Reliance Industries Ltd (RIL) is expected to begin production of natural gas from its Krishna-Godavari (KG) block D-6 soon. Industry analysts are, understandably, excited about the prospect. It has been argued that the discovery could herald significant savings in the oil import bill.
Illustration: Jayachandran / Mint
It is expected that production, which petroleum secretary R.S. Pandey said he was “told” will commence in April, will start at the level of 5-10 million cubic metres per day (mcmd). This figure will rise to 40mcmd by July and at its peak, some 1.5 years later, it will touch 80mcmd. Immediate beneficiaries include fertilizer companies who will get 14-15mcmd, power plants (18mcmd) and city gas projects (5mcmd).
Yet, this is only one aspect of the picture. A legal battle ensued between RIL and Reliance Natural Resources Ltd (RNRL) over the price at which gas was to be supplied to RNRL. There was controversy over the amounts to be supplied to fertilizer companies.
It is, however, also important to look at the economic impact of the discovery, largely the reduction in the total oil/energy import bill. In this context, there are significant fluctuations in analyst estimates. For example, for fiscal 2010, estimates of this reduction in the import bill range from 7-9% and rise to 19-24% by fiscal 2014. The assumption here is that India’s energy demands will grow and that our oil import bill will increase greatly. Some analysts have said that gains to the government in terms of profits, royalties and corporate tax will be four times that of what the company will gain. One report went as far as to state that the government will gain $39 billion once production commences (in net present value terms).
On one hand, the assumptions behind these projections are overtly optimistic and on the other hand, they are not very clear. Oil demand forecasting is dodgy at the best of times. From 1997-98 to 2008-09 India’s oil import bill galloped from roughly $8 billion to $85.6 billion (provisional). While this figure could have been “forecast”, was there any way any analyst could have predicted the impact of the subsidy regime of the government in determining oil demand and, hence, the final oil import bill? Do analysts look at the role played by governments in aiding or preventing price discovery in commodities such as oil?
In case of a company such as RIL, which has at best been opaque in sharing geological, financial and production data, there is the added urgency of treating such estimates with caution. The impact of the KG D-6 find requires careful interpretation. There is no need to be gung-ho about estimates of its benefits.
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