Reliance Industries Ltd. (RIL), battling to reverse a two-year slump in natural gas production, is spending about $1 million a day with partner BP Plc (BP/) (BP/) to look for new reserves more than a mile below its biggest field, said a person with direct knowledge of the matter.
The Indian explorer, which also runs the world’s biggest oil refining complex, started drilling under its KG-D6 block in the Bay of Bengal on March 1, the person said, asking not to be identified because of confidentiality rules. The exploration may be completed in about four weeks, the person said.
Reliance, controlled by billionaire Mukesh Ambani, and BP, Europe’s second-biggest oil company, plan to spend more than $5 billion in five years to develop discovered gas deposits in the KG-D6 block off India’s east coast. Ambani, listed as India’s richest man in the Bloomberg Billionaires Index with a wealth of $24.4 billion, is betting an increase in output and higher prices from April 2014 will revive earnings, which declined in four of the last five quarters.
“Finding new gas pools is critical for Reliance to return to its plan of supplying much of India’s needs,” said Alok Deshpande, a Mumbai-based analyst with Elara Securities Ltd., who recommends investors accumulate the stock. “A higher price from 2014 onward would be an added incentive.”
The government, which controls India’s natural gas prices, is due to review Reliance’s rates in 2014. Prime Minister Manmohan Singh’s administration is studying the recommendations of a panel, which advised local prices should be linked to global rates. That will almost double prices to about $8 per million British thermal units.
The new exploration well will go to a depth of 4,500 meters from the seabed to reach 70 million-year old rocks that may contain gas, the person said. These are present 2,000 meters below the producing D1 and D3 fields in the KG-D6 block.
Tushar Pania, a spokesman for Reliance, didn’t answer an e- mail seeking comment on the drilling for new deposit.
Reliance produced an average 28 million cubic meters of gas a day from the KG-D6 block in the nine months ended Dec. 31, 37 percent lower than a year earlier, according to a Jan. 18 report. The company started output in April 2009 and planned to raise it to a peak daily rate of 80 million cubic meters in a year.
Production is declining because of reservoir complexity, the company said on Jan. 18. The BP-Reliance partnership is “focused on finding more hydrocarbons and addressing the complexities of the geology along the east coast of India,” Ambani said in a Feb. 20 statement.
Reliance’s net income increased 24 percent to 55 billion rupees ($1 billion) in the three months ended Dec. 31 after earnings from its two refineries rose. The company reported higher profit after four consecutive quarters of declines.
Higher earnings and a possible increase in gas prices have made analysts the most bullish on the company’s stock since August. Bank of America Merrill Lynch upgraded the shares to neutral from underperform and increased its price target by 9 percent to 893 rupees on March 11. Morgan Stanley on March 4 raised the stock to overweight from underweight with a 20 percent increase in the price estimate.
Twenty of 52 analyst who track Reliance advise investors to buy the stock, while eight recommend they sell, according to data compiled by Bloomberg.
Return to Drilling
Reliance and Cairn India Ltd. (CAIR), which operates the nation’s biggest onshore oil field, are returning to exploration after the government in January allowed companies to search for new oil and gas deposits in existing fields to cut India’s crude imports and meet demand. Slumping output from Reliance’s block in the last two years has reduced gas supplies to fertilizer producers and forced some power stations to shut down.
The explorer sold stakes in KG-D6 and 20 other blocks to BP for $7.2 billion in August 2010 as Ambani sought the London- based company’s technology to drill and produce gas from deepwater areas. The companies are awaiting government approvals to produce from three gas discoveries in the KG-D6 block and two in an area off the coast of Odisha in eastern India.
“There’s a lot of pressure on Reliance’s earnings because of falling gas production and its imperative it finds more reserves,” said U.R. Bhat, director at Dalton Capital Advisors India Pvt. in Mumbai. “The company needs to get the maximum return from all the money it has already invested.”
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