Company sees higher regulatory risks
Reliance Industries could cut back on its $10-billion investment plan for the domestic oil and gas sector over the next five years if the Government insists on regulating gas prices.
The company fears that the Government setting natural gas prices unilaterally poses a risk to its oil and gas business. This has been compounded by the Finance Ministry asking the Petroleum Ministry to cap the benefit of higher gas prices for Reliance on the plea that the company has missed key supply commitments from its mammoth D6 gas project.
“It will not be easy to convince our board for any further investments till there is some stability on the risk elements (such as regulatory risks, cost incurred, and market price) involved in the business,” said a top associate of the company’s oil and gas business division.
Asked if Reliance was rejecting the formula proposed by the Government, company sources said what was troubling the industry was that the Government’s decision was deviating completely from commitments made in oil and gas contracts.
Though the Government’s decision translates into a significant increase in the price of domestic gas, private producers are not over-enthused, given the current global trend. According to the June 27 decision of the Cabinet Committee on Economic Affairs, the gas price will be revised on a quarterly basis by the Government and will be applicable uniformly to all producers and consumers.
Informally, the industry has communicated to the Government that this was a deviation from the commitment under the New Exploration Licensing Policy (NELP) contracts. The NELP contracts provide for market-determined gas prices through competitive bidding on an arm’s length basis. At present, gas is being produced from two NELP blocks — one operated by Reliance and the other by Niko Resources.
Reliance, which has six exploration and production blocks that it won under various oil and gas licensing rounds, has invested almost $14 billion in them since 2000. Of this, $10 billion was spent on just D6 and satellite projects. The company started earning a return on its investments in 2009, once production from the D6 block started. With the company in a silent period, ahead of its July 19 board meeting, its representatives declined to give out the revenues from the block till now.
Nevertheless, with output from D6 dropping from a peak of 60 mmscmd (million standard cubic metres per day) in end 2009-10 to 14-15 mmscmd now, the returns have clearly dwindled. When the blocks were acquired, the contractors knew of the risks involved, said a company official. While geological risks are inherent to this sector, no regulatory risks were foreseen nor a deviation from the commitment to marketing freedom, he said.
The CCEA decision introduces a larger regulatory risk that can impact investment plans in a project, the official added. “Price approval has to come well before time for the contractors to work out their investment plans,” he said.
The current D6 gas price, approved in 2008, is valid till March 2014. If the gas price trend continues as now, from April 2014, it will double to $8.4 per million British thermal units (mmbtu). But Reliance claims it will not benefit from the revision. “Even if the output from the D6 block increases, gas will not flow before 2017-18. This means it will not be the biggest beneficiary of the price hike, if any,” a company official explained.
The D6 block accounts for just 10 per cent of the gas production in the country, while 70 per cent is produced by ONGC and Oil India.