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The Government’s approval last week to Reliance Industries to further develop its largest oil and gas producing block — KG-D6 — is credit positive for the company, Moody’s Investor Services has said.
This approval is credit positive for RIL (Baa2 positive) because the continued investment and development at KG-D6 will augment oil and gas production from the basin, the international rating agency said in a note to its research clients.
As of September, the KG-D6 block accounted for more than 80 per cent of RIL’s total oil and gas production.
“We expect the approval to reverse a two-year decline in gas output since production peaked at 63 million cubic meters a day (mmscmd) in June 2010,” Moody’s credit outlook has said.
Production averaged 30 mmscmd in June 2012, just 37.5 per cent of its target daily rate of 80 mmscmd, owing to reservoir geological complexity that hindered the drilling of new wells.
With this approval, Reliance Industries Ltd (RIL) can move ahead with a plan to boost output at KG-D6, which is off India’s eastern coast.
RIL holds a 60 per cent interest as the operator of the block, while UK-based BP (A2 stable) owns 30 per cent, and Niko Resources (unrated) of Canada, owns the remaining 10 per cent.
The Government’s approval also signals an improvement in its thorny relationship with RIL.
The Government was concerned about KG-D6’s steady decline in gas output in recent years.
CAG audit
Relations between RIL and the Government were also strained by the results of a Comptroller & Auditor General (CAG) of India audit that followed RIL’s revision of KG-D6’s capital expenditures to $8.80 billion from $2.39 billion.
CAG, among other things, raised doubts about the robustness of the data and the assumptions underlying the development plan.
“If this improvement in relations between RIL and the Indian Government continues, we expect both sides to also reach a decision on gas prices,” said Moody’s research note.
Gas price revision
The current gas price of $4.2 per million British thermal units (mmBtu) is due for revision on 1 April 2014, although negotiations began earlier this year.
RIL is proposing linking gas prices to a percentage of oil prices.
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