Mumbai: Two oil and gas exploration projects of Reliance Industries Ltd (RIL) in the Krishna-Godavari and Mahanadi river basins are going to be delayed by a year, two minority partners have said, with one citing a scarcity of deep water oil rigs as the spoiler.
Big plans: Sea exploration equipment in KG-D6 basin. Reliance Industries, the oil-to-yarn conglomerate, has sought approval to invest an additional $5.91 billion in nine more discoveries in the block.
London-based Hardy Oil and Gas Plc., which has a 10% holding in KG D9 block, and Canada’s Niko Resources Ltd, that has a 15% stake in MN D4, have separately said in recent announcements to investors that they will now be drilling fewer wells off India’s eastern coast.
RIL owns the remaining equity in these blocks. The company din’t respond to an email questionnaire.
In a 15 April report to clients, Harshad Katkar, a sector analyst with UBS Securities India Pvt. Ltd, noted that with “drilling in highly prospective blocks pushed to 2010E (E denotes estimated)... due to a lack of deep water rigs,” the delay will “defer likely positive news flow on RIL’s exploration efforts from 2009 to 2010.”
UBS downgraded its rating on RIL shares, India’s most valuable company by market capitalization, to “neutral” from “buy,” and lowered the price target to Rs1,900 a share from Rs2,000, citing several reasons including the exploration delays.
Seismic data has shown that the KG D9 block could have the same oil-bearing channel found in the adjacent, prolific KG D6 block, where RIL recently began production after striking huge natural gas and modest oil reserves. Preliminary estimates by Hardy Oil have pegged the gross prospective resources for KG-D9 at 4 trillion cu. ft (TCF). An independent technical adviser has attributed a 15% probability of success. In comparison, KG D6, according to Niko, has 40TCF of reserves, but RIL has confirmed only a third of this figure.
While Hardy Oil had earlier stated it expected to drill four wells by the end of 2009, it said in a 19 March statement that due to shortage of “drilling ships capable of operating in water depths greater than 2,000 metres, delays have been experienced on the D9 exploration licence.”
It added that one deep water drill ship, Deepwater Expedition, had arrived in India last August, but was currently operating on the adjacent D6 block and the partners had agreed to bore just one well this calender year. “Timing will continue to be dependent on Reliance’s scheduled operations and commitments,” Hardy Oil said.
Similarly, excerpts from Niko’s 2008 annual report on their website had said locations will be selected as early as mid-2009 and drilling would follow soon after. But in its update to investors on 13 February, Niko said that selecting the location of the first well would only be by mid-2010.
A 17 September 2007 report by Macquarie Research had stated that the MN D4 block “may even dwarf KG D6” and presented significantly greater potential.
RIL’s president and chief executive, petroleum, P.M.S. Prasad, had said in February that the company had three deep water rigs at work and wanted five more, but was expecting only three to be available due to a shortage.
Explaining that rig rental rates had not fallen much and availability continued to be a hurdle despite a slowdown in exploration worldwide due to the recession, Prasad had said demand might have gone down but availability had declined even more because of lack of financing for new deep water rigs.
Prasad had also confirmed that RIL had contemplated manufacturing deep sea drilling rigs but had “stepped back from the idea” for now.
The Mukesh Ambani-owned RIL seems to have its hands full—and capital committed—with gas production commencing from a few wells in KG D6, further exploration in the rest of the block, and efforts to relaunch its domestic petrol retailing venture.
The oil-to-yarn conglomerate has sought regulatory approval to invest an additional $5.91 billion (Rs29,633 crore) in nine more discoveries in KG D6 block and link them to the ones already in production. It also plans to bid for $15-20 billion worth of oil projects in the Venezuelan Carabobo region along with ONGC Videsh Ltd and possibly Indian Oil Corp. Ltd (IOC).
Last week, RIL surrendered its export-oriented unit tag for the older Jamnagar refinery, with 660,000 barrels a day capacity, as a possible preparation for selling crude distillates such as petrol and diesel in the domestic market through a joint venture being discussed with IOC. RIL’s shares have risen 39% this year, outperforming the bellwether Sensex index, which has increased by about 14%.
This has prompted research and brokerage firms such as UBS, Kotak Securities Ltd and Sharekhan Securities Ltd to say in the past week that the current stock price factors in all the positives but not the risks.
On Monday, RIL shares fell by Rs3.80 to close at Rs1,713.70 on the Bombay Stock Exchange, while the Sensex ended nearly flat at 10,979.50 points.