Reliance Industries Ltd. is drilling its first well in India’s biggest natural gas deposit in more than a year as it struggles to reverse a slump in output, according to a person with direct knowledge of the matter.
Reliance, along with partners BP Plc and Canada’s Niko Resources Ltd., started a well in a smaller gas discovery area, called a satellite field, within the KG-D6 block earlier this week and plans to complete the work in about a month, the person said, asking not to be identified citing rules. The area may produce as much as 10 million cubic meters of gas a day starting 2015, equivalent to about 43 percent of current output from the block, the person said.
Production from the site off India’s east coast has slumped more than 60 percent since 2010 as reserves proved more difficult to recover than initially estimated, hurting supplies to power stations and fertilizer makers, and prompting companies to import gas at higher costs. Reliance, India’s biggest company by market value, will need to price the fuel at least 67 percent more than the current rate to break even on sales from the new area, the person said.
“Gas price is one of the key determinants for capital expenditure,” said Niraj Mansingka, a Mumbai-based analyst with Edelweiss Securities Ltd. “It remains to be seen how much the government will raise prices by, but Reliance would require between $6.5 to $8 per million British thermal units to get a reasonable return on their investments.”
Reliance was waiting for government approvals and the return of a deep-water rig leased to Malaysia’s Petroliam Nasional Bhd. to resume drilling. The company won permission to tap eight wells in the satellite field earlier this year.
BP, Europe’s second-biggest oil company, bought a 30 percent stake from Reliance in 21 Indian blocks, including KG-D6, last year for $7.2 billion. Reliance owns 60 percent stake in KG-D6, BP 30 percent and the rest is with Niko.
Reliance is also seeking to drill a deeper exploration well in the current reservoir to check for newer reserves. It applied for government permission earlier this year and is waiting for an answer, the person said.
The drop in current gas production is irreversible and Reliance and its partners would require output from the satellite area and another field called the R-Series to help stem the decline, the person said.
Tushar Pania, a spokesman for Reliance, didn’t immediately reply to an e-mail seeking comment on the start of drilling and the price of gas required to make a profit. The company gets a government-approved price of $4.2 per million Btu.
The KG-D6 block in the Bay of Bengal now produces about 23 million cubic meters a day (812 million cubic feet per day) of gas from three fields, called the D1, D3 and MA, the person said. The satellite and R-Series discoveries can add as much as 30 million cubic meters of gas a day, according to the person.
Reliance fell as much as 1.3 percent to 821.9 rupees and traded 1.2 percent lower as of 9:36 a.m. in Mumbai. The shares have gained 19 percent this year, lagging behind the 25 percent increase in the benchmark Sensitive Index.
The explorer, controlled by billionaire Mukesh Ambani, India’s richest man, needs to raise gas production and get a higher price for the fuel to help reverse four straight declines in quarterly profit. Net income declined 5.7 percent to 53.8 billion rupees in the three months ended Sept. 30, compared with a year earlier.
Gas production from the KG-D6 block in the Bay of Bengal declined 35 percent to 5.6 billion cubic meters in the six months ended Sept. 30 from a year earlier, according to an Oct. 15 statement. The drop was because of reservoir complexity and a natural decline in output, according to the statement.
The continuous decline in gas production has made analysts the most bearish on the company’s stock in at least 15 years. The consensus rating, or the average of recommendations updated by analysts in the past year, dropped to 3.12 on Oct. 25. Five denotes a buy and one a sell, according to data compiled by Bloomberg.
Reliance reduced its estimate of reserves at all its gas fields by 6.7 percent to 104 billion cubic meters as of March 31, according to its annual report. Niko Resources cut the estimate for its 10 percent share of proved and probable gas reserves in the KG-D6 block to 5.5 billion cubic meters as of March 31, according to a June 20 statement, which didn’t provide year-earlier figures.
Output from the three producing areas in the KG-D6 block is expected to decline to 20 million cubic meters a day in the year starting April 1, 2014, then Oil Minister S. Jaipal Reddy said in parliament on May 8.
“Gas production will remain a very important trigger for future earnings and so increasing production will be crucial,” said Neelabh Sharma, a Mumbai-based analyst with BOB Capital Markets Ltd., a unit of state-run Bank of Baroda. “As far as raising prices go, the government will have to walk a very thin line, balancing interests of both the producer and the consumer.”
India’s government-approved price for KG-D6 gas comes up for renewal in April 2014. A majority of the gas is sold to producers of power and fertilizer, prices of which are controlled by the government.
BP is confident “economic realities would force the Indian government to agree to a price closer to” liquefied natural gas rates, Iain Reid, Brendan Warn, Laura Loppacher and Daniela Almeida, London-based analysts at Jefferies & Co. Inc., said in a Dec. 4 report.
BP may be forced to write off part of its investments in India if gas prices aren’t increased, according to the report.
“Our planning on the satellite developments in India is good,” BP Chief Executive Officer Bob Dudley said Dec. 3 while hosting an investor day at the company’s Sunbury, U.K. campus. India is “going to need every molecule it can produce of almost any form of energy to be able to meet the prosperity growth that is likely to be desired there.”
India’s energy consumption is projected to rise 14 percent to 27.8 quadrillion Btu by 2015 from 2011, according to U.S. Energy Information Administration data. Gas use will grow 35 percent to 3.5 quadrillion Btu, according to the data.