Reliance Industries Limited (RIL) received good news on Friday, 20th December when the Cabinet Committee on Economic Affairs (CCEA) allowed the company to sell KG-D6 block gas at a higher price with effect from April 2014. The one condition that the committee has laid down is that the Mukesh Ambani led giant will have to submit a bank guarantee decided by the Petroleum Ministry.
Leading Investment Bank Goldman Sachs in a report said, “We believe the Cabinet decision clearing the uncertainty on pricing of gas produced at KG-D6 is a key positive as this would likely end the political debate around the D6 gas price increase, allowing the market to focus on the company’s strong medium-term earnings growth prospects.” The Parliamentary Committee on finance had questioned RIL’s raising of the gas prices earlier, even more so because RIL had failed to meet the stipulated supply of gas. The matter was taken by government and the consensus was that RIL shouldn’t be allowed to raise prices until the matter was resolved.
The company then came out and proposed to the ministry of petroleum that they would submit a bank guarantee for the shortfall seen in the production of gas in the KGD6 basin. The D6 block is currently producing much lower than the supply commitment of about 80 mmscmd. According to the estimates of the directorate general of hydrocarbons, the shortfall in supplies from the D6 basin was about one trillion cubic feet.According to initial estimates, KG-D6 output was to reach 80 mmscmd by April 2012. Production from D-1, D-3 fields in the block started in April 2009. After hitting a peak of 60-61 mmscmd in early 2010, the output started to drop. At present, the output from D-1, D-3 fields stands at 9.5 mmscmd. Total output from D6 block that includes MA fields is around 11-12 mmscmd.While the price rise will start in just a few months, RIL will see an overall increase in revenues from 2016-2017.
According to Goldman Sachs, investors in RIL have nothing to be worried about. The bank guarantee would come into the picture if and only if RIL was found to have deliberately not produces gas as per requirements. The oil & gas giant has repeatedly stated that the production of gas being less than expect from the D6 basin was due to geological problems. The matter as requested by RIL was solved through arbitration and a panel of independent international experts in the field.