RIL, partners may pay $147 m per quarter as bank surety for KG-D6

Written by Pranav Nambiar | New Delhi | Updated: Dec 21 2013, 10:35am hrs
With the bank guarantee that the Reliance Industries-BP-Niko Resources consortium will have to furnish likely to be only $147 million per quarter, and the path cleared for it to invest around $6 billion (see graphic) over the next three to four years, Reliance's stock price jumped 4.6% on Friday against the broader market's 1.79% hike.

The lower bank guarantee comes as a big relief since, at one point, the finance ministry had estimated it could be as high as $9 billion. This, however, was over a longer period and on the shortfall in RILs output vis-a-vis what it was alleged to have promised.

On Thursday, after the Cabinet cleared the proposal to allow RIL to charge the Rangarajan formula-based price subject to bank guarantee, petroleum secretary Vivek Rae clarified the formula would be prospective. That means if RIL and partners produce 100 units of gas and get a price of $840 against the $420 it gets currently, they will have to give a bank guarantee of $420.

Edit: Stepping on the gas, P6

Based on the likely 11mmscmd output, that works out to a bank guarantee of $147 million per quarter. Of this, Reliance's share will be $88 million. For a period of two years, by when the arbitration over gas hoarding is likely end, the overall bank guarantee will amount to $1.2 billion.

The oil ministry and RIL are currently engaged in arbitration over the government's move to disallow $1.005 billion expenditure made by the company in developing the gas fields because of a sharp fall in output. Oil ministry officials say that the outcome of the arbitration would prove whether the contractor deliberately suppressed gas output or it was a genuine geological surprise.

The bank guarantee will be equivalent to the incremental revenue RIL will get from the new gas price. It will cover the difference between the current gas price of $4.2 per million British thermal units (mmBtu) and the new rate which will come into effect from April 1 as per the Rangarajan committee formula. It will be revised on a quarterly basis depending on variation in gas price which is indexed to the international hub rates.

The D1 and D3 fields have about 1.2 trillion cubic feet (tcf) of reserves still to be tapped and the company is currently producing at around 0.05 tcf per year. The company plans to invest a further $500 million on these fields. The R-series and satellite fields have reserves of around 3 tcf with $5-6 billion investment earmarked for the fields.

RIL has another discovery in the KG-D6 block which lies below the D1 and D 3 fields. Sources say that this field requires a higher price than the Rangarajan formula but can share the infrastructure used by D1 and D3.

The company's Cauvery fields are in the exploration phase and the company will know its prospects only over the next three to four years. It is deeper than the D1 and D3 fields and requires free market pricing to be viable. As far as the NEC 25 discoveries in Mahanadi is concerned, the company is awaiting a concession for conducting drill stem test (DST) in order to continue developing the field. It would invest around $3 billion in case free market pricing comes into force.

The Directorate General of Hydrocarbons in July raised the penalty on RIL to $1.8 billion to reflect the sharp fall in natural gas supply from Dhirubhai 1 and 3 gas fields in KG-D6 block. Directorate General of Hydrocarbons vide letter July 22, 2013, has proposed for disallowance of cumulative cost recovery amounting to $1,797 million up to financial year 2012-13 towards creation of excess capacity, said a DGH note.

RIL states that the fall in production is a result of geological complexities. Gas production from the D1&D3 fields fell to 8.7 mmscmd this month from a peak of 55.9 mmscmd in 2010-11. The estimated shortfall in production vis-a-vis targets between 2009-10 to 2013-14 stands at 1,22.77 mmscmd of gas.

Meanwhile, exploration companies are awaiting the Vijay Kelkar committee report on a roadmap for enhancing domestic oil and gas production expected in the next few months. The panel has been asked to suggests steps to be taken for enhancing domestic oil and gas production from the unconventional energy sources and institutional mechanism (required) for appraisal of Indian sedimentary basins to the extent of 75% by 2015 and 100% by 2025.

PSU oil major Oil and Natural Gas Corporation has welcomed the news but cautioned that they might be liable to contribute more to subsidies on account of higher gas prices not being passed on to sectors like fertiliser and power. The new gas price will make some of our deep water blocks viable, but we fear that a greater subsidy burden might be imposed on us. We are currently undertaking the appraisal of our deep-water block in KG-D6 but I cannot comment on what price it will be viable, said Narendra Verma, director exploration at ONGC.