Company board wary of Govt policies, future investments in oil and gas business

A strategy shift seems to be taking place in Reliance Industries Ltd’s domestic oil and gas exploration business. The Mukesh Ambani-led company is considering returning two more blocks to the Government in the next few months.

With this, RIL’s domestic exploration and production (E&P) portfolio will shrink to four from six. The reasons for surrendering the blocks, as cited by the company, vary from lack of economic viability to uncertain Government policies.  “It’s not about just one block (KG-D6, off the Andhra coast), we have an E&P portfolio. From once having 45 blocks won under various auction (New Exploration Licensing Policy) rounds, today, we have six. So far, we have relinquished 39 and are in the process of surrendering two more,” said a senior RIL executive.

The company also has a stake in the Panna-Mukta-Tapti fields in the Western region and two coal bed methane blocks.

While RIL has chalked out its next phase of capital investments in the refining, petrochemicals, retail and broadband services, the exploration business is still in limbo. The company board has not yet approved any investment for the exploration business.  “No one talks about the failed exploration or economically unviable discovery costs that we incur. This number is close to $3.4 billion, which at today’s exchange rate is about ₹23,000 crore,” he said on the risk element in the business. “When deciding on the company portfolio, we have to consider what return E&P as a business generated? In each block, there are explorations and appraisal costs involved, and only if the initial results show economic viability, an operator goes for the development phase. The company should have commensurate return on the risk it has taken,” he added. 

Asked about the returns from the upstream (oil and gas) business, he said: “Where is the profit? We are yet to recover the capital invested. We have so far recovered about $10 billion, whereas we have invested over $14 billion over a period of 13 years.” 

In fiscal 2013, revenue from oil and gas exploration and production business (including assets acquired outside the domestic auction rounds) fell 35.8 per cent to ₹8,280 crore from the previous fiscal. Contribution of the oil and gas business to RIL’s revenue fell by half from 3.8 per cent of the total revenue to 1.9 per cent during 2013.

The Government has earned about $700 million as its share of profit from the KG-D6 block.

(This article was published on March 2, 2014)
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