Reliance KG-D6 gas production fall is worrisome: Nomura

The brokerage further says that even as relations between contractors & Govt /DGH have eased, there is still non-alignment on several issues

The recent fall in KG-D6 gas production of Reliance Industries have been sharp and worrisome and much higher than expectations, warns global brokerage firm Nomura. "We think there is downside to our fiscal year 14/15 assumption of 17/15mmscmd, respectively, but we believe impacts on earnings will be minor. Each 5 mmscmd reduction in average production reduces FY15 EPS or earnings by share by INR2/share or 2.5%. We think that production declines will likely continue for some time," the brokerage said in a note to its institutional clients.

The brokerage further says that even as relations between contractors & Govt /DGH have eased, there is still non-alignment on several issues. "Apart from technical issues, a quick and early settlement on CAG audit issue and agreement on gas pricing are a must, in our view, for significant investments to commence," says Nomura.

Nomura's note to its clients was sent after Reliance stopped gas supply to its 25 power plants that were allocated gas from KG-D6 fields since last week. This follows KG-D6 output dipping to an all-time low of 17.3 million standard cubic meters per day (mmscmd) this week. Of this, about 15.2 mmscmd was supplied to top priority urea-making fertilizer plants and about 2 mmscmd was consumed by state-owned GAIL’s LPG extraction units. The rest was used to fire the East-West pipeline. This left no gas for power plants, which are placed third on the priority list of consumers receiving KG-D6 gas. Reliance is expecting the Government to increase gas prices from next year from the present $4.2 per unit to $ 8 a unit. The government has not taken a call as yet on the price rise.

Business Standard reported that Reliance Industries is spending a massive $ 28 billion in its energy business in the next five years. This investment is excluding the $ 5 billion which Reliance will be spending in its "non-core" retail and telecom business.