The Supreme Court’s ruling in favour of Reliance Industries (RIL) would have come as a big relief for its promoter, Mukesh Ambani, and the company. While the ruling allays concerns over RIL’s future earnings, as well as new (gas) discoveries pertaining to its hydrocarbon business, it has also set a roadmap for the industry.
Little wonder, RIL’s stock was up 2.27 per cent at Rs 1,033.85 on the Bombay Stock Exchange, on a day when the Sensex fell 1.29 per cent (218.42 points) to 16,769.11. However, since most analysts had assumed the higher price (of $4.2 per mmbtu) for gas sales, their earnings estimates for RIL are unlikely to change drastically.
Industry experts say revenues from KG-D6 gas sales are expected to be $42 billion (Rs 1.9 lakh crore) over the 11-year life of the field, and the government’s profit share at a minimum $14 billion. RIL could have lost over Rs 32,900 crore ($7 billion) in terms of revenue if it would have had to sell 28 million standard cubic metres of gas per day (mscmd) to Anil Ambani-promoted Reliance Natural Resources (RNRL) for 17 years at $2.34 per mBtu.
P M S Prasad, RIL’s director, had earlier told Business Standard in an interview that if 11 trillion cubic feet was the gas reserve, it converts to 1.8 billion barrels of oil equivalent. RIL will spend $8.8 billion, plus the $700 million spent initially on exploration and appraisal. The total will be $9.5 billion, which works out to a little over $5 per barrel of oil equivalent. The international benchmarks are $6-9 for comparable fields.
A lower gas price would have translated into lower revenues and profits, and would have an impact on RIL’s cash flows from the business, with possible effect on its hydrocarbon exploration plans. “The verdict was expected as it is. You can’t get into a family agreement over a national property that does not belong to you,” said Kamlesh Kotak, Head, Asian Market Securities.
He added that the verdict would help strengthen RIL’s exploration and production plan.
“In light of the verdict announced today, the current structure of the gas industry does not undergo immediate change. The gas allocation also remains unaltered. Typically, E&P (exploration and production) investors would like the verdict because the court has indirectly upheld a higher gas sale price of $4.2/mBtu, but also be concerned that the investments will need to be made not knowing what price the government would approve if gas is discovered and produced,” said Deepak Mahurkar, Associate Director at PricewaterhouseCoopers. “Knowing that gas will be the preferred fuel and usually cheaper than oil on a heating value basis, at least in the foreseeable future, the government will continue to have say in price and utilisation. And, so, why talk of freedom of price and marketing in PSC (production sharing contract)?” Mahurkar added.
