Reliance’s share price slips on fears of low cost re­cov­ery of its in­vest­ment in the KG- D6 gas field

India Today - - NATION - by Shan­tanu Guha Ray

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.




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