RIL Faces Additional Penalty Of $792 Million

Following the natural gas production shortfall from Reliance Industries’ (RIL) Eastern Offshore KG-D6 block, the government has impose a USD 792 million additional penalty on the company. RIL had announced plans to increase production from its KG-D6 (Krishna Godavari) block in Feb 2013, but did not meet the targeted volumes.

Over the past three years, RIL has been fined a cumulative of USD 1.797 billion in the form of cost being disallowed for having produced less than the targeted output. The company has continued to suffer on this front, with the gas production from the KG-D6 basin having dropped to 14 mmscmd in Q2FY14, down 51% on a YoY basis and 8% QoQ.

RIL had closed half of its 18 producing wells at the Dhirubhai-1 and 3 gas fields in the KG-D6 block due to sand and water flooding, which led to an 85% output drop. But the official said that RIL did not drill the committed number of wells, which led to output dropping from the aforementioned gas fields in the block.

“The company has spent $10.76 billion on the block till date, which is difficult to recover from the sale of oil and gas”, commented Bhavesh Chauhan of Angel Broking.

RIL had built facilities to handle 80 million standard cubic metres per day of gas from D1&D3. Its present output, though, is just 8.78 mmscmd. In fact, according to the approved field development plan, the output should have reached 80 mmscmd in the last fiscal itself. We also expect that the production from the KG-D6 basin will continue to be lower.

Over the past few quarters, the company’s exploration and production (E&P) division has remained a laggard and pulled down its overall performance. However, we maintain our positive stance on the stock and believe that the continued weakness in the exploration business would be compensated by improved outlook for the petrochemical and refining businesses, led by the expansion of projects. The weak rupee would also continue to be beneficial for the company in the coming quarters.