Govt, RIL in proxy fight over KG-D6 output decline: report

Reliance Industries (RIL) wants a hike in the price of natural gas to resume drilling in the KG-D6 fields, which have seen a sharp drop in output due to drilling of less wells than committed, investment research group Sanford Bernstein & Co said.

"We believe that RIL doesn't believe it is worth its while to invest additional capital in drilling wells when the price at the beach remains at $4.20 per million British thermal units, Neil Beveridge, a Hong Kong-based analyst for Bernstein, said in a report today.

Gas output from the Dhirubhai-1 (D1) and D3 fields in the KG-D6 block had steadily risen to 53 million standard cubic metres per day (mmscmd) in March last year, but have dropped to below 42 mmscmd now instead of rising to the projected level of 61 mmscmd.

Another 8 mmscmd is produced from the MA field in the same block, taking the total output from KG-D6 to about 50 mmscmd.

The fall in output due to drilling of less wells had earned RIL the ire of the government and the regulator DGH.

While the DGH is pressing RIL to drill more wells outside the main channel that is currently producing, the government is pressuring RIL by directing it to supply gas to priority sectors like fertiliser and power and cut off sales to refineries and petrochemical plants, including its own.

"We believe that this is a proxy fight between the government and RIL," Bernstein Research said.

"Lower production output is primarily a function of the hiatus in development drilling," it said. "While it seems likely that the reservoir is more complex than originally anticipated, performance on a per well basis has not been too dissimilar to the original field development plan.

"Instead, the lower number of development wells drilled (18 versus 22 planned) is primarily the reason for the under-performance," it said.

Bernstein said completion of Phase-I drilling plus initiation of Phase-II drilling, when the total number of wells could reach up to 50, would restore output growth.

"We believe that the natural rate of the decline in production for the KG-D6 wells is around 20% annually, or around 5% per quarter, not substantially different from similar fields around the world," it said.

"In case RIL doesn't take any more action on the drilling of wells and connecting those to the reservoir and continues operating with 18 wells, we expect the production to reach a level of around 37-38 mmscmd by FY13," Bernstein said.

The government has asked the company to drill 11 wells by the fiscal-end to take the total number to 31 as had been planned when RIL won approval for investing $8.8 billion, SK Srivastava, the director general of the country's oil regulator, had said earlier this week.

RIL will submit a drilling plan in two weeks, he had said on May 2.

The government had in 2007 fixed the price of gas produced from the KG-D6 block at $4.205 per mmBtu for the first five years of production. RIL began output on April 2, 2009, and the price is valid till March 31, 2014.

"Though Dhirubhai (gas fields) are turning out to be more complex than originally anticipated, there is a broader problem - gas pricing," Bernstein said. "While there are technical issues with D6, what is being played out is a negotiation by proxy between RIL and the government on gas pricing."

Lower gas output is not good for RIL shareholders as well as India Inc, which has to import more gas in the form of liquefied natural gas (LNG).