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Raghuvir Srinivasan

WHAT is the extent of Reliance's gas? The news of a downward revision in the reserve estimate by technical agency, D&M, has opened up the issue of how much gas is really there in the KG basin block. Is it 14 trillion cubic feet (tcf), as claimed by Reliance, or 8.6 tcf, as now declared by D&M? What is the cause for the divergence between the two estimates? And what does it mean for Reliance and its stakeholders? These are some important questions that have arisen now.

D&M's revised estimate of 8.6 tcf is as of March 31, 2003 when Reliance had completed drilling five wells. Reliance went on to drill three more wells subsequently, all of which, according to the company, yielded gas prompting an upward revision in its estimate to 14 tcf, which has not been certified yet by D&M.

Proven, probable and possible

D&M has explained that as per its revised estimate, proven reserves are 2.5 tcf, probable 3.4 tcf and possible 2.6 tcf. What this means is that the agency is certain, from the data submitted to it by Reliance, about the existence of 2.5 tcf of gas in the D-6 block. The estimates of probable and possible reserves can be confirmed only after further drilling and survey efforts. In other words, it is probable that the field has an additional 3.4 tcf of gas but that cannot be proved without further data.

Now, according to geologists who have spent years in oilfields, a maximum of 70 per cent of the "proven" reserves is what can be recovered with existing technology. This means that the expected production as per data of March 2003 from the D-6 block will be 1.75 tcf only. Of course, this estimate could well go up once Reliance submits for certification the data for the additional three wells drilled after April 2003. The assumption here is that D&M will find enough proof in the new data to support the 14 tcf reserves claimed by Reliance.

How dependable is the estimate?

There are some geologists who believe that it is difficult to estimate reserves of such a massive block with data from just eight wells. According to them, at least 25 wells have to be drilled before a viable estimate of gas reserves can be made.

But, then, there are others who feel that given the advances in reservoir technologies, it is possible to extrapolate data from a smaller number of wells. The point is that there is some uncertainty over the overall projections.

Problem for potential customers

The revision now may cause uncertainties in the minds of potential buyers of Reliance's gas from the field. Downstream customers put up capacities based on the dependability of the gas linkage and they will hesitate to do so if there is uncertainty on the quantum and period of gas supply. Reliance's vigorous efforts to develop a viable gas market for its production could well receive a setback from this development.

Pricing talk is premature

What this issue also highlights is that it is too early to even talk about the pricing. Reliance has tried to generate excitement by giving the impression that it can supply its gas at as low a price as $3 per million British thermal units compared to a price closer to $4 that may be charged by Petronet LNG.

But there are some critical issues to be accounted for including the cost of developing the field and getting the gas to the customer's door-step. Experts say that developing a deep-water field can cost two-three times that of a normal shallow-water field and the biggest advantage for Reliance till now was the massive size of the reserves which would have enabled it to recover costs over higher volumes. With doubts now surfacing over the actual size of the reserve, pricing also becomes uncertain.

Setback to development plans

Investment in downstream user industries has to precede or at least happen simultaneously with the development of the gas field. This is because there is no viable gas market yet in the country either in power generation or fertiliser production. The uncertainty over the quantum of reserves now will certainly not help Reliance's efforts to promote downstream linkages such as its proposal to the Karnataka Government to set up a 3,000 MW gas-based plant near Bangalore. A setback in developing a market for the gas would mean that Reliance will also have to defer its production plans — as of now the first gas is expected to be out by 2006 but it remains to be seen if that deadline will be met.

What the entire issue underlines is that it is premature yet to build up expectations on the revenue potential for Reliance Industries from this gas find. There is a long, long way to go yet and several major hurdles to be crossed before the reserves in this field, whatever size it may be, can be monetised.

Revenue and profits can , at best, be realised only in the medium to long term and certainly not in the short term. It will not be surprising if, in the light of the latest development, the Reliance stock loses some of the sheen that it has acquired in the last few months riding on the KG basin find.

Twists and turns

The in place volume of natural gas is in excess of 7 trillion cubic feet, equivalent to about 1.2 billion barrels or 165 million tonnes of crude oil.

— Mr Mukesh Ambani, Chairman, RIL, at the AGM of the company on October 31, 2002.

Reliance made India's largest natural gas discovery in nearly three decades, approximately 10.5 trillion cubic feet, equivalent to about 1.7 billion barrels or 232 million tonnes of crude oil.

— Statement in Management Discussion and Analysis of 2002-03 results, April 23, 2003.

Since the time I spoke to you at the last AGM, Reliance has found an additional 7 trillion cubic feet of gas in the Dhirubhai discoveries. This doubles the total in-place gas volume to 14 trillion cubic feet.

— Mr Mukesh Ambani at the RIL AGM on June 16, 2003.

Niko was advised by DeGolyer and MacNaughton (D&M) that D&M made an arithmetical error in the March 31, 2003 reserve report for the Company's interest in the D6 Block. The revised report from D&M, assigns gross in place gas reserves of 8.6 trillion cubic feet (tcf) (as compared to 9.9 tcf as previously reported by D&M), including 2.5 tcf proved, 3.4 tcf probable and 2.6 tcf possible.

— Niko Resources Ltd., Reliance's partner in KG basin, November 13, 2003.

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