Reliance Industries Limiteds (RIL) results for the three months to September 2012 came in on expected lines, with gross refining margins (GRM) jumping nearly $2 sequentially to $9.5 per barrelnet profits at R5,376 crore, were up 20% q-o-q but fell 6% y-o-y. The petchem piece, expectedly, turned in subdued numbers with ebit margins remaining flat sequentially and volumes coming off slightly. The petchem cycle will take a while to turn depending on demand from China, a factor that will also determine the profitability of the refining business in the coming quarters when more global capacity which has been shut down for a variety of reasons will be up and runningthe former will boost RILs profits while the latter will dampen them.
The biggest dampener in the September quarter was, of course, the oil and gas segment where revenues came off sharply, by about 36% y-o-y and pbit by over 40% y-o-y. RILs capital employed has stayed more or less flat sequentially at R2.54 lakh crore with close to a 12% drop for the oil and gas business or about $700 million.The management offers no clues about how capex for this business will pan out, though there are news reports to the effect that it could scale back the amount by about $3 billion eventually. Cumulative crude oil production from the KG-D6 block was 1.7 million barrels while that of natural gas was 197 BCF in the first half of FY13, a drop of 37% and 35% y-o-y respectively. RIL attributes the fall to reservoir complexity and a natural decline but the oil minister has gone on record to say the government doesnt believe this is the case. Given that this is now a long-running dispute, its high time the government roped in the services of a global certifying agency to sort out the matter once and for all. The unstated argument is that RIL is deliberately lowering productionand this is the view the minister seems to be endorsingtill gas prices are revised upwards. If the global agency points out there are no reservoir issues, then RIL needs to be penalised; if it says there are problems then, as RIL points out, there are no provisions in the production sharing contract to disallow RILs expensesthis has been a big reason for RILs disappointing profits in recent quarters.
The larger issue is that, whether or not there are reservoir issues, the government needs to get RIL to step up output since there are huge downstream effects of lowered gas supplies. While the government has said that it will expedite clearances for other fields in the KG basin, its not immediately clear this is happening. RILs field development plan for the MA field, for instance, was submitted in February but government hasnt yet signed off on it. Again, updated FDPs for the D1-D3 fields have been handed in and are awaiting a nod from government. Perhaps this is something the to-be constituted National Investment Board needs to take up since the line ministry doesnt seem to be making much progress.