Production and Operations

Oil production from the PY-3 field in the nine month period ended 30 September 2007 averaged 4,560 bopd (821 bopd to the Group). The reduction in production was largely attributable to the natural decline of the field and, as announced on 10 August 2007, the shut-in of PY-3-3RL due to water breakthrough. Average daily production during October and November 2007 from the PY-3 field was 3,364 bopd.

The PY-3 field came on stream at the end of November 1997 with 4 subsea wells (PY-3-2; PY-3-3; PD-3 and PD-4). Since production start-up, the field showed a steady decline from an initial production rate of 12,000 bopd, with abandonment originally expected in 2001. After the Company acquired HEPI in September 1999, it actioned measures to improve production and reduce costs.

Following the acquisition of HEPI by the Company, HEPI initiated phase II of the field’s development by re-entering three vertical oil producers, drilling the two deepest lateral wells in India and putting them on production.

In November 2002, well PD-3 was lost when the drillship, after having successfully drilled and tested a lateral from the original vertical hole, was driven off location following a break in the anchor chain. The wellhead assembly was sheared off, but there were no injuries, loss of life or environmental damage. The well was made secure shortly thereafter. The successful re-drill of PD-3 in May 2004 increased production to 7,200 bopd which subsequently declined to 6,660 bopd as at 31 December 2004.

In September 2003, HEPI implemented water injection through the PY-3-2RL lateral well which has been essential for maintaining reservoir pressure and maximising recovery from the field. These developments have considerably extended the economic field life of the PY-3 field.

The facility at PY-3 consists of the floating production unit, ‘‘Tahara’’, and a 65,000 DWT tanker, ‘‘Endeavor’’, which acts as a floating storage and offloading unit. There are four sub-sea wells tied back to Tahara. Tahara has a three-stage crude oil separation system, with the first two stages being three-phase separators and the third stage a two-phase separator. Actual liquid processing capacity on Tahara is 20,000 bopd with 17 MMscfd of gas handling capacity.

For the nine month period ended 30 September 2007, average water injection rates were approximately 6,643 bwpd which is sufficient to maintain voidage replacement. The field produces associated gas of 3.7 MMscfd. This produced gas is used as fuel gas, with excess gas being flared. Current stabilised crude oil is pumped from Tahara to Endeavor for storage and offloading to shuttle tankers.

Crude oil from the PY-3 field is sold to CPCL at its refinery in Nagapatsham, near Chennai. As operator of the field, HEPI advises CPCL of a date range during which cargo will be ready for lifting. CPCL then nominates a tanker to make the lifting and it is transferred to the CPCL terminal in approximately 100,000 bbl lots. The price at which the cargo is sold is determined under the crude oil sales agreement between CPCL and HEPI (as Operator), dated 26 September 2003 (and effective for all sales since 1 October 2001) which stipulates a price of Brent minus 35 cents per barrel, dependent on the crude meeting the quality standards stipulated in the agreement.

The PY-3 field joint venture has approved a US$92 million proposed phase III development programme which provides for the drilling of two additional lateral wells (one producer and one injector) and various gathering lines and facility upgrades. Drilling of these wells is not expected to commence before the first quarter of 2009 and additional production from the wells may not be expected until the latter part of 2009.

In light of the recent shut-in of the PY-3-3RL well, the PY-3 operating committee is evaluating several options and is expected to decide on an appropriate course of action in the first quarter of 2008.