Valuation affected due to reserve downgrade and surrender of blocks
First came the downward revision in reserves; then came the relinquishment of blocks. In less than a year of signing the transformational deal between Reliance Industries (RIL) and British Petroleum (BP), analysts say the value of the deep-water blocks held by RIL and BP (in India) is down by over a half.
In February 2011, when BP picked up a 30 per cent stake in RIL’s 23 Indian oil and gas blocks for a consideration of $7.2 billion and further performance related payments of up to $1.8 billion, analysts valued the deep-water assets anywhere between $24 billion and $30 billion. As of April 2012, the value of the same assets has come down between $12 billion and $15 billion, six analysts told Business Standard. An email sent to RIL seeking valuation details remained unanswered.
* February 2011: BP buys 30% stake in 23 blocks of RIL for $7.2-9 bn
* Analysts valued the deep-water assets at $24-30 billion
* March 2012: BP states reserves in KG-D6 as 1.4 tcf
* April 2012: RIL-BP relinquish 10 blocks
* RIL restates KG-D6 proven reserves by 12-15%
* Relinquished D9 block was valued at $1-1.5 bn
“Given the reserve downgrade and relinquishment of blocks, the value of these assets held by RIL and BP has come off,” said the assistant vice-president (research) of an institutional securities firm in Mumbai, who did not want to be named. “While production from the KG D6 asset has seen a significant downgrade from 10 tcf (trillion cubic feet) to around 5.5 tcf, the relinquishment of block D9 has wiped away a valuation of $1-1.5 billion.”
CLSA had, in its February 2011 report, said BP had, at $7.2-9 billion for 30 per cent, valued assets at $24-30 billion, but subsequently RIL told analysts on April 20, 2012, that it would restate its proven reserves downwards by 12-15 per cent -- from 6.5 trillion cubic feet (tcf) in March 2011 to 5.5 tcf likely, including FY12 production, in its annual report.
This has made analysts downgrade RIL’s exploration and production portfolio alone by over a half. “RIL’s E&P business should have been valued at $15 billion but that is not the case,” said the head of research at a broking firm. “Today, we are valuing it at not more than $8 billion which is an optimistic estimate. With D6 probable reserves now at 40 per cent of what they used to be, E&P portfolio has already been downgraded.”
BP had, in its annual report for 2011 calendar year, stated that it was accounting for just 0.3 tcf of proven reserves (1P) for its 30 per cent stake in KG-D6, implying that gross 1P reserves in KG-D6, including the government’s share, is barely 1.4 tcf. It has, within a year of the deal, already reduced the value of its Indian exploration and production assets on books by $785 million.
Added to this is the relinquishment of 10 blocks. “We are surprised by RIL’s relinquishment of 10 exploration blocks in FY12” said Sanjeev Prasad and Tarun Lakhotia of Kotak Institutional Equities Research in a report. “The company had reported oil and gas discoveries in four of these blocks and the key KG-DWN-2001/1 (KG D-9) was estimated to have prospective resource potential of 4.7 tcf of natural gas and 180 million barrel of oil and condensate.”
A senior BP executive said on the condition of anonymity that BP, considering the deal between RIL and BP came as a package, had taken whatever RIL had on offer. “All of RIL’s deep-water blocks were on offer. Some blocks were valuable and some were not valuable. It is, however, difficult to put a figure to one block and evaluate its value,” he said.
BP, in an emailed response BP said, the company “and RIL (and other contractors as appropriate) jointly continue to evaluate the blocks, high grade and rationalise the portfolio, and focus our efforts on delivering the value proposition of our partnership”.
BP said the two partners are working on an integrated development plan (IDP) to develop and integrate other discoveries in KG-D6 (satellite fields, R-series,other satellites, NEC-25) into the existing infrastructure. After the management committee’s approval for predevelopment activities, RIL plans to file the IDP in the second half of financial year 2013.
In January 2012, the government’s management committee had approved the optimised field development plan for development of four satellite discoveries (D2/D6/D19/D22) in KG-D6 block ). In February 2012, the management committee of KG-D6 block declared the commerciality (DOC) of R-Series (D34) discoveries.
Analysts say R-series and the other satellite discoveries combined, could produce around 15-20 million standard cubic metres per day (mscmd) on a reserve base of around 4 tcf. However, these are not over and above what has been proven on D6. “These, in fact, will serve to perhaps get production back to the 60-65 mscmd level that it was supposed to be,” said an analyst.
Gross gas production from RIL’s flagship KG-D6 field production in fourth quarter was 35.8 million cubic meters per day -- down 30 per cent year-on-year. “Now, RIL and BP have said that they will be submitting a full re-development plan to the Directorate General of Hydrocarbons in October this year,” said Mriganka Jaipuriyar, Senior Editor (Asia), Oilgram News, Platts. “But what happens after that will depend, to a large extent, on what the Indian government decides to do about its current gas pricing mechanism, which in turn will determine the block’s economic viability.”
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