 "Reliance unlikely to let $1.5 bn penalty hit shareholders")
While India is hosting the global oil industry at 12th Petrotech starting Monday, its biggest private player in the sector, Reliance Industries Ltd (RIL) is shouldering a loss-making oil and gas business and has turned its focus to telecommunication. The earnings before interest and tax (EBIT) for the oil and gas segment of the Mukesh Ambani-promoted group in 2008-09, the year it started oil production from the Krishna Godavari (KG) basin, rose 48 per cent but fell 88 per cent in 2015-16.
Production from its flagship KG-D6 has been falling since 2012. It produced 0.26 million barrels of crude oil and 25.1 billion cubic feet of natural gas in the quarter ending September 30, 2017, a reduction of 34 per cent and 32 per cent, respectively on year-on-year basis.
On the regulatory and contractural fronts, RIL is involved in several arbitration with the Indian government; the latest being an
arbitration notice on $1.55 billion penalty imposed on RIL and its partners—British Petroleum and Niko Resources--for producing natural gas from state-owned Oil and Natural Corporation’s (ONGC) share of gas flowing from an adjoining lease area. The company along with British Gas is also under the weight of $1 billion price dispute with the government which it had recently lost in an arbitration for Panna-Mukta-Tapti fields.
RIL’s exploration and production (E&P) business, accounted as the oil and gas segment in its books, has to compete with various existing businesses for capital allocation. Since any company’s board takes a decision to allocate capital depending upon the nature and exigencies of the respective businesses, the RIL board is expected to take into consideration the current gas price and the investment and regulatory climate, which analyst believe has “enhanced the risks” to the sector considerably.
“These factors are expected to make it challenging for the E&P business to get allocation of capital for future investment from the board,” said an analyst tracking the company but did not want to be quoted.
“These factors are expected to make it challenging for the E&P business to get allocation of capital for future investment from the board,” said an analyst tracking the company but did not want to be quoted.
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The group instead is focussing on its telecommunication business under the RJio brand, even extending its free service to March 31, 2017 which analyst believe will postpone the revenue flow by another quarter. “Jio is preparing for a 'push' strategy: doubling electronic-KnowYourCustomers centres to 0.4 million in four months, chasing higher average revenue per user customers by offering home delivery of SIM cards...This strategy pushes out revenues by a quarter, while allowing users to experience higher quality service – potentially increasing share of users who continue with Jio post the free offer's expiry,” Credit Suisse said in its December 1, 2016 report.
The company that has not bid for any acreage under the recently concluded auction of small and marginal fields, had floated tenders in April 2016 to develop its other discoveries in KG-D6. Gas from these could be eligible for a premium, under the government gas price guidelines of 2014.
This premium, however, cannot go above a notified capped price and is conditioned upon the company withdrawing various arbitration against the government. According to the petroleum ministry, the new pricing norms for difficult fields would help in production of 6.5 trillion cubic feet of gas valued at $28.35 billion, or Rs.1.8 trillion. Of this, RIL has eight deep-water and ultra-deep water discoveries with 2.53 tcf of gas.
This premium, however, cannot go above a notified capped price and is conditioned upon the company withdrawing various arbitration against the government. According to the petroleum ministry, the new pricing norms for difficult fields would help in production of 6.5 trillion cubic feet of gas valued at $28.35 billion, or Rs.1.8 trillion. Of this, RIL has eight deep-water and ultra-deep water discoveries with 2.53 tcf of gas.
Though a detailed questionnaire sent to the company on the road ahead for its oil and gas business did not get any response, its E&P projects are either at planning stage or await regulatory approval. It has received bids from vendors, in response to some of the tenders issued in April 2016. For further investment, the company needs to ascertain the price and present an investment budget to the board for approval, senior company executives have maintained all along.
The focus in the current financial year has been on optimising production from the existing fields by maintenance capital expenditure. In fact, the analyst quoted above said depressed oil and gas prices coupled with lower volumes resulted in the E&P business posting negative EBIDTA.
By contrast, government-promoted ONGC in March 2016 said it would invest Rs 34,012 crore, the largest in its history, for the KG basin. The investment will be made over a period of three to four years to bring Cluster 2A and 2B into production. At its peak production in 2023, the field will contribute 3.5 million tonne of oil, around 15 per cent of the total oil production of 22 MT envisaged by then, D K Sarraf, ONGC chairman and managing director, said after a board meeting on March 28, 2016. ONGC has so far not moved aggressively on its KG plan, despite being a government company.
It is not that RIL has given up on oil and gas; the business remains a significant part of the group, at least operationally but the absence of its representatives as participants at the main events of Petrotech is a reflection of a chasm in its E&P profile.
When Oil Takes a Dip
When Oil Takes a Dip
| Oil and Gas: Profile of RIL | FY08* | FY09 | Increase | FY15 | FY16 | Fall |
| Revenues** | 2,702 | 3,489 | 29.10% | 11,534 | 7,527 | -34.70% |
| EBIT** | 1,503 | 2,226 | 48.10% | 3,181 | 378 | -88.10% |
*RIL started crude oil production from KG-D6 in 2008 and gas production in 2009; **in Rs crore
