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Is the $6 billion Bet of Reliance-BP in Right Direction?

RIL's renewed effort in E&P, after six years of subdued gas production at its Krishna-Godavari (KG) basin and four arbitration proceedings, is primarily aimed at capturing the domestic market.

twitter-logo Nevin John   New Delhi     Last Updated: June 15, 2017  | 21:35 IST
Is the $6 billion Bet of Reliance-BP in Right Direction?

After being wiped off from the global hydrocarbon exploration and production (E&P) map, Reliance Industries (RIL) makes a second try, splurging Rs 40,000 crore along with British giant BP Plc to recapture its lost position in the business. They plan to produce 30-35 million cubic metres (1 billion cubic feet) of gas a day from KGD6 block, which consists of the R-Series, Satellites and D55, starting from 2022. It is expected to substitute $20 billion worth energy import, says BP Plc chief executive Bob Dudley.

RIL's renewed effort in E&P, after six years of subdued gas production at its Krishna-Godavari (KG) basin and four arbitration proceedings, is primarily aimed at capturing the domestic market, dominated by state-run players ONGC, Indian Oil, Bharat Petroleum and Hindustan Petroleum. As it did with Reliance Jio in telecom, the company looks to disrupt the market with new technologies in E&P and fuel retailing, says chairman Mukesh Ambani.

ONGC dominates the E&P segment because of the government support and RIL looks to topple the public sector giant with advanced technology. But the fact is that the company and its partner BP Plc hasn't been able to resolve the existing issues in KG D6, where geological complexity scuttles the gas evacuation plans. Another scope of the investment is that the oil marketing companies (OMCs) lag behind in enhancing the customer services at their fuel stations. BP Plc has license to set up about 3500 fuel stations in India. RIL operates about 1,500 stations.

But the key question here is that whether the government has agreed to RIL's demand for revising the gas price, linking it to the market. The government and the company were in disputes for the last six-seven years over the pricing issues. RIL took a position that the E&P at KG D6 will not be viable at the government-fixed price. So they stopped investing in the block in 2012-13.

The Modi government was unwilling to heed to RIL's demand for arbitration in revising gas price since 2014. The government revised the price to $5.6 per mBtu from $4.2 for gas producers in India, except for RIL, then. Last year, RIL planned to withdraw from all its disputes with the government.
At present, the domestic natural gas price is at $2.48 per unit but the ceiling for gas from difficult fields, which is linked to alternative fuels, rose marginally to $5.56 a unit. RIL's gas falls in the second category, but it can't claim that price since the company hasn't been able to deliver the promised gas within the scheduled timeframe.

RIL has invested about $10.5 billion for E&P in KG D6. Only two KG D6 fields, D1 and D3, produce gas now and the reserves are expected to exhaust in a few years. At present, D1 and D3 produce about 15 mscmd of gas, compared with its peak of 60 mscmd in 2010.

RIL'S revenue and EBIT (earnings before interest and taxes) from the E&P vertical was Rs 17,250 crore and Rs 6,700 crore, respectively in 2010/11. The revenue fell to Rs 5,191 crore in 2016/17, making an EBIT loss of Rs 1,584 crore. But, statistically, RIL recovered most of its costs through the sale of gas and 30 per cent stake sale in its upstream assets to BP Plc at $7 billion in 2011. But cost recovery has still not been at the level defined in the PSC.
The British giant had to write down its value of investment in KG D6 block by $790 million in 2014 besides another $830 million in impairment charges.
In this scenario, it's quiet natural that the investors will doubt about the sincerity in the new investment.

ALSO READ: RIL-BP to invest Rs 40,000cr in India's energy sector

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