$6.5 a unit gas price must for Reliance exploration: Deutsche Bank

While the stakeholders keenly await the government to notify new prices of natural gas soon, a Deutsche Equity Research report says $6.5 per unit is a must for Reliance Industries to profit from deep water discoveries.

The report, while expecting the government's announcement of a gas price hike by October 2014 and a bounce back in refining margins, said each $1 hike in the price raises Reliance's earnings per share by 2 percent.

"Our channel checks indicate that a gas price of over $6.5 per mmBtu (million metric British thermal unit) is necessary to enable monetisation of RIL's deepwater discoveries," Deutsche Bank Market Research said in a note.

"Every $1 per mmBtu hike in domestic natural gas price raises RIL's FY16 EPS (earnings per share) by 2 percent," it added.

The Deutsche Bank note expects RIL to focus on development of the R-series and satellite gas discoveries in the eastern offshore KG-D6 block as well as coal-bed methane (CBM) block in Madhya Pradesh and discoveries in NEC-25 block once there is clarity on a new gas price.

"We expect the government's announcement of a gas price hike by October 2014 and a bounce back in refining margins (GRMs) from recent lows to be near-term catalysts for RIL," it said.

A four-member Committee of Secretaries (CoS) set up by the government to review the gas-pricing formula is likely to submit its report Wednesday.

The government last month constituted a committee comprising the secretaries of power, fertilizer and expenditure with Rajive Kumar, additional secretary in the petroleum ministry, as its member secretary.

The committee has held discussions with representatives of both gas producers and consumers on the issue.

Sep 30 is the deadline for announcing the new gas price.

The committee's brief is to examine the whole range of issues related to gas pricing, including the Rangarajan Committee formula, which was approved by the previous UPA government but could not be implemented as the Election Commission barred price announcement in the period leading up to general elections.

A new price based on the Rangarajan Committee formula would have most likely doubled the gas price to $8.4 per unit from April 1.

The Cabinet Committee on Economic Affairs on June 25 decided to defer implementation of the Rangarajan formula till Sep 30 and come up with a new regime by Oct 1.

There has been opposition to the Rangarajan formula from various quarters on account of its likely impact on electricity tariff, urea cost, CNG rates and piped cooking gas price.

Every dollar increase in gas rates will lead to a Rs.1,370 per tonne rise in urea production costs and a 45 paise per unit increase in electricity tariff. There would be a minimum Rs.2.81 per kg increase in CNG rates, and a Rs.1.89 per standard cubic metre hike in piped cooking gas cost.

The Mukesh Ambani-led Reliance Industries (RIL) and its partners British oil giant BP and Niko Resources have served an arbitration notice on the government on revising their gas price, which expired on March 31 this year.

The oil ministry, on the other hand, has imposed a penalty on the company for failing to meet output targets from RIL-led consortium's D-1 and D-3 fields in the KG-D6 eastern offshore block to the extent of 1.9 trillion cubic feet of gas.