Is Reliance’s KG basin foray a risky bet?

It re­mains to be seen if the Reliance-BP part­ner­ship ben­e­fits from the new pric­ing pol­icy due to the for­mer’s le­gal tan­gles

Business Standard - - TAKE TWO - JY­OTI MUKUL

Af­ter meet­ing Prime Min­is­ter Naren­dra Modi and Pe­tro­leum Min­is­ter Dharmendra Prad­han ear­lier in the day, Reliance In­dus­tries Chair­man and Man­ag­ing Di­rec­tor Mukesh Am­bani and Bri­tish Pe­tro­leum Group Chief Ex­ec­u­tive of­fi­cer Bob Dudley hosted a press con­fer­ence in New Delhi last week. Be­fore the con­fer­ence, not a word had come out on what the an­nounce­ments would be, though ru­mours trig­gered by a tweet from Prad­han in­di­cated a joint in­vest­ment in fuel re­tail­ing. Dudley broke the sus­pense by an­nounc­ing that the two com­pa­nies were ready with fresh in­vest­ments in the Kr­ishna-Go­davari basin.

To­gether the part­ners will in­vest ~40,000 crore ($6 bil­lion) in three projects com­pris­ing the R-Se­ries, satel­lites and D55 dis­cov­er­ies. Though the first to take off will be R-Se­ries, all three will be de­vel­oped in an in­te­grated man­ner, pro­duc­ing ap­prox­i­mately 3 tril­lion cu­bic feet of gas. “We plan to sub­mit de­vel­op­ment plans for the next two projects (satel­lites and D55) for gov­ern­ment ap­proval be­fore the end of 2017,” Dudley said. The de­vel­op­ment of the three projects is ex­pected to bring a to­tal of 30-35 mm­scmd (1 bil­lion cu­bic feet of gas a day) of new do­mes­tic gas pro­duc­tion, phased over 2020-2022.

Reliance’s cur­rent pro­duc­tion from the D1 and D3 fields in KG-D6 is just 261 mil­lion stan­dard cu­bic feet a day with price re­al­i­sa­tion at $2.52/MMBTU. Not sur­pris­ingly, the earn­ings be­fore in­ter­est and tax for 2016-17 were in the red by R1,584 crore.

The an­nounce­ment, there­fore, raised its own set of queries. Is it that the com­pa­nies have got a sig­nal from the gov­ern­ment that they will be el­i­gi­ble for a higher gas price through a pre­mium mech­a­nism put in place for nat­u­ral gas pro­duced from high-pres­sure and high-tem­per­a­ture deep­wa­ter and ul­tra-deep-water dis­cov­er­ies? Ac­cord­ing to a March 2016 de­ci­sion of the Union cabi­net, the pre­mium would be ap­pli­ca­ble to fu­ture dis­cov­er­ies as well as ex­ist­ing dis­cov­er­ies which com­mence com­mer­cial pro­duc­tion af­ter Jan­uary 1, 2016. Ac­cord­ing to the pe­tro­leum min­istry, the new pric­ing norms for dif­fi­cult fields would help in the pro­duc­tion of 6.5 tril­lion cu­bic feet of gas val­ued at ~1.8 lakh crore, or $28.35 bil­lion. Of this, Reliance has eight deep-water and ul­tra-deep-water dis­cov­er­ies with 2.53 tril­lion cu­bic feet of gas.

The caveat to the ap­pli­ca­bil­ity of the de­ci­sion to Reliance was: “If there is pend­ing ar­bi­tra­tion or lit­i­ga­tion filed by the con­trac­tors di­rectly per­tain­ing to gas pric­ing cov­er­ing such fields, this pol­icy guide­line shall be made ap­pli­ca­ble only on the con­clu­sion/with­drawal of such lit­i­ga­tion/ar­bi­tra­tion and the at­ten­dant le­gal pro­ceed­ings”. Reliance is in­volved in sev­eral ar­bi­tra­tions with the gov­ern­ment in­clud­ing one on the $1.55-bil­lion penalty im­posed on it and its part­ners, Bri­tish Pe­tro­leum and Niko Re­sources, for pro­duc­ing nat­u­ral gas from state-owned Oil and Nat­u­ral Cor­po­ra­tion’s share of gas flow­ing from an ad­join­ing lease area. The com­pany along with Bri­tish Gas is also in­volved in a $1-bil­lion price dis­pute with the gov­ern­ment for the Panna-Mukta-Tapti fields, which it had re­cently lost in ar­bi­tra­tion.

At the press con­fer­ence, Am­bani said: “We still have pend­ing ar­bi­tra­tions with the gov­ern­ment. We’ll fol­low the nor­mal course of law.” Since his state­ment did not have any hint of a pos­si­ble with­drawal of ar­bi­tra­tion by the com­pany, it is not clear what is it that has bright­ened the prospects of in­vest­ment in the KG block.

A gamble?

Ac­cord­ing to a Moody’s re­port, the an­nual in­vest­ment in these dis­cov­er­ies is dis­pro­por­tion­ately higher than the cash flows be­ing gen­er­ated by Reliance’s up­stream busi­ness. “This im­plies that the up­stream busi­ness will drain cash from the rest of the busi­ness from fis­cal 2018 un­til pro­duc­tion be­gins from these blocks. This adds fur­ther drag on Reliance’s re­fin­ing and petro­chem­i­cal busi­nesses that are al­ready sup­port­ing the com­pany’s R3 lakh-crore ($47 bil­lion) cap-ex over the last four years in its en­ergy and telecom busi­nesses,” says the Moody’s re­port.

The min­i­mal in­vest­ments in the year end­ing March 2018 and the an­nual in­vest­ment will be about R6,000 crore af­ter that, which will in­crease bor­row­ings and lever­age. How­ever, rel­a­tive to Reliance’s to­tal earn­ings be­fore in­ter­est, taxes, de­pre­ci­a­tion and amor­ti­sa­tion (Ebitda) of R56,800 crore in FY17, this amount will have lit­tle im­pact on its credit met­rics, says the re­port.

It fur­ther points out the com­pa­nies will move for­ward only when the de­vel­op­ment plans are ap­proved by the gov­ern­ment and their boards. The rat­ing agency sees Reliance’s ex­po­sure to the In­dian gas busi­ness, which is “ex­tremely chal­leng­ing given the de­lays in reg­u­la­tory ap­provals, ret­ro­spec­tive changes in reg­u­la­tions and slow res­o­lu­tion of dis­putes, in­creas­ing”.

The re­vised pric­ing pol­icy, ef­fec­tive for all gas pro­duc­tion from fields that start pro­duc­ing af­ter Jan­uary 1, 2016, al­lows pric­ing and mar­ket­ing free­dom sub­ject to a price ceil­ing linked to the landed prices of LNG and other sub­sti­tute fu­els such as fuel oil. The price ceil­ing for gas from such blocks is cur­rently $5.56 per MMBTU.

If the three new fields to­gether man­age to achieve pro­duc­tion vol­umes of 1 bil­lion cu­bic feet of nat­u­ral gas, they could gen­er­ate an­nual rev­enues of $2.2-2.5 bil­lion, of which Reliance’s share will be $1.3-1.5 bil­lion.

Two fields in the KG-D6 block have seen a sharp de­cline in pro­duc­tion from 60 mm­scmd in 2010 to 7.8 mm­scmd in 2017. The com­pany has at­trib­uted the de­cline to more-thanex­pected com­plex­ity of the reser­voirs.

If the new fields also ex­hibit the same kind of com­plex­ity, the cash flows from the project could be much lower, says Moody’s.

A Mor­gan Stan­ley re­port, how­ever, sees an over­all es­ti­mated 12 per cent in­ter­nal rate of re­turn for the project. It says the up­stream in­vest­ment plan and col­lab­o­ra­tion with Bri­tish Pe­tro­leum in ex­pand­ing in­vest­ment in con­ven­tional fu­els, un­con­ven­tional mo­bil­ity so­lu­tions and ad­dress­ing elec­tri­fi­ca­tion, sets the tone for Reliance’s growth plans.


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