Reliance Industries Ltd. (RIL), sitting on untapped natural gas reserves off India’s east coast, will be able to generate profit from new fields if the government agrees to double prices, a person familiar with the matter said.
At $8 per million British thermal units Reliance will earn a profit margin of about 15 percent from fuel trapped more than a mile deep in the newer pockets of KG-D6, said the person, who asked not to be identified, citing rules. While Reliance sells gas from the basin at a government-set price of $4.20, at least $7 is required to break even on the new wells, the person said.
Output from India’s biggest natural gas block slid more than 60 percent since 2010 as the reserves proved more difficult to recover than estimated, eroding supplies to power and fertilizer producers, and prompting high-cost imports. A panel led by Chakravarthy Rangarajan, chief of the prime minister’s Economic Advisory Council, last month recommended prices be linked to global rates, which brokerage Emkay Global Financial Services Ltd. estimates may push local prices to $8.
“A higher price will make smaller discoveries more economical to start and go a long way toward lifting India’s production,” Oil & Natural Gas Corp. (ONGC) Chairman Sudhir Vasudeva said in an interview in New Delhi, where the company is based. “It’ll also bring in an environment of investment.”
Reliance spokesman Tushar Pania didn’t reply to an e-mail seeking comments on the impact of higher gas prices on the company’s earnings.
State-run ONGC, which found reserves adjacent to Reliance’s fields in the Bay of Bengal six years ago, has said deepwater drilling is unviable at current prices. Gujarat State Petroleum Corp., an explorer controlled by the Gujarat state government, is also developing a field in the area.
Shares of billionaire Mukesh Ambani-controlled Reliance gained 4.4 percent and ONGC climbed 12 percent since Dec. 24, the week when Rangarajan submitted his report to the prime minister. The key Sensitive Index (SENSEX) gained 2.3 percent in the period. Reliance declined 0.6 percent to 856.60 rupees in Mumbai trading today and ONGC added 1.1 percent to 288 rupees.
“We’re going through the Rangarajan report,” Oil Minister Veerappa Moily said at a conference in New Delhi on Jan. 4. “We’re trying to see if it can be implemented.”
While the three fields Reliance now operates in KG-D6 produce about 23 million cubic meters (812 million cubic feet) a day, the company’s discoveries around this area can add as much as 30 million cubic meters daily, the person said. ONGC in December 2006 said it discovered 2 trillion cubic feet of gas reserves in a block next to Reliance’s.
“Reliance will be the biggest immediate beneficiary if gas prices are increased,” analysts led by Jagdish Meghnani at Mumbai-based Emkay wrote in a Jan. 3 report. “ONGC is expected to benefit gradually in the long run.”
The panel recommended India set gas prices at a 12-month average of the U.S. Henry Hub, the U.K. National Balancing Point and Japan’s liquefied natural gas price minus freight and insurance costs, Rangarajan said on Jan. 2 in New Delhi. The government could also take an average of the price of India’s LNG imports, excluding transportation costs, he said.
“Prices will rise, but that’s necessary because we’re already spending a lot to import gas,” he said. “This method is the best way to go.”
Prime Minister Manmohan Singh is seeking to boost energy exploration and production and cut an import bill that’s widened the current account deficit to a record. The government needs to allow explorers higher selling prices to attract overseas companies to invest and encourage Indian explorers to produce from discovered reserves, said R.S. Sharma, chairman of the Federation of India Chambers of Commerce and Industry’s Hydrocarbon Committee and former chairman of ONGC.
“The doubling of prices will make all of Reliance’s and ONGC’s deepwater discoveries viable,” Sharma said in an interview. “Higher prices will bring clarity and visibility and explorers will be clamoring to drill.”
Reliance’s selling price of KG-D6 gas comes up for revision in April next year. The company last month began drilling its first well in the KG-D6 block in more than a year.
About two-thirds of the gas available in India is used by plants that produce electricity and fertilizers, prices of which are controlled by the government. Higher gas prices will increase costs for these factories and result in a higher subsidy bill for the government even as it attempts to cut the fiscal deficit, which Finance Minister Palaniappan Chidambaram has pledged to narrow to 5.3 percent of gross domestic product this fiscal year from 5.8 percent in 2011-2012.
“While power generation cost would increase necessitating an increase in power tariffs, increase in feedstock cost for fertilizer sector would lead to increase in government’s outlay on fertilizer subsidy,” according to the Emkay report.
In May 2010, India’s cabinet agreed to more than double the price to the equivalent of $4.20 per million Btu for gas produced from fields that were awarded before 1999 to state explorers ONGC and Oil India. This price, based on the government’s Administered Pricing Mechanism, is unrelated to Reliance’s selling price.
Slower Indian expansion and threats from trade and budget deficits have increased the economic risks the nation faces, the Reserve Bank of India said in its biannual Financial Stability Report last month. The current-account deficit widened to a record $22.31 billion in the quarter ended Sept. 30.
“All the data show that India needs to reduce its fiscal deficit and cut import spending and that can be done by producing more oil and gas here,” Sharma said. “We need to really step on that.”
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