SC ruling positive for RIL, energy sector: Moody's

The global rating agency Moody's today said last Friday's Supreme Court ruling on gas pricing will have positive impact not only for Reliance Industries but also on the country's energy sector.

Last Friday, the Mukesh Ambani-owned Reliance Industries (RIL) emerged victorious in a long-drawn legal battle with his younger brother Anil Ambani-run Reliance Natural Resources (RNRL), when the Supreme Court nullified a 2005 family contract between the brothers under which RIL was to supply natural gas to RNRL at 44 per cent discount to the government-set price of $4.2/mmbtu, for 17 years.

The apex court also rued that the government, and not any private parties, has the right to set prices for gas as it remains a national property until it reaches end-consumers.

"The ruling has positive credit implications for RIL and for the overall gas exploration and production sector in its removal of legal uncertainty that has deterred foreign investment," Moody's said in a statement.

It said the ruling will "save RIL from an annual reduction in EBITDA or operating profit of around $600 million, beginning in two to three years when RNRL's as-yet-unbuilt power plants come online".

The rating agency further pointed out that by that time RIL’s total annual operating profit is expected to be between $9 billion and $10 billion. "Much of the extra profit is to come from its massive offshore Krishna Godavari Basin (KG-D6) oil and gas fields, which was at the heart of the dispute," it added.

That apart, output from the KG Basin fulfils about one-fifth of the country's current demand for oil too.

Moody's said the resolution of the case between RIL and RNRL has broader implications for the country's energy sector because the long-running dispute had deterred further exploration for energy resources within the country.

It recalled that last October, after trying to attract foreign bidders and commitments of at least $3 billion, the government’s largest-ever auction of rights to explore oil and gas received bids on only half the offered blocks.

Global oil majors such as Exxon Mobile and Royal Dutch Shell did not participate in the bidding, preferring instead to wait to see how the government would treat production sharing contracts, Moody's pointed out.

It further said despite the country having rich energy resources of gas and coal, much of it remains unexploited.

"Since India’s exploration and production sector needs tens of billions of dollars in investment over the next several years, the court’s ruling should lead to a more predictable environment for the sector, reassure potential investors and improve the prospects of the country’s overall energy industry," Moody's concluded.