Govt's nod for RIL's satellite field plan is credit positive

Last Wednesday, the Directorate General of Hydrocarbons, India’s oil and gas regulator, approved Reliance Industries Limited (Baa2 positive) $1.5 billion satellite field development plan around its largest gas reserve in the Krishna Godavari basin (KG-D6) off the eastern coast of India. The government approval is credit positive for Reliance because it will increase gas production amid speculation and suspicion surrounding plummeting production levels at KG-D6 over the past year.

The company expects the four fields included in the satellite field plan to produce an additional 10 million cubic meters of gas per day by 2016, which will shore up output from the block. After spending more than a year awaiting approval, last week’s regulatory nod ensures that work can start immediately without losing one full year as the fair-weather window in the Bay of Bengal only permits field development work between December and March.

Production levels at KG-D6 last month fell to a low of 38 million metric standard cubic meters per day (mmscmd), which is less than half of its full production capacity of 80 mmscmd. Its proved reserves have also not seen meaningful organic growth in the past three years and are now at their lowest levels since March 2006. We note that the increased production from the four satellite fields will only be available in 2016, and in the interim, Reliance and its partner BP Plc will have to work around KG-D6’s existing fields to keep production at or slightly above current levels. In our view, higher production levels may require a substantial capex investment.
 
In a tactical move, Reliance last February sold a 30% stake in its 21 exploration and production fields to BP for $7.2 billion. The partnership with BP will not only provide the company access to BP’s deep-water drilling expertise, but also allow it to offload some of the risks and costs of future exploration and infrastructure projects. Furthermore, BP has been actively involved in discussions with the government to seek timely investment approvals, according to media reports.
 
It remains unclear whether the selling price of the gas would be open to negotiations as a result of last week’s approval. The current price of $4.2 per one million Btu is fixed until 2014.
 
To an extent, the government approval also eases industry concerns about Indian regulations on oil and gas exploration, which recently have come under scrutiny and have made the direction of future policies uncertain. Nonetheless, older disputes between the government and Reliance on cost recovery mechanisms and profit sharing still remain a bone of contention. Over time, we expect more clarity and prompt action from the government to help restore confidence in the regulatory framework and help attract more foreign investment into India’s oil and gas sector.

Vikas Halan is a Moody's Vice President and senior analyst and Nidhi Dhruv is an analyst at Moody’s Investors Service.