Govt gets to control prices, say analysts

Several analysts say the Supreme Court’s decision in the Reliance gas case makes the Union government the de facto regulator of both onshore and offshore gas prices. 

The price decided by the Empowered Group of Ministers would apply to all the parties utilising KG-D6 gas. As there is no differential pricing for consumers, the verdict signifies RNRL will have to buy the gas at the government-decided price. 

Deutsche Bank said the judgement removes the overhang on RIL stock. RIL’s exploration and production activities are expected to accelerate ,considering the deepwater rigs at its disposal as well as stakes in exploration blocks with high prospects. “We await more clarity on the renegotiation option as, based on RIL’s stand, we believe the company has limited leeway to supply gas to consumers yet to be allocated gas by the government and at any price significantly different than $4.2 per mBtu,” it said. 

According to Ambit Capital Research, RIL would clearly continue to sell KG-D6 gas at the government-approved $4.2 per mBtu, implying no impact on cash flows. It would have lost $700 million annually if it had sold at the price decided by the Bombay high court last year, it noted. 

The firm of Prabhudas Lilladher said with this ruling in favour of RIL, Reliance Power’s (RPower’s) landed cost of fuel would be close to $6.5 per mbtu in Dadri. “This is likely to lead to a generation cost of Rs 3.1 per unit in Dadri for the initial 1,400 Mw which we have considered. In this case, the company would be required to sign a power purchase agreement around Rs 3.3 per unit. Thus, the company would either have to shift the location of the plant to optimize on cost or put the project on hold.” 

According to Goldman Sachs, “We had currently built in a midpoint of gas price of only $3.27 per mBtu for the gas supply from RIL to RNRL from FY12 onwards. We believe this verdict implies a potential upside of Rs 25 per share for RIL. Given that there is clarity on gas volume usage and allocation, we believe RIL is now in a better position to optimise gas output, manage its reservoir and reduce D-6 costs.” 

Bernstein Research said in the longer term the key point is that the government will become the de facto regulator of both onshore and offshore gas prices. “This is important because we believe that RIL needs prices higher than $4.2 per mBtu to develop the next phase of its deepwater gas fields. Assuming the government is aligned with the need to develop India’s domestic gas resources, then prices will be adjusted higher to enable this. The downside is that excess returns will be capped as the government balances consumer interests with those of RIL.” 

Edelweiss Research said while the decision lowers the risk on account of the outcome from the RIL-RNRL case, the risks to the RIL-NTPC case decision remains (12 mscmd at $2.34 per mBtu). This decisions expected around July this year.