Business Today

The $6-billion Bet

With renewed interest in the KG basin, RIL and BP hope to benefit from the government's new pricing policy.
By Nevin John   Delhi     Print Edition: July 16, 2017
The $6-billion Bet
(L) Bob Dudley, CEO, BP, with RIL chief Mukesh Ambani [Photo: Chandradeep Kumar]

In the words of Miguel de Cervantes, a 16th century Spanish writer, "In order to attain the impossible, one must attempt the absurd". It's not quite clear whether Mukesh Ambani, the billionaire chief of Reliance Industries, and the British petroleum giant BP Plc's chief executive Bob Dudley are attempting the same.

On June 15, the heads of the petroleum companies announced an investment of $6 billion (roughly Rs 40,000 crore) in the three gas fields - R-Series, Satellites and D55 - of the Krishna-Godavari (KG) D6 block. Development of these fields is expected to bring a 30-35 million metric standard cubic metres per day (mmscmd) of new domestic gas by 2022, said Dudley in a press conference. A week later, they withdrew two out of the four arbitrations against the government, filed during the UPA regime, to claim the new premium price for output from deep-sea fields under the new hydrocarbon exploration licensing policy (HELP).

Reliance Industries (RIL) has been witnessing a catastrophic crash in gas production over the last seven years at the block - from the D1 and D3 fields. It has never been able to look up to the peak production of about 55 mmscmd in mid-2010. Today, the production is pegged at around 7 mmscmd. The company openly admits that the wells will empty in 12-18 months.

RIL and its partner Niko had made an investment of around $10 billion at the D1 and D3 fields between 2003 and 2010. In 2011, BP picked up 30 per cent stake in the venture, by paying $7.2 billion when the production began to plummet. The expectation was that it would ramp up the gas production; however, things got worse over the last six years.

RIL's revenue and EBIT (earnings before interest and taxes) from the exploration and production vertical in 2010/11 was Rs 17,250 crore and Rs 6,700 crore, respectively. The revenue fell to Rs 5,191 crore in 2016/17, making an EBIT loss of Rs 1,584 crore. In 2014, BP wrote down $790 million from its books, besides taking $830 million as impairment charges.

With this new investment, coupled with the HELP policy of the government that offers market-linked gas pricing - in which companies can price the gas up to the landed price of the substitute fuels (fuel oil or LNG or a combination of others) - things may begin to look up.

RIL and BP will ring-fence the sick gas fields - which fetch $2.52 per million British thermal units (mBtu) - and separately pursue the investment opportunity at the new fields and price it to the market rates.

Dudley said that the fields have 3 trillion cubic feet of discovered gas resources. At a gas price of $5 per mBtu, the value of the gas in the resource will be $15 billion, say industry experts. After giving the government's revenue share, it's not clear how much of the $6-billion investment and its interest can be recovered from the gas sale after 2022. A Morgan Stanley report, meanwhile, sees an overall estimated 12 per cent internal rate of return for the project.

@nevinjl

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