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RIL to suspend drilling for oil and gas

RIL to suspend drilling for oil and gas

Mumbai: Reliance Industries Ltd, India’s most valuable company, will suspend drilling across its entire oil and gas portfolio until a process of re-evaluation, currently under way, ends and a fresh plan is submitted to the government.

Reliance’s management told analysts at a meeting following the announcement of its September quarter earnings on Saturday that it was “re-evaluating" its exploration and production strategy along with its venture partner, BP Plc. Three analysts, who had attended the meeting, confirmed the management’s intention to suspend drilling till the re-evaluation was completed, as expressed to them.

Reliance sold a 30% stake in 21 of its oil and gas blocks for $7.2 billion to London-based BP in February. The transaction received government approval on 30 August and Reliance has received the entire payment from BP, according to the company’s investor presentation dated 15 October on its website.

The company’s decision to halt drilling work will delay the time by which these oil and gas assets were to come on-stream, according to these analysts.

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A Mumbai-based analyst with a foreign brokerage, who attended the meeting, said the Reliance management told them the company will not embark on any new drilling at any of its sites for the time being. He did not want to be identified as he is not authorized to speak to the media.

“In view of this development, the time taken for these blocks to start production will materially differ from what the Street was expecting," this analyst said. “The company will also have to talk to the government to allow it to redesign its work plan."

Reliance will approach the government with a fresh work plan for its entire exploration and production portfolio, based on the joint assessment by Reliance and BP, according to a person familiar with the development, who declined to be identified.

The oil-to-yarn and retail conglomerate did not specify the time frame in which the re-evaluation will be done and drilling work will restart.

Its exploration and production business has been a major cause of concern for Reliance, as gas output from D6, the reservoir operated by Reliance that is India’s largest gas find, has been in a state of decline for the past few quarters.

According to the original development plan, gas production from D6 should have been at least 60 million standard cubic metres per day (mscmd) by now, whereas it averaged 45 mscmd for the September quarter.

Apart from D6, there is a natural decline of oil and gas produced from Reliance’s Panna Mukta and Tapti fields as well, because the reservoir is ageing.

As a result, the revenue earned by Reliance from its oil and gas business in the September quarter declined 17.2% from a year earlier to Rs3,563 crore. Operating profit from the segment also dropped 10.2% to Rs1,531 crore.

The company has been subject to regulatory scrutiny with respect to its operations in this block. The Directorate General of Hydrocarbons (DGH), under the ministry of petroleum and natural gas, has claimed in the past that Reliance did not drill enough wells to evacuate the gas. The Comptroller and Auditor General of India (CAG) has also examined whether Reliance had gold-plated the cost incurred in developing this block.

“Detailed responses (have been) provided to the issues raised by CAG," the aforementioned Reliance presentation states.

Questions have also been raised on the manner in which Reliance was allowed to recover the capital expenditure incurred in developing the gas field. Solicitor general of India, Rohinton Nariman, had advised the oil ministry to link recovery of cost to the utilization of capacity at D6 rather than front-loading it.

Some analysts are also looking at the suspension of drilling work as a pause to clear pending regulatory issues.

“Apparently a strategy is being devised where Reliance and BP want to start on a clean slate and clear all pending regulatory issues before going ahead with their exploration and production plans," says Arun Kejriwal, director at Kejriwal Research and Investment Services Pvt. Ltd.

The deal with BP was necessitated because of the London-based energy firm’s expertise in deep-water drilling, which Reliance hopes to utilize to find a remedy to the falling gas output at D6.

Another analyst with a Mumbai-based brokerage, who was present at the meeting, stated that the Reliance management indicated to them that gas production from D6 may not rise before 2015.

Mint had reported on 8 June that at a meeting between DGH and Reliance officials in May, both sides had agreed that it was difficult for gas output to rise before 2014. Reliance had cited unforeseen complexities in the geological character of the D6 reservoir as the reason for gas production failing to meet targets.

The latest guidance on gas output given by the Reliance management on Saturday is a year’s delay from the timeline suggested at the May meeting between the government and the operator.

“Reliance and BP may also be suspending drilling operations in order to focus all their efforts towards finding a solution to the immediate problem at D6. All other exploration plans may be put on the back burner till then," said the analyst with the foreign brokerage, who was cited earlier.

Reliance’s share gained 2.36% on BSE on Friday to close at Rs866.80, while the benchmark index, the Sensex, rose 1.18% to end at 17,082.69 points.