Reliance May Boost Gas Output on Price, Analyst Says

Reliance Industries Ltd., India’s biggest company by market value, may speed up natural gas production after the nation’s top court said the fuel should be sold at the government-approved price, an analyst said.

The Mumbai-based explorer may start production from new areas in the KG-D6 block by 2014, increasing the field’s peak output to 120 million cubic meters a day, said Neil Beveridge, an analyst at Sanford C. Bernstein Ltd. in Hong Kong. That compares with Reliance’s current estimate of 80 million cubic meters of peak output from KG-D6 in the Bay of Bengal, India’s biggest gas field.

India’s Supreme Court said May 7 Reliance Industries, controlled by Mukesh Ambani, Asia’s richest man, should negotiate gas sales afresh with a company owned by estranged brother Anil Ambani, which sought to buy the fuel at a discount to the state-set price in accordance with a family agreement. Reliance Industries has informed the nation’s oil regulator of gas discoveries in eight additional areas in the KG-D6 field off India’s east coast.

“The most important word is clarity,” Beveridge said by telephone from Hong Kong. “Reliance can start developing smaller discoveries now which wouldn’t have been viable at the discounted price.”

Reliance Industries shares gained 4.5 percent, the most since Dec. 23, to 1,079.40 rupees in Mumbai trading, extending a 2.5 percent increase on May 7. Anil Ambani’s Reliance Natural Resources Ltd. declined 4.8 percent to the lowest level since April 2, 2009, after slumping 23 percent following the court’s verdict.

Development Plan

Reliance Industries discovered natural gas in four additional areas at the KG-D6 field and informed the Directorate General of Hydrocarbons in February, according to two people familiar with the development. The explorer also submitted a plan to the regulator last year to develop four additional discoveries at KG-D6 at a cost of $1.5 billion, the two people said.

Reliance Industries may be able to raise output from the KG-D6 field by 2014, after the regulator approves the development plan, Beveridge said. Anil Ambani’s planned gas-fired power plant at Dadri, about 50 kilometers (31 miles) east of New Delhi, may also be ready by then, he said.

Reliance Ebitda

The Supreme Court’s decision will save Reliance Industries from an annual reduction in earnings before interest, tax, depreciation and amortization of around $600 million, starting in two to three years, when Reliance Natural’s power plants come up, Moody’s Investors Service said in a statement today. By then, Reliance Industries’s Ebitda may increase to $9 billion to $10 billion, according to Nidhi Dhruv, associate analyst at Moody’s.

Reliance Industries should start renegotiations with Reliance Natural within six weeks, according to the Supreme Court’s judgment. A revised agreement should then be submitted to the company court within eight weeks of the talks starting, the court said.

The Ambani brothers will renegotiate volumes and tenure of gas to be supplied to Reliance Natural, Alok Deshpande, an analyst with Elara Capital Ltd., said in a report today. Anil Ambani said he had an agreement with Mukesh Ambani to buy 28 million cubic meters a day of gas at $2.34 per million British thermal units for 17 years.

Reliance Power Ltd., the operator of Anil Ambani’s power plants, will be able to consume natural gas 24 to 36 months after reaching an agreement, Jayarama Chalasani, chief executive officer, said in an interview to Bloomberg-UTV news channel.

Manoj Warrier, a spokesman for Reliance Industries, declined to comment.

Priority Customers

The Indian government fixed the price of gas to be sold from the KG-D6 field in September 2007 at $4.2 per million British thermal units for five years. The government has allocated the field’s current output of around 63 million cubic meters a day to priority customers, including power stations and fertilizer plants.

India plans to add 78,000 megawatts of power generating capacity in the five years ending March 2012 and 100,000 megawatts in the next five years to reduce blackouts in Asia’s third-biggest energy consumer.

The Dadri power station in Uttar Pradesh state is intended to have a capacity of 7,480 megawatts, using gas from the field operated by Reliance Industries, according to Reliance Power’s annual report for 2008-09.

“Given the importance of adding power capacity, I think the government will allocate gas to the plant,” said P. Phani Sekhar, who manages funds for wealthy individuals at Angel Broking Ltd. in Mumbai. “India needs as much power as it can get and gas is a clean fuel.”

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