Mumbai/New Delhi: The share price of Mukesh Ambani-promoted Reliance Industries Ltd (RIL) slumped after its partner in the D6 gas field in the Krishna Godavari (KG) basin, Canada’s Niko Resources Ltd, slashed the proven and probable gas reserve estimate from D6 by 78.55% to 1.93 trillion cubic feet (tcf), compared with earlier estimates of around 9 tcf.
RIL fell 2.5% to Rs 718.60 on the BSE on Thursday. The Sensex rose 0.8% to 17,032 points. This was the sharpest fall in RIL’s stock price after 1 June, when it lost 3.16%.
The find off the eastern coast of India, hailed as the world’s largest natural gas discovery in 2002, has been facing a constant dip in production. KG-D6 is the company’s main gas asset.
In its 20 June Reserves and Contingent Resources Update, Niko said, “The reason for the decline in reserves referred to above relates to the D6 block. Proved plus probable reserves at D6 as at March 31, 2012, have reduced to 193 bcfe (billion cubic feet of natural gas equivalent) but it is important to recognize that coincident with the reduced reserves, there is approximately a $700 million reduction in future capital.”
This development comes at a time when RIL has been trying to assuage investors who have been concerned about its ability to arrest the fall in gas production and improve output from its reservoir. The output from the fields has dipped to 31.33 million standard cubic metres per day (mscmd) this month, and according to the Directorate General of Hydrocarbons (DGH), may further fall to 27.6 mscmd in the next fiscal (2012-13) and 22.6 mscmd in 2013-14. According to previous estimates, a projection of 80 mscmd was expected to have been achieved by now.
While Niko holds a 10% stake in the block, RIL and BP Plc hold 60% and 30%, respectively.
“An assessment of reservoir performance concluded that, contrary to the previous geological model, the current D1/D3 producing wells did not appear to be receiving any contribution from outside the main channel areas,” Niko added.
A senior executive at state-owned Oil and Natural Gas Corp. Ltd said, requesting anonymity, “They are facing a real and a very difficult test.”
According to RIL’s 2011-12 annual report, the company had trimmed the volume of its proven gas reserves by 0.43 tcf, or 6.63% of proven reserves, at the beginning of fiscal 2012. Most of this revision was on account of D6.
At first, the cut effected by Niko, according to its 20 June report, appears more adverse in comparison to that undertaken by RIL. Both companies attributed this to different rules of computing proved and probable reserves in their respective countries, as well as the methods employed by the consultants hired to assess such reserves.
“Each company has its own independent assessment of reserves and each country has different regulations,” William Hornaday, chief operating officer of Niko Resources, said during a conference call on Thursday. “We are guided by Canadian regulations.”
An RIL official, speaking on condition of anonymity, said that in its calculations, RIL factored in reserves from the satellite fields in D6 as well, which Niko didn’t, since the work plan to develop these marginal fields was yet to be approved by the government.
The Niko management said during the call that all three partners at D6 had “general technical agreement” over the level of reserves in the gas field.
Emails sent to RIL and BP did not elicit any response till press time.
A Mumbai-based oil and gas sector analyst with a foreign brokerage said Niko’s statement appeared “more dramatic” than it actually was and the Street had already factored in Wednesday’s disclosures in RIL’s stock price.
“The reserves estimate given by Niko is mostly in line with what RIL has guided,” this analyst said. “The RIL stock should not react too negatively to this going forward.”
The consultant hired by Niko to assess its gas reserves, Ryder Scott Co. LP, has advised the company that no new wells were required to be drilled in the D1 and D3 blocks in the D6 field to recover the proved and probable gas reserves from the region. RIL, BP and Niko’s efforts will be directed more towards bringing the satellite fields in the region under production to improve output from the reservoir, which is the aim of the integrated field development plan, expected to be submitted to the government in the fourth quarter of calendar 2012, Niko said. In Niko’s opinion, the capital expenditure required to execute the field development plan could be approximately $4 billion.
D1 and D3 are the main gas-producing areas currently, where gas production has been on a decline.
If RIL and BP concur with Ryder Scott’s assessment, the plan to stop drilling new wells in D1 and D3 may be a part of the integrated plan to be submitted to the government. Though Niko didn’t specify whether RIL and BP agreed with this assessment, the management said the three companies “met regularly” and had “good technical agreement”.
RIL has officially applied to the government for determining a new price for the incremental gas expected to be produced from D6 under the integrated plan post-2014, the Niko management said.
It clearly stated that the Canadian company would not be willing to commit fresh investment to execute the integrated development plan unless prices were made more remunerative when gas output rises.
Currently D6 gas is sold at the government-approved price of $4.2 per million British thermal unit (mBtu).
RIL is also engaged in a dispute with the petroleum ministry that is proposing to deny $1.24 billion in costs claimed by the firm. RIL had invested $5.69 billion in the block as of 31 March and recovered $5.26 billion.
The public accounts committee has started investigations into cost escalations in the D6 block and alleged contract violations. The Comptroller and Auditor General of India, in its Performance Audit of Hydrocarbon Production Sharing Contracts report submitted to Parliament last year, had stated that RIL had breached some terms of a production-sharing contract with the government for the D6 block. It also blamed the petroleum ministry and DGH for their failure to provide adequate supervision of the process.
The slashing of estimates also comes against the backdrop of RIL trying to secure a higher price for the gas. RIL is seeking a rise in the $4.2 per mBtu gas price. In 2007, a ministerial panel headed by then external affairs minister Pranab Mukherjee had approved a price of $4.25 per mBtu for a period of five years from the date of production. Gas production from the block began in April 2009.
RIL’s net profit fell 21.2% to Rs 4,236 crore for the quarter ended 31 March from a year ago, despite a 16.7% increase in revenue to Rs 87,833 crore. For fiscal 2012, the company reported a net profit of Rs 20,040 crore, a marginal decline of 1.3%, on a 31.4% increase in sales to Rs 3,39,792 crore.