Mumbai/New Delhi: Power and fertilizer companies already reeling under the effects of declining gas production from Reliance Industries Ltd’s (RIL) gas field in the Krishna-Godavari (KG) basin may have to brace for tougher times.
The oil-to-yarn and retail conglomerate, which operates KG D6—the nation’s largest gas find till date—has intimated the Directorate General of Hydrocarbons (DGH) that gas production from the field could slump further to around 47 million standard cubic metres per day (mscmd) in 2012-13, from 51-52 mscmd at present, “unless radical changes were implemented at the block”.
Significant cut: A control and raiser platform at RIL’s KG basin block.
According to guidance given by RIL last year, gas production from KG D6, located off the eastern coast of India, should have reached 60 mscmd by now. An empowered group of ministers of the government had allocated natural gas to various power, fertilizer, and city gas distribution companies based on this.
Indian Petro, an industry website, reported on Thursday that in response to some queries raised by DGH, RIL had stated that gas production from two blocks located in KG D6, namely D1 and D3, may drop to 38 mscmd during fiscal 2013, from around 43-44 mscmd at present.
The MA oilfield, located in KG D6 as well, where RIL also produces some gas, is expected to maintain the current natural gas production level of 9 mscmd, according to the website.
RIL is reported to have told DGH that undesired water production in the existing wells in the field could drag the production profile further, and that it was studying ways of minimizing the same.
Contrary to Thursday’s report, S.K. Srivastava, director general of hydrocarbons, was quoted on 10 March as saying that RIL was expected to meet the targeted production of 67 mscmd by April, by drilling four additional wells.
Calls made to Srivastava remained unanswered.
The conflicting reports may have sparked off some confusion among investors.
RIL lost 3.71% on the Bombay Stock Exchange (BSE) on Friday to close at Rs 993.15, its sharpest fall in more than 10 months. The bourse’s benchmark equity index, the Sensex, declined 1.49%.
In a statement to the bourses, RIL clarified that the projected production figures were “purely provisional and indicative and are subject to such variations as may emerge during the actual operations in the future years”.
These variations can be on account of physical inputs, work programme as well as geological and reservoir complexity, the RIL statement added.
Mumbai-based independent stock market analyst S.P. Tulsian said a 10 mscmd cut in gas production could lead to RIL’s earnings per share declining by Rs 3.20, which could have a Rs 60-100 per share impact on the company’s stock price.
“Going forward, if there is a further decline in gas production from KG D6, I do not expect RIL to ration supplies to the fertilizer companies keeping in mind the current food inflation situation,” Tulsian said. “Gas allocation to the power sector over and above the gas available after meeting the fertilizer sector’s demand may be withdrawn.”
In February, London-based oil and gas company BP Plc announced an agreement to buy a 30% stake in 23 oil and gas blocks operated by RIL, including those in KG D6, for $7.2 billion (around Rs 32,475 crore today).
In addition to the cash, the company is expected to leverage BP’s technical expertise in deepwater drilling to overcome some of the challenges being faced by RIL, India’s largest company by market value.
However, the deal, which is subject to approvals in India and the UK, has not been closed as yet. RIL chairman Mukesh Ambani had said that the money from BP should come in by March 2012, indicating the deal is expected to be consummated in the next fiscal.
A 3 March Morgan Stanley report said the power and fertilizer companies that have been allocated gas from the said reserves would be significantly affected by the cut in gas supplies.
“Our discussion with fertilizer and power companies suggests that RIL has applied an 8-10% cut in gas supplies because of the shortfall in its production from the KG D6 block,” the Morgan Stanley report said. “We believe this could affect the profitability of some companies as they either cut volumes or resort to purchase of gas from alternative sources at a higher cost to maintain operating rates.”
RIL’s own consumption of KG D6 gas at its refinery and petrochemicals plants has dropped as supply is down 8% to 3.9 mscmd.
The inadequate gas supply comes as the nation gears up for summer and amid high food inflation.
Power generators that have contracted gas supplies from RIL, especially in the southern states, are operating at a lower plant load factor (PLF), a measure of average capacity utilization.
Seven of these units in Andhra Pradesh are facing supply cuts of 8-33%.
A senior executive of one of the companies that operates a 445 megawatt plant said the cut in gas supply is leading to losses of as much as Rs 4 crore per month since October. He did not want himself or his company to be identified.
“We have obviously had to cut down generation. Also, with the ‘heat rate’ going up due to operating at a lower PLF, plant efficiency is compromised as we are consuming proportionately more gas,” the executive said.
Heat rate—a measure of the efficiency of the power generating turbine—is the ratio of the total energy supplied to the turbine to the total electrical energy output.
GMR Infrastructure Ltd’s power plant in Vemagiri in Andhra Pradesh also had lower PLF in the third quarter of the current fiscal, to 76% from 90%. GMR attributed this to a “lower fallback gas allocation from RIL”.
The executive quoted earlier stated that buying gas from alternative sources was not an option as it would be more expensive, pushing up the cost of operations and rendering the unit unviable in competitive bidding.
Some companies are in discussions with APTransco, the Andhra Pradesh state-owned power transmission firm that has signed power purchase agreements with power producers, to explore the option of importing liquefied natural gas as fuel.
In the case of the fertilizer industry, the lower supply is being felt mostly by the government, which has to subsidize the cost of gas for the companies.
The urea sector requires 43.14 mscmd of gas annually, one-third of which is supplied from RIL’s KG D6 field. If a potential shortfall of 10%, or 1.4 mscmd, in RIL’s supply to the sector had to be made good through the purchase of gas from the international spot market, it would lead to an additional burden of up to Rs 887 crore, with the cost differential between imported gas and D6 gas being $10 per million British thermal unit (mmBtu). The government has fixed the cost of KG D6 gas at $4.2 per mmBtu.
The potential rise in the subsidy bill would be in addition to the Rs 7,000 crore increase announced by the the government in February for importing non-urea fertilizers.
Fertilizer companies that are not yet affected by the cut in gas supply are also circumspect about the future.
A senior official at Rashtriya Chemical and Fertilizers Ltd said its plants in Thai and Trombay were running at full capacity as it had access to gas under the administered pricing mechanism from GAIL (India) Ltd. He, too, did not want to be identified.
“But if the RIL problem continues for long, we may have to shift to naphtha, which is 1.7 times costlier than RIL gas, and hope the government will compensate the additional cost through subsidy at the current demand scenario,” he said.
Analysts say the only solution lies in developing alternative sources of energy faster.
“Development of shale gas, coal-bed methane are all possibilities, but they are long term. In the interim, the only option is to import gas even if it is at a higher price,” said Kalpana Jain, a senior director at international audit and consulting firm Deloitte Touche Tohmatsu India Pvt. Ltd. “People have made huge investments in power and fertilizer, and it is critical that they remain operational, even if high input costs fan inflationary pressures.”
C.H. Unnkrishnan in Mumbai contributed to this story.