Reliance’s share price slips on fears of low cost recovery of its investment in the KG- D6 gas field
The standoff between Reliance Industries Limited ( RIL) and the Ministry of Petroleum and Natural Gas over honouring the production- sharing contract at KG- D6, the country’s largest gas field, may affect the share value of India’s largest company, brokers warn. RIL shares slid 15 per cent in March, the biggest slump since October 2008, after the Government said it was considering restrictions on cost recovery as output was lower than what was envisaged by the company. As of April 30, the share is trading at Rs 745 on both Bombay Stock Exchange and National Stock Exchange, from a high of Rs 964 in May 2011.
“The shares could see a further slide if this slugfest does not end soon,” says Niraj Mansingka, an analyst at Mumbaibased Edelweiss Capital. “RIL shares have been underperforming over the past few months as the company has not been able to ramp up gas production in the KG basin,” says Hemen Kapadia of Chart Pundit, adding that retail investors have been moving away. A stock market analyst, who did not want to be named, says there is little clarity where the company will get its incremental profits from. “The retail investor, who makes up nearly 12.33 per cent of the company’s shareholding pattern, is worried. There’s trouble at D6, the company’s refining business is witnessing a two- year low margin squeeze of $ 6.8 ( Rs 359) per barrel, there’s slowdown in polymers and petrochemicals,” he says.
The low cost recovery, RIL officials have told the ministry, would affect its future output from the gas field, once seen as the game- changer in India’s energy sector. While making a presenta- tion to investors on April 20, Mukesh Ambani, India’s richest man, offered no clarity on his plans for D6.
RIL is arguing that the petroleum ministry must honour the productionsharing contract which allows the operator to recover its entire cost from gas sales. RIL is allowed to recover expenditure on exploration and production before sharing profits from the KG- D6 field with the Government. But the ministry, under S. Jaipal Reddy, has rejected RIL’S claim and an integrated plan submitted by the company for development and production of 16 gas finds. Instead, it has curtly asked RIL to restrict pre- development expenses only to fields that have proved commercial viability. In short, it means RIL will be allowed to recover Rs 9,250 crore less than its investment of Rs 28,500 crore.
RIL claims output has fallen due to geological and technical problems and also blamed the ministry for not clearing exploration plans for years but that has not cut much ice with the Government. Reddy has squarely put the blame on Reliance, saying the company had not drilled as many wells as it promised to. Gas from the D6 block was expected to rise to 80 million cubic metres a day but has fallen sharply to less than 37 million cubic metres a day in April from 54 million cubic metres in June 2011. It is projected to fall further to around 27 million cubic metres next year. This, in turn, has reduced supplies to factories and cities, leading to higher and more expensive imports.
Reliance appealed to the Supreme Court in 2010 to appointment an arbitrator to resolve the crisis. “We are in a high cash- rolling business where daily drilling expenditure costs Rs 3 crore. We have no option but to get ready for a long haul in court,” Sanjay Joshi, a senior consultant for RIL, told INDIA TODAY.
Reddy refused to talk on the subject but ministry insiders claim his stand was bolstered by advice in mid- April from the Comptroller and Auditor General not to validate RIL’S entire expenditure in the D6 block because part of the money was spent after 2008, the period for which accounts have not been audited.
KG- D6, INDIA’S LARGEST GAS FIELD