RIL: Oil wells can't be built in a year

Contradictory statements from regulator and company confuse the stock market.

Just the way Rome wasn’t built in a day, nor can oil wells. Over the last few days, the Reliance stock has been on a roller coaster ride, with the company and the Directorate General of Hydrocarbons coming out with contradictory statements on the quantum of gas likely to be produced from the 18 wells in the Krishna Godavari basin.

Last week, the Directorate General of Hydrocarbons said, according to the approved field development plan (FDP) filed by RIL, production should rise to 67 mscmd in April 2011. This came as music to a struggling stock market, which was beleaguered by bad news flowing in from West Asia and Japan. In the days following, RIL came to the rescue of a falling market and its stock price increased on hopes that the company's refining margins would improve as demand and price for petroleum products would increase.

But this cheer was short lived, as fresh details of RIL’s annual work plan for financial year 2013 became public. This stated that if the capital expenditure plan for the year was not approved, then production could provisionally fall to 38 mmscmd in the period from the current 42-43 mscmd.

Clearly, the company isn’t sure which way the production will move or how the oil wells will perform, as a lot is subject to capex approvals and performance of the wells, which may not perform according to the wishes of the government or the company.

Thoroughly confused by the contradictory statements from regulator and the company, the RIL stock fell by 4 per cent on Friday, forcing the stock exchanges to demand an explanation from the company. The company’s response to the exchanges reads like this: “With reference to news item appearing on leading web-portal titled "Nifty trades lower; RIL down over 3 per cent".

Reliance Industries has clarified to BSE as under: ‘Reliance Industries Limited (RIL) has ongoing discussions, consultation and correspondence with the Director General of Hydrocarbons in respect of regulatory compliance, technical reviews and finalisation of work programme and budgets for the future years. The projected production figures referred to in the media are purely provisional and indicative and are subject to such variations as may emerge during the actual operations in the future years. These variations can be on account of physical inputs, work programme as well as geological and reservoir complexity. RIL makes the necessary disclosures of actual production from its domestic oil and gas segment in its quarterly financial releases.”

However, analysts are not satisfied with any of this, given that it took four long days for RIL to come out with its response.

While RIL has come out with a clarification and the company has possibly no control over the regulator, analysts now believe it’s increasingly difficult to rate the stock, as there is no clarity on what could be the possible output from the company’s KG fields in financial year 2011-12 or 2012-13.