RIL guarantee paves way for $6bn investment
Given that the Sensex rose 1.8% on Friday, the 4.6% hike in Reliance Industries Limited’s stock is stupendous, and has a lot to do with the Cabinet finally agreeing to the company moving on with its exploration and production (E&P) business once it gives a bank guarantee for the alleged shortfall in production in its D1/D3 fields in the KG Basin. The bank guarantees are modest for the size of RIL-BP, around $147 million a quarter, of which Reliance’s share will be $88.1 million—this is based on a likely production of 11 mmscmd and on the assumption the difference between the price Reliance gets right now and the Rangarajan formula-based one will be $4.2 per mmBtu, or double the current price. With the bank guarantee solution in the bag, RIL-BP’s development plans add up to around $6-7 billion—around $500 million will be spent on the D1/D3 fields and another $5-6 billion in the R-series and Satellite-series in the KG Basin area. Between these fields, an estimated 4 tcf of extra gas can be taken out. The way the bank guarantees work, if after a period of time it is shown that Reliance did not, in fact, hoard gas and that its supplies fell due to natural reservoir complications, the company will get its money back—if the arbitration shows Reliance did hoard the gas, the government will encash the bank guarantees. If the arbitration lasts two years, the total bank guarantee works out to $1.2 billion, assuming the Rangarajan formula-based price is still $8.4 per mmBtu.
While this is undoubtedly a big step, for the really big jump in gas production, the government has to look at the post-Rangarajan period and the move to free-market pricing. A study by consultants IHS-Cera, for instance, had pointed out that while India has 53 tcf of reserves, around 85% of this is viable only at prices above $10 per mmBtu. In the case of Reliance alone, the MJ1 field—2 km vertically below D1/D3—is not viable at the Rangarajan-based prices, nor is the Cauvery one where by next year the company hopes to have a firmer fix on the size of the gas fields.
Indeed, a large part of the success of the next NELP round of oil/gas auctions depends on how government policy shapes up. It is, for instance, curious that while private producers get a market price for their oil production, they do not for gas—in the original PSCs, though, free-market pricing is prescribed for gas as well. There is also the issue of tax certainty—in the case of gas exploration, this was withdrawn some years ago. It doesn’t help that, RIL apart, even other firms like Cairn have large amounts of money stuck—$1 billion for Cairn, of which more than half has been pending for at least 5 years—in terms of cost-recovery. Movement on all these parameters will determine whether the next NELP round will be a success or whether, like some of the earlier ones, it too will be only moderately successful—the saving grace is that Cairn has already indicated that it is very keen to win back the acreage it had surrendered over the years in Rajasthan.