Reliance Industries Ltd is ready for KG gas output: Supply From Deep-Sea Block To Begin As Early As Today

Did you now understand why I recommended Reliance Industries Ltd at Rs.1150, when most of the fund houses are asking to sell the scrip

RELIANCE Industries Ltd (RIL), India’s largest private sector company by market capitalisation, will begin gas production from the Krishna Godavari basin in the next 24-48 hours. The production of gas from Dhirubhai 6 (D6) block of the KG basin will open up a potentially vast new revenue stream for the oilto-yarn conglomerate and is estimated to add close to $2 billion to RIL’s bottomline at peak production level, said a person close to the development, who did not wish to be named.

RIL, which has recently commissioned a new 29-million tonnes refinery in Jamnagar, is now set to monetise two of its biggest investments in recent years. Unlike the refinery project, which may not send cash registers ringing in the immediate future, given the contraction in global demand for fuel, the gas project is set to have a sizeable upside for RIL’s bottomlines.

This is because RIL will be supplying gas to the domestic market, which has a huge demand-supply gap with fertiliser and power companies running plants at sub-optimal levels owing to the need of the fuel. Also, unlike the refinery business, the gas project will generate stable revenue and profits, which are not dependent on variables like crude prices, said a sector analyst, who closely tracks RIL.

The current demand for gas in India is estimated to be nearly 190 mmscmd, against a supply of 80 mmscmd, resulting in a shortfall of over 110 mmscmd. The KG-D6 field is expected to reach a peak production of 80 mmscmd by the end of 2009. “A major portion of the current shortfall in India’s gas availability can be met once this happens,” says RIL president and CEO, oil and gas, PMS Prasad. Topline at peak output likely to be $4.2 b ALTHOUGH the KG-D6 project is expected to take around four years to break even, the profits from the gas business will steadily add to RIL’s bottomlines.

RIL’s topline at peak production is likely to be $4.2 billion. The estimate of the net profit of $2 billion is after deducting a 10% share to partner Niko, royalty and cess payments, operational expense, the government’s share of profits, interest and depreciation. The company will be paying 10% as profit on petroleum to the government initially according to its production-sharing contract with the state. Oil companies share a pre-determined part of their profits with the government in accordance with regulations governing India’s oil and gas exploration policy.

The pre-commissioning countdown has begun and the production of gas from the deep-sea exploration block is all set to begin, possibly as early as Monday or Tuesday, the person in the know said.

The gas would be pumped into the East-West pipeline and supplies to the first batch of consumers — 12 fertiliser companies — would begin from mid-April. RIL has projected a production of 10 mmscmd in the first month, which would be increased every month. The fertiliser companies have been allotted 15 mmscmd of gas in the first phase. RIL is planning to scale up production to the peak of 80 mmscmd by the year end.

RIL’s next set of consumers will be the gas-starved power companies, which would be signing the gas sales contract in the next few days. The petroleum ministry has approached the Election Commission to obtain special permission for the gas contracts to be signed, a government official in the know said.

“It is important to have the contracts and consumers in place because it would be difficult to regulate the gas supplies once the production has begun,” he said. According to a Goldman Sachs report released last week, the KG-D6 gas could substitute around 7% of oil consumption in 2009-10 and about 10-11% over the next three fiscal. Goldman Sachs also foresees a fall in India’s total import bill and in the current account deficit.

“In addition, we expect the lowering of input costs to help boost corporate profits, and thereby tax collections. We estimate that the direct impact of this on revenues will be 0.1% of GDP in FY10, but will increase to nearly 0.2% over FY11-14,” according to the report authored by Asia Economics Research vice-president Tushar Poddar.

RIL is planning to invest an estimated $8.8 billion in the KG exploration block, and of this, it has spent $5.5 billion in developing the block and beginning production [From Internet]