The Hindu Business Line : RIL-RNRL dispute: Await more twists in the tale

The Government has laid down a list of priority sectors for the gas where fertiliser ranks at the top and power is down the list. RIL can take shelter under this and push most of its output to fertiliser companies at the discovered price of $4.2/mbtu.

Raghuvir Srinivasan

Chennai, June 15 Did the markets over-react to the Bombay High Court judgment in the Reliance Industries – Reliance Natural Resources (RNRL) case? It does appear so, especially in the case of the 24 per cent mark-up in the stock of RNRL.

Yes, the judgment per se is unfavourable to Reliance Industries (RIL) even as it grants RNRL the right to 28 million standard cubic metres a day (mmscmd) of gas from the KG-Basin field of the former. Yet, the fact is that it is still early days and the probability of the judgment being implemented in full does not appear very high.

RIL can take the case to the Supreme Court and the judgment has also left the doors open to a settlement between Mr Mukesh Ambani and Mr Anil Ambani presided over by their mother. There could, therefore, be more twists in the tale before it concludes.

Impact on RIL revenues

That said, RIL’s revenues from gas sales could take a big hit if the judgment is indeed operationalised.

RIL has already contracted to sell 15 mmscmd of gas to various fertiliser companies and a further 12 mmscmd to power producers. These have been contracted at $4.2 per million British thermal unit (mbtu).

Its current output is known to be around 25 mmscmd only, but this is expected to be ramped up to 80 mmscmd by the end of this fiscal. However, according to the judgment, RIL has to part with 28 mmscmd for 17 years to RNRL at $2.34/mbtu. The loss of revenue to RIL due to this is estimated at $1 billion which is why the stock was marked down during Monday’s trading.

NTPC case

Besides this, there is also the ongoing case with NTPC on the MoU to supply 12 mmscmd for 17 years, again at $2.34/mbtu.

Assuming that the NTPC case goes against RIL — and the probability that it will is high because the RNRL price was based on the NTPC deal which was forged before the family settlement — RIL will have to part with, in all, 40 mmscmd of the output from KG Basin at $2.34/mbtu. This is against the discovered price of $4.2/mbtu at which it is now selling to fertiliser and power producers.

Damage control

Yet, there could be ways in which RIL could contain the damage. RNRL, according to the family settlement, is not entitled to trade the gas that it gets from the KG Basin and has to use it for power generation by its own group companies. But the massive 7,000 MW Dadri project is still on the drawing board and there is no way in which it can consume its entitlement of gas through other projects.

RIL could therefore take the position that it will supply the gas only when RNRL is in a position to consume it at its own power stations. The Government has also laid down a list of priority sectors for the gas where fertiliser ranks at the top and power is down the list. RIL can take shelter under this and push most of its output to fertiliser companies at the discovered price of $4.2/mbtu.

Viewed thus, the market’s optimism on RNRL certainly appears overstated.

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