Govt-RIL standoff needs to be resolved once and for all
Reliance Industries Limitedís (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 barrelónet 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 runningóthe former will boost RILís 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. RILís 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 doesnít believe this is the case. Given that this is now a long-running dispute, itís 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 productionóand this is the view the minister seems to be endorsingótill 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 RILís expensesóthis has been a big reason for RILís disappointing profits in recent quarters.
The larger issue is that,