)
Newspaper reports say that Reliance will be allowed to double the gas price it currently enjoys if it produces bank guarantee of $1.2 billion (around Rs 7,500 crore).
The bank guarantee will be encashed if it is proved that the company hoarded gas or deliberately suppressed production at the D1 and D3 fields of the KG-D6 block. The amount is equivalent to the incremental revenue that Reliance will get from the new gas price.
Cabinet Committee on Economic Affairs (CCEA) wants to give the impression that this is a fair deal and that the government is insuring itself with the bank guarantee. But that's their view. Let's look at the deal from an investors point of view (which I am not).
When Reliance's gas reserves were announced in April 2009, it was said that there was 10.3 trillion cubic feet (tcf) of gas which Reliance would exploit over the years. But in 2012, this reserve was slashed to 2.9 tcf. Reliance says that the sharp drop was on account of water ingress, sand sweeping and drop in pressure in the reservoir.
It is this missing 7.4 tcf of gas which is the bone of contention as the government has accused Reliance of hoarding it. To arrive at the value of this 'missing gas' let's use the valuation used by the government in arriving at the bank guarantee figure.
A PTI report says that if gas prices rise from $4.2 per million British thermal unit (mmBtu) to $8.2-8.4 mmBtu (a rise of around $4 per mmBtu), the bank guarantee amount which is the difference of current and new price is said to be $4 billion for every trillion cubic feet of gas.
If the incremental amount is valued at $4 billion for every $4 per mmBtu rise, the actual value of gas at a price of $8.2 per mmBtu should be at least $8 billion for every trillion cubic feet of gas. This gives the value of 'missing gas' at $59.2 billion (Rs 367,040 crore), against which government is taking a bank guarantee of $1.2 billion (around Rs 7,500 crore).
If you think what more can a shareholder ask for from this deal, here are some more details. The figure of $1.2 billion has been arrived from the residual 2.9 TCF gas reserves. But out of this, 2.2 tcf has already been taken out, what is left is only around 0.75 tcf. Now the bank guarantee is for a maximum of $1.2 billion and that too paid over three years. At the current production rate D1&D3 will be producing 0.3 tcf over the next three years, which gives a value of $1.2 billion since the impact is going to be $4 billion for one tcf.
If we look at the deal in volume terms, a bank guarantee of 0.3 tcf of gas will be given by Reliance in lieu of 7.4 tcf of 'missing gas'.
Even this $1.2 billion bank guarantee is not needed at one go. The report says that the payments have to be made on quarterly basis. Based on Reliance's share of 60 per cent in the gas field, the company will be producing $60 million (around Rs 375 crore) worth of bank guarantees every quarter.
The deal gets even sweeter for the investor. Only D1 & D3 production will be used for bank guarantee. Thankfully for the investor, government has not bothered to look at other gas reserves. While government is watching with hawk eyes at the gates of D1 & D3, it is the other wells of Reliance which will be pushing production going forward. The higher gas prices thankfully (from an investors point) will be applicable to all production.
But the icing on the cake is the financial instrument chosen to act as a 'mortgage'. A 'bank guarantee' is a guarantee from a bank ensuring that if the company (in this case Reliance) fails to pay the amount, the bank will meet the payment.
For a medium sized company which has regular transactions with a bank, such guarantees can be availed for anywhere between 1.5 per cent to 3 per cent of the sum to be insured. For a AAA company, investment bankers say it can be done for less than one per cent. Even if the amount is one per cent, Reliance will have to shell out Rs 3.75 crore (one per cent of Rs 375 crore) every quarter to furnish the bank guarantee.
Over a span of three years, Reliance will be paying Rs 45 crore to produce the bank guarantee of $1.2 billion. This amount is less than the profit the company makes in a day. Reliance makes around Rs 57 crore in profit every day.
In return for Rs 45 crore spread over a period of three years, the company will get to sell gas at near import parity prices for rest of its life.
In an open letter to the prime minister (Read here), Surya P Sethi, former Principal Adviser, Power and Energy, Government of India has termed the bank guarantee as a fig leaf justifying the shameful price rise of gas. The numbers show that all that is left of the fig leaf is the leafstalk.
While activists can complain, from the Reliance investors, a big thank you note to Veerappa Moily and his team is in order.
Who else can swing such a sweet deal from the govt but Reliance.
