RIL to press KG-Basin for higher revenues after govt hikes gas price

Mukesh Ambani-led Reliance Industries (RIL) is reaping the benefits of an increase in production from its oil and gas assets. The higher production from RIL-bp controlled Dhirubhai-6 (D6) block in the Krishna Godavari (KG) Basin will coincide with the government significantly hiking the price allowed for selling domestically produced natural gas.

RIL’s share of production from the KG-D6 basin sequentially rose by 18.4 per cent to 39.2 billion cubic feet equivalent (BCFe) during the quarter ending September 30 of the current financial year. This stood at 33.1 BCFe in April-June 2021. There was nil production from this asset in July-September 2020. “Commissioning of R-Cluster and Satellite Fields in KG D6 block led to a turnaround in the oil and gas segment earnings,” RIL said in a presentation.

The gas produced from this asset, awarded under the New Exploration Licensing Policy (NELP) regime, is priced in line with a government approved formula instituted in March 2016. The KG-D6 asset is enlisted under the Deepwater, Ultra Deepwater, and High Pressure-High Temperature area (collectively called difficult discoveries) category. This allows RIL and bp marketing freedom including pricing freedom, subject to a ceiling price on the basis of landed price of alternative fuels.

The landed price is calculated once in six months and applied prospectively for the next six months. According to the Ministry of Petroleum and Natural Gas, the price data used for calculation of ceiling price in $ per million British thermal units (mmBtu) shall be the trailing four quarters data with one quarter lag. One BCF is equal to one million mmBtu.

Under this pricing regime, RIL-bp was allowed to sell natural gas produced from KG-D6 subject to a price ceiling of $3.62 per mmBtu during the first half of financial year 2021-22 (till September 30, 2021). This drove up RIL’s revenue from the oil and gas business sequentially by 28.3 per cent to Rs 1,644 crores in Q2FY22.

However, these earnings are expected to multiply when the year closes since the notified gas price ceiling has been almost doubled to $6.13 per mmBtu for the remaining six months of the current financial year. “A price of $7 to $8 per mBtu is remunerative for gas produced from difficult discoveries. These price levels are also expected to be attained in the April 1, 2022 to September 30, 2022 price revision,” said Sabri Hazarika, senior research analyst at Emkay Global Financial Services.

These price hikes come on the back of global price movement. An unprecedented demand across the globe has led to a historic increase in gas prices, with most markers up three times (sequentially). According to RIL, a further increase is likely in the ceiling price applicable for KG-D6 gas buoyed by current high prices.

In addition to the existing production, first gas is expected from the KG D6 – MJ Field by Q3FY23. RIL-bp expects to produce 1 BCF of gas per day, in a phased manner, from the integrated development of KG-D6 by 2023. This will be approximately 25 per cent of India’s production and 15 per cent of demand.