RIL looks to turnaround domestic E&P biz with fresh launches by next year

Mukesh Ambani promoted Reliance Industries is attempting a second try at India's hydrocarbon exploration and production (E&P) sector. With two of its clusters, R-series and Satellite series, likely to start production in the next two years, the company looks to turnaround production from this business.

"After five challenging years, domestic upstream business is set to turnaround next year," Reliance Industries said in its June quarter investor presentation last week. The company expects its first gas from the R-cluster by mid 2020 and from the Satellite cluster by mid 2021. 

E&P, which accounts for 1 per cent of earnings before interest, tax, depreciation and amortization (EBITDA), Reliance along with its partner BP has launched 3 new developments in the KG basin (R-Series, Satellite and MJ development), which together contain 3 trillion cubic feet (TCF) of reserves which should provide a turnaround in production from mid-2020, analysts wrote in a Bernstein report on the company.

For the June 2019 quarter, the company reported domestic oil and gas production at 11.6 billion cubic feet equivalent (BCFe), down 35 per cent (Y-o-Y). KG-D6 field produced 5.66 BCF (billion cubic feet) of natural gas in the same quarter, lower by 57 per cent (Y-o-Y). Panna Mukta fields saw a decline of 13 per cent in oil and 12 per cent in gas volumes sequentially.

In 2019 Q1, the overall exploration and production business reported an earnings before interest and taxation (EBIT) loss of Rs 249 crore. EBIT for domestic exploration and production was at Rs 117 crore. "The two new clusters will help turnaround volumes, overall financial turnaround will depend on factors like crude and mainly gas prices," said a domestic brokerage firm analyst who did not wish to be identified.

The Berstein report has estimated a positive EBIT at Rs 650 crore from RIL's exploration and production business for the financial year 2021.

In June, Reliance-BP announced the sanction of the MJ project in Block KG D6, offshore in the east coast of India. MJ is the third of three new projects in the Block KG D6 integrated development plan of the R-Series in June 2017 and for the Satellite cluster in April 2018. The total investment in these three projects is pegged at Rs 35,000 crore, and expected to develop a total of about 3 trillion cubic feet (TCF) of discovered gas resources.

This investment would be the company's second attempt to get its domestic exploration and production segment right. In 2008, RIL was hopeful the KG-D6 project would deliver its first gas by second half of FY2009 and contribute significantly to RIL's earnings growth. However, more than a decade later, the oil and gas business continues to languish with no significant contribution. Analysts said whether this second bet will pay off will be clearer once production starts. 

"They were confident when the first round of KG investment was made, but there were surprises on the production side. Hopefully, the company this time, would have learnt its lesson," said an analyst.