RIL gas output: Analysts back oil ministry on bank guarantee plan

Bank guarantee would devolve in case it is proven that RIL deliberately not produced enough natural gas from D6 block

With the ministry of petroleum and natural gas moving a Cabinet note proposing that Reliance Industries (RIL) be asked to furnish a bank guarantee of $135 million every quarter, analysts believe the move could finally end the political debate around the natural gas price increase.

Said Goldman Sachs in a note, “If confirmed (the bank guarantee of $135 million), we believe  this would be a positive development for RIL and the Indian natural gas industry overall, as well as for long- term affordable energy security of the country.”

The bank guarantee would be enforced if it was later proven that RIL had deliberately not produced enough natural gas from the D6 block.

“Moreover, this could lead us to the end of the political debate around the D6 gas price increase and will likely allow the market to look beyond the intense near-term noise around RIL stock and focus on the strong medium-term earnings growth in the company,” Goldman Sachs added.

Said the assistant vice-president of a domestic brokerage firm, “It would be good for the industry  to know where it is headed in terms of gas pricing.” Goldman Sachs added RIL had earlier proposed to the government to invite a reputed international consultant to inspect the D6 block, to confirm the geological reasons behind the sharp decline in natural gas output. The proposal, was however, rejected by the upstream regulator.

This June, despite opposition, including from within the cabinet, the government approved doubling of natural gas prices from the present $4.2 a million British thermal unit (mBtu) to $8.4 an mBtu from April 1 2014.

There has been much argument that the revision would benefit RIL, which has seen a steady decline in production from its KG-D6 block’s D1 and D3 fields. To this, RILexecutive director P M S Prasad had, this August, in a letter to the parliamentary standing committee on finance, said: “The bulk of gas — 70 per cent — is produced by public sector companies such as Oil and Natural Gas Corporation and Oil India. RIL’s KG-D6 block has a mere 15 per cent share in total domestic production.”

He said with RIL holding only 60 per cent interest in the KG-D6 block, its share in domestic production was less than 10 per cent, adding further production from KG-D6 was unlikely before 2018.

RIL said it was miffed by the flip-flops on policies related to the energy sector. “With the government going back on its own policies and words in the past couple of years, with talk of price control and regulatory hurdles, we are going back to the pre-1991 era,” said B Ganguly, president and chief operating officer (business operations, petroleum, exploration and production). “Unless it is demonstrated that irrespective of any government, the continuation of economic and sectoral policies would be respected, no investor will have confidence.”

RIL's total investment in India's petroleum exploration and production business so far stands at $22 billion. "We have not even recovered our investments in KG-D6,” Ganguly said.

Adding: “When we entered the business, we were willing to assume geological risks. Both the commodity price and the capital cost being market-related risks, we would have had a reasonable hedge between the two risks. Now, with a poor regulatory record and commodity price control, all the four risks have come to the investor.”