RIL's Gas Output At A Historic Low

India's most valued company Reliance Industries has received a setback after gas production from its KG-D6 basin has dropped to a historic low. Also, the Rangrajan committee's gas formula has worked out the gas prices from KG-D6 basin at USD 7.4 per million British thermal unit (mBtu). The energy giant has been expecting prices of USD 13.23 per mBtu but at USD 7.4 per mBtu the company will see lower than expected realizations from the gas sourced through the KG-D6 basin.

Currently RIL is getting a price of USD 4.2 per mBtu for the gas produced from the KG-D6 basin. These prices were set in 2007 and are linked to the Brent crude oil prices. In the last 6 years there has been no revision in the prices and the next round of revision is expected in 2014. RIL's expectation of gas price of about USD 13.23 per mBtu would have given it an additional revenue of over USD 4 billion per year but that seems like a distant possibility after the price derived by the formula suggested by the Rangrajan committee.

The price of USD 7.4 mBtu would, however, increase the subsidy bill by Rs 28000 crore to the government. Reliance wants to bring parity in the gas and imported liquefied natural gas prices and therefore is seeking higher price of the gas. Sectors like Fertilizer and power would be impacted by the rise in the gas price and have opposed to this.

Even though the gas price of 7.4 mBtu would still be better compared to what it is getting now, the impact of this would not be much on its topline as RIL is witnessing a strong decline in the production from KG-D6 basin. Its gas production which has constantly been on a decline and has seen another blow after it has shut eight of its 22 wells in the basin. While the company has technical work in the basin and has also got an approval for its capex, the production is expected to decline until 2015-16 after which it may start rising. It is, however, not very clear as to when the company will see a rise in the gas production from the basin.

We also spoke to some Oil and Gas analysts who, on condition of anonymity, said that the USD 7.4 mBtu is still a good price which can pull up the gas revenues. But the real game changer for the company is the Gross Refining Margins. Decline in gas production would offset the rise in the gas price. They also said that the results were above expectations. Mostly the stock has been upgraded by many brokerage houses. From the long term perspective, the stock remains an attractive bet and one can add the stock on decline to their portfolios.