Reliance Industries Ltd. (RIL), controlled by India’s richest man, is optimistic for the first time in three years about reversing a slide in gas output after the government began approving its expansion plans.
The company in January got endorsement for its proposals to explore and develop areas off India’s east coast submitted in 2010, Mumbai-based Executive Director P.M.S. Prasad, 61, said in an interview. That assent helped Reliance make a “significant” gas discovery in KG-D6, its biggest block in the Bay of Bengal, after drilling the first exploration well in the area in more than four years.
Prime Minister Manmohan Singh’s government is accelerating permissions to allow companies including billionaire Mukesh Ambani’s Reliance and Cairn India Ltd. (CAIR) boost output and help Asia’s second-largest energy consumer slash purchases from overseas by half by 2020. An unprecedented $151 billion oil import bill in the year ended March 31 propelled India’s current account deficit to a record, weakened the rupee and fueled inflation that’s the highest among large emerging nations.
“The approvals have started coming in after nothing was happening for three years,” said Prasad. “This year, we drilled a new well looking for more gas, submitted plans to produce from discoveries, got budgets approved, and resolved various issues. Things are moving now.”
Reliance’s output fell 39 percent to an average 26 million cubic meters of gas a day from the KG-D6 block in the year ended March 31, according to an April 16 report. Production is currently about 15 million cubic meters a day. The company started output in April 2009 with a plan to raise it to a peak daily rate of 80 million cubic meters in a year.
The company achieved its highest gas production in 2010 helping Reliance post a 25 percent profit increase in the year ended March 31, 2011, the fastest pace of growth in three years. Revenue from the business has plunged 52 percent since then, pulling the stock down 20 percent even as the benchmark S&P BSE Sensex (SENSEX) gained 3.1 percent.
The stock rose 1.8 percent to 843.4 rupees at in Mumbai as about 20.4 million shares or 0.6 percent of equity changed hands in a single block trade.
Reliance attributed the drop in gas output to difficult geology, which the company hadn’t anticipated earlier.
“There’s nothing yet to suggest the difficult geology won’t extend to the other discoveries in the block,” said K.K. Mital, a fund manager with Globe Capital Market Ltd. in New Delhi. “We’ve already seen and experienced the geological difficulties Reliance has faced.”
Production will also depend on the price of gas. Reliance sells the fuel from its KG-D6 block at a state mandated $4.2 per million British thermal units.
Natural gas futures in New York trading have increased 26 percent to $4.2 per million Btu this year, while Japan, the world’s biggest buyer of liquefied natural gas paid $16.44 per million Btu for purchases from overseas in March, the latest month for which data is available.
The tariff for Reliance comes up for renewal in April. A panel led by Chakravarthy Rangarajan, chief of the prime minister’s Economic Advisory Council, wants rates in India to be an average of gas prices in the U.S., U.K. and Japanese imports, which may almost double it.
“There’s a lot of gas in India waiting to be developed and produced,” B. Ganguly, president of Reliance’s petroleum exploration and production business, said in an interview. “It’s important these get government and regulatory approvals and market price to help the nation cut imports.”
India has 27 trillion cubic feet of proven and possible gas reserves in fields that are yet to be developed, researcher IHS Cera said in a January report. That’s four-times higher than the U.K.’s known gas deposits. India’s 12 major petroleum basins may hold another 64 trillion cubic feet of undiscovered gas, according to the report.
Most of this lies in the deep waters off India’s coast, which requires prices of $8 per million Btu to $12 per million Btu to make it viable to extract, according to the report. Gas price of $10 per million Btu could more than double production in India by 2025, according to IHS Cera.
Billionaire Anil Agarwal’s Cairn India, operator of the nation’s biggest oil field on land, discovered fuel in a new well at its area in Rajasthan state last month. It was the first well the explorer drilled in the block in five years after winning approval in February.
The government in January approved Cairn India’s plan to raise production from the block to 300,000 barrels a day, equivalent to about 40 percent of India’s current output, from 175,000 barrels per day.
Minister for Petroleum & Natural Gas M. Veerappa Moily, who took over the post in October, aims to cut oil imports by 75 percent by 2025. Lower imports may help narrow India’s current account gap, which swelled to $32.6 billion in the quarter ended Dec. 31. A depreciating rupee is also boosting cost of overseas purchases adding to consumer price increases that’s the highest among Brazil, Russia and China.
Vivek Rae, secretary at the ministry, couldn’t be reached for comment at his office in New Delhi yesterday.
Government endorsement for Reliance’s plans have made analysts the most bullish on its shares in almost a year, according to data compiled by Bloomberg. The consensus rating, or the average of recommendations updated by analysts in the past year, increased to 3.77 this month, the highest since June 2012. The rating fell to 3.1 on Jan. 7. Five denotes a buy and one a sell.
“Approvals coming in after a lull is a positive thing, but it also has to be a continuous process,” said Alok Deshpande, a Mumbai-based analyst with Elara Securities Ltd., who has a buy recommendation on Reliance’s shares. “Along with crude oil imports, gas imports are now rising and its at the back of everyone’s minds. The government just has to help boost production in India.”
Reliance and its partner BP Plc (BP/) said in February they plan to spend $5 billion developing discovered 4 trillion cubic feet of gas reserves in the block. This is equivalent to about two years of India’s gas consumption. India’s proven gas reserves were 43.8 trillion cubic feet at the end of 2011, according to BP data.
The new gas pool announced on May 24 may hold about 2 trillion cubic feet of gas, Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein & Co., wrote in a report yesterday, while upgrading Reliance to outperform from market perform.
BP’s board of directors met in New Delhi this month, their first meeting in India, and visited Reliance’s onshore gas terminal on the east coast, about 1,700 kilometers (1,056 miles) away. Europe’s second-biggest oil company bought stakes in KG-D6 and 20 other blocks for $7.2 billion in August 2010 as Ambani sought the London- based company’s technology to drill and produce gas from deepwater areas.
“BP’s directors visited our facilities and said it was one of the nicest projects they’ve seen anywhere in the world,” said Prasad, who joined Reliance 31 years ago from Schlumberger Ltd. (SLB) “They were very happy with the projects we’re planning and with the positive regulatory environment in the country.”
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