Niko Resources, which owns 10 per cent in the Reliance Industries-operated KG-D6 block, shocked the markets with its reserve update, earlier this week. The company’s commentary is important not just because it has cut reserves by 80 per cent but also because it said that unless there was clarity on gas pricing, further capital expenditure might be difficult.
To start with, Niko has stated the D1 and D3 fields in the D6 block are “receiving no contribution, other than the main channel”. This has resulted in a nearly 80 per cent fall in D6 reserves estimates to 1.9 trillion cubic ft (tcf). Therefore, drilling further wells will not increase the output. This estimate includes reserves from the producing D1/D3 and MA fields, and not the additional recoveries possible from satellite discoveries and R-Complex discoveries in the D6 block, explains Morgan Stanley’s Vinay Jaising, in a note.
Analysts say while the government has approved the development plan for four of these seven satellites, the joint venture partners plan to file an integrated plan for R–Series and the seven satellites together. As a result, even the four satellites with the approval are not included in Niko’s 2P reserves estimates, explains Edelweiss Securities.
However, Niko has clearly stated that further capex will depend on the government clearing the field development plan and giving clarity on gas prices. RIL has been asking for a revision in gas prices for a while, but now Niko has come out in the open and put the ball back in the government’s court. At the current price of $4.2/mBtu, investing money in developing fields may not be viable. On many occasions, RIL has said it had submitted a field development plan to the government and was awaiting approval.
According to Motilal Oswal, Niko’s estimates are lower than what Reliance announced in its FY12 annual general meeting. The company had said it was targeting to produce 60 mscmd of domestic gas on a sustainable basis in the next three to four years and expected to produce 30 mscmd of additional gas through development of R-series/satellite fields in the KG-D6 and NEC-25 blocks. Says Motilal Oswal in its report, “Niko’s production plan envisages production at just 18/21 mscmd in FY15-16 and even seven years from now, i.e. FY19, it expects production to just touch 44 mscmd.” While Niko’s guidance has added to the pressure on RIL’s share price, the resolution of its cost recovery issues with the government and clarity on the seven-year tax holiday for the KG-D6 block will be equally critical.