RIL's KG gas data foxes markets

Firm hints at fall in output, contradicting DGH claims

Nine days after the Directorate General of Hydrocarbons (DGH) said that Reliance Industries (RIL) is expected to increase gas production, India’s largest company is saying exactly the opposite.

RIL has told DGH that production of natural gas and crude oil from its most prolific Krishna-Godavari (KG) basin may fall.

The news that gas production from the block could come down to 38 million standard cubic metres per day (mscmd), from the present 50-51 mscmd, next financial year sent investors and the RIL stock in a tizzy. The stock fell over 4 per cent today.

Just nine days ago, DGH had said that RIL was expected to increase gas output by 30 per cent from the same D6 block in the KG basin. The stock had risen 1.4 per cent intra-day after the announcement, before closing marginally higher.

Despite repeated attempts, S K Srivastava, the head of DGH, was unavailable for comment. An official, however, said an increasing water cut in existing wells could be behind the fall in production.

On March 9, Srivastava had said that gas production should rise to 67 mscmd in April 2011, adding that 18 wells had been completed out of 22 development or production wells approved in Phase-I of the field development plan. Gas is being produced from 16 wells. Two more wells are complete, but not producing any gas. Another two wells are yet to be connected to the production system. “Reliance needs to drill two more wells by April,” he said.

Such contradictory statements in a short span, triggering stock price swings, forced the exchanges to seek clarification from RIL.

In response, RIL informed the Bombay Stock Exchange that: “RIL has discussions, consultations with DGH in respect of regulatory compliance, technical reviews and finalisation of work programmes and budgets for the future years. The projected production figures referred to in the media are purely provisional and indicative and subject to such variations as may emerge during actual operations in the future years. These variations can be on account of physical inputs, work programme as well as geological and reservoir complexity.”

A decline in gas output from the KG D6 block had hit RIL’s third-quarter results.

Analysts said the decline could also hit gas allocations to various industries. The present output from the block is lower than the average of 60 mscmd in the April-June 2010 quarter. The company is selling 14 mscmd to fertiliser plants, 24 mscmd to power plants and the remaining 13 mscmd to others such as sponge iron plants, LPG and city gas distribution companies, petrochemical plants and refineries. The block’s peak production is expected to be 80 mscmd.

After today’s announcement, the RIL scrip opened at Rs 1,035.90 and touched an intra-day low of Rs 987.20, before closing at Rs 993.15.

Even when RIL had sold 30 per cent in its exploration and production (E&P) business to BP for $7.2 billion, the understanding the company had given to analysts was that production would stay at 38 mmscmd in 2010-11 and 2011-12. Accordingly, analysts valued the E&P business at Rs 297 a share (plus Rs 61 a share for an additional $1.8 billion payment discounted by two years) going by the upfront payment made by BP.

According to a Citi report on the deal dated March 7, “Our new E&P valuation of Rs 380/share (earlier Rs 471) is in line as it also includes coal bed methane reserves (not part of the deal). While further clarity on KG ramp-up remains elusive, the deal nevertheless provides a benchmark for valuing the E&P business amid production uncertainties.”

After this, the company had a conference call with analysts in which it gave a guidance of 43 mmscmd output from the KG D6 block. This made analysts project an upward bias in the stock.