Mumbai: Reliance Industries Ltd (RIL) upstream business will drain cash from the rest of the business from fiscal 2018 until production begins from the three gas fields where RIL and BP announced fresh investments, says Moody’s investor service.

RIL and BP Plc together on 15 June announced their plan to invest Rs40,000 crore in “R-Series" deep water gas fields in block KG-D6 off the east coast of India. The investment in the deep water gas fields is expected to boost production to 30-35 million metric standard cubic meter per day (mmscmd) by year 2020-2022, nearly five times the current production level. 

Moody’s investor service in a note released on Tuesday said, “The annual investment amount is disproportionately higher than the cash flows being generated by RIL’s upstream segment, which reported an earnings before income and tax (Ebit) loss of Rs1,600 crore in fiscal 2017. This implies that the upstream business will drain cash from the rest of the business from fiscal 2018 until production begins from these blocks. This adds further drag on RIL’s refining and petrochemical businesses which are already supporting the company’s Rs3 trillion capex program over last four years in its energy and telecom businesses."

RIL’s scrip was trading at Rs1,413.55, up 0.31% on the BSE at 1.15pm, while the benchmark Sensex index was trading at 31,326 points, up 14 points, or 0.045% from Monday’s closing level.

RIL and BP are partners in the KG-D6 block which currently produces around 7 mmscmd. While RIL holds a 60% stake in the gas block, BP owns 30%. Canada-based Niko Resources Ltd owns the rest. 

RIL’s 60% interest in the block and its proportionate share of the Rs40,000 crore investment will be at Rs4,000 billion, said Moody’s, adding: “We expect minimal investments in fiscal 2018 ending March 2018 and the annual investments will be about 6000 billion after that, which will increase borrowings and leverage. However, relative to RIL’s total earnings before interest, taxes, depreciation and amortisation (Ebitda) of Rs56,800 crore in fiscal 2017, this amount will have little impact on its credit metrics."

On 15 June, RIL and BP said they plan to submit development plans for the projects for government approval before the end of 2017. “Development of the three projects, with total investment of Rs40,000 crore ($6 billion), is expected to bring a total 30-35 million cubic metres (1 billion cubic feet) of gas a day, new domestic gas production onstream, phased over 2020-2022," a joint statement from the companies said.

The field began gas production in April 2009 and was to hit a peak output of 69.43 mmscmd in March 2010. However, water and sand ingress forced the closure of some wells, leading to a drop in production.

“The planned investment will increase RIL’s exposure to Indian gas business, which is extremely challenging given the delays in regulatory approvals, retrospective changes in regulations and slow resolution of disputes. RIL is already in arbitration with the regulator for costs previously incurred in the KGD6 block," the note from Moody's added. 

RIL and its partners are embroiled in multiple arbitrations against the government, including for disallowing cost recovery as a penalty for gas output not meeting stipulated targets; deferment of natural gas price hike due to RIL from 1 April 2014; and for demanding $1.55 billion compensation from RIL and its partners for producing gas that belonged to Oil and Natural Gas Corp. Ltd’s field in the KG basin. 

Currently, RIL is only getting $2.5 per million British thermal unit (Btu) for its current gas production from the KG-D6 block. However, revised pricing policy, effective for all gas production from fields that start producing after 1 January 2016, allows for pricing and marketing freedom subject to a price ceiling linked to landed prices of LNG and other substitute fuels such as fuel oil. 

“RIL’s production from the new fields will be eligible for such higher price as the fields are in water depths of over 2000 meters, which will be considered ultra deepwater blocks based on the government gas pricing policy notification dated 21 March 2016. The price ceiling for gas from such blocks is currently $5.56 per million btu," said Moody’s note, adding that if the three new fields together manage to achieve production volumes of 30-35 mmscmd of natural gas, they could generate annual revenues of $2.2-2.5 billion, of which RIL’s share will be $1.3-1.5 billion.