Slowing pace of RIL’s oil and gas business casts pall on Petrotech Jio opposed to interconnect talks: COAI
While India is hosting the global oil industry at 12th Petrotech starting Monday, its biggest private player in the sector, Reliance Industries Ltd (RIL), is busy making a pivot to telecommunications, amid losses from its oil and gas business. The profit before interest and tax for oil and gas of the Mukesh Ambani-promoted group in 2008-09, the year it started oil production from KrishnaGodavari (KG) basin, rose 48 per cent but fell 88 per cent in 2015-16.
Production from its flagship KG-D6 has been falling since 2012. It produced 0.26 million barrels of crude oil and 25.1 billion cubic feet of natural gas in the quarter ended September 2016, a reduction of 34 and 32 per cent, respectively, year on year.
On regulatory and contractual fronts, RIL is involved in several arbitration cases with the Indian government; the latest being an arbitration notice on $1.55-billion penalty imposed on RIL and its partners British Petroleum and Niko Resources for producing natural gas from state-owned Oil and Natural Gas Corporation's (ONGC)'s share of gas flowing from an adjoining lease area. The company, along with British Gas, is also under the weight of $1-billion price dispute with the government, which it had recently lost in an arbitration for PannaMukta-Tapti fields.
RIL's exploration and production (E&P) business, under oil and gas segment on books, has to compete with various existing businesses for capital allocation. Since any company's board takes a decision to allocate capital depending upon the nature and exigencies of the respective businesses, the RIL board is
expected to take into consideration the current gas price and the investment and regulatory climate, which analysts believe have "enhanced the risks" to the sector considerably. "These factors are expected to make it challenging for the E&P business to get allocation of capital for future investment from the board," said an analyst tracking the company who did not wish to be named. The group instead is focusing on its telecommunication business under the Jio brand, even extending its free service to March 31, 2017, which analysts believe will postpone the revenue flow by another quarter. "Jio is preparing for a push strategy: doubling e-Know Your Customer centres to 0.4 million in four months, chasing higher average revenue per user by offering home delivery of SIM cards...This strategy pushes out revenues by a quarter, while allowing users to experience higher quality service — potentially increasing share of users who continue with Jio after the free offer's expiry," Credit Suisse said.
The company, that has not bid for any acreage under the recent auction of small and marginal fields, had floated tenders in April 2016 to develop its other discoveries in KG-D6. Gas from these could be eligible for a premium, under the government gas price guidelines of 2014. This premium, however, cannot go above a notified capped price and is conditioned upon the company withdrawing various arbitration cases against the government. According to the petroleum ministry, the new pricing norms for difficult fields would help in production of 6.5 trillion cubic feet of gas valued at $28.35 billion, or ~1.8 lakh crore. Of these, RIL has eight deepwater and ultra-deep-water discoveries with 2.53 trillion cubic feet of gas. A questionnaire to the company on road ahead for its oil and gas business did not get response. Its E&P projects are at planning stage or awaiting regulatory nod. It has got bids from vendors, in response to some of the tenders issued in April 2016. For further investment, the company needs to ascertain the price and present an investment budget to the board for approval, senior company executives have maintained all along.
The focus in the current financial year has been optimising production from existing fields by maintenance of capital expenditure. The analyst quoted above said depressed oil and gas prices, coupled with lower Mobile operators' association COAI has told a parliamentary panel that its efforts to anchor a meeting over contentious interconnect issue failed to take off after Reliance Jio held that its intervention is not warranted on a "bilateral matter".
The Cellular Operators Association of India (COAI) has written to Anurag Singh Thakur, chairman of standing committee on information technology, saying COAI invited all members for a meeting on November 16, in line with the committee's "instruction" to attempt to resolve points of interconnect issue. volumes, resulted in E&P business posting negative operating profit. In contrast, government-promoted ONGC in March 2016 said it would invest ~34,012 crore, the largest in its history, in the KG basin. The investment will be over three to four years to bring Cluster 2A and 2B into production. At its peak production in 2023, the field will contribute 3.5 million tonnes of oil, around 15 per cent of the total oil production of 22 mt seen by then, D K Sarraf, ONGC chairman and managing director, said after a board meeting on March 28, 2016. ONGC has so far not moved aggressively on its KG plan. It is not that RIL has given up on oil and gas; the business remains a significant part of the group, at least operationally, but the absence of its representatives as participants at the main events of Petrotech reflects its E&P chasm.