effective planning and execution.
And now, we arrive at the the contentious legal battle with Reliance Industries.
Legal Battle with Reliance Industries
Honestly, the legal battle between ONGC and Reliance Industries is a story filled with twists and turns, almost deserving its own chapter in the saga of KG-DWN-98/2. At the heart of the dispute lies Cluster 2B of ONGC’s KG-DWN-98/2 block, which shares an underground gas reservoir with Reliance’s KG-D6 block. This geological connection meant that gas extracted from one block could inadvertently flow from the other.
Reliance began gas production from its KG-D6 block in 2009 inadvertently it got gas from the reserves under ONGC also. A third-party investigation confirmed that gas from ONGC’s reserves had also flowed into Reliance’s wells. The report quantified Reliance’s gains at $1.7 Bn, prompting the Indian government to demand compensation of $1.55 Bn for lost revenue.
The legal proceedings spanned years and multiple jurisdictions. Reliance initially won an international arbitration case, absolving it of liability. However, in February 2025, the Delhi High Court ruled in favor of the government, reigniting the dispute. Reliance is expected to challenge this rule in Supreme court now who will take the final call on this decade old dispute.
This landmark ruling has already led to significant regulatory changes aimed at preventing similar conflicts in the future.
The story of KG-DWN-98/2 reflects both India’s potential for domestic energy independence and the systemic inefficiencies that hinder progress. While its contribution (less than 1% of total oil consumption) is modest, every barrel produced domestically reduces reliance on imports.
Closing Thoughts
This project serves as a valuable lesson in overcoming technical challenges while emphasizing the need for better project management practices in India’s energy sector.
Disclaimer: This newsletter is for educational purposes only and is not intended to provide any kind of investment advice. Please conduct your own research and consult your financial advisor before making any investment decisions based on the information shared in this newsletter.
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