Reliance Industries Ltd., India’s most valuable company, said it is losing $100 million of sales a month from the nation’s biggest gas field because of a government delay in allocating buyers for the fuel.
Reliance has been producing 60 percent of the 60 million cubic meters daily capacity in the KG-D6 field since May, P.M.S. Prasad, president of the company’s oil and gas business, told reporters yesterday at the field in the Bay of Bengal. Reliance needs government approval to sell the gas.
The company, controlled by the world’s seventh-richest man Mukesh Ambani, is fighting a lawsuit over output from the field with Mukesh’s estranged younger brother Anil Ambani. Reliance’s earnings may be affected by the limited output as the government awaits a resolution of the suit before naming additional buyers, said Deepak Pareek, a Mumbai-based analyst with Angel Broking Ltd.
“The government may be going slow on allocating additional gas because half of the peak output is under litigation,” Pareek said. “Reliance’s estimated earnings may be hit for a quarter and it could be longer till the court decides in its favor.”
Reliance shares fell 0.3 percent to 2,140.85 rupees at the end of trading in Mumbai on Sept. 11. The stock has gained 74 percent this year, giving the company a market value of $69.5 billion. The key Sensitive Index of the Bombay Stock Exchange has risen 69 percent since January.
Cost of Debt
The cost of paying interest on 280 billion rupees ($5.7 billion) of debt raised to develop the field is increasing because Reliance is unable to repay the borrowings as rapidly as it would like and cut interest costs, Prasad said.
“We would’ve liked to repay the loans quicker,” he said. “We can’t and that is increasing our interest costs. We will service the debt, not default on it.”
Through the 11-year life of the field, Reliance aims to invest $8.8 billion, of which it has spent about $5.8 billion, Prasad said. Beside the debt raised from local and overseas lenders, Reliance will use its own money, he said.
The KG-D6 field may hold as much as 9.2 trillion cubic feet of gas, according to Reliance’s partner Niko Resources Ltd., based in Calgary, Canada.
The government designated fertilizer and power producers as priority customers for the fuel from the field. India’s Oil Minister Murli Deora said on Aug. 31 he asked the prime minister to form a new panel of ministers that will decide the additional allocation of natural gas from the KG-D6 field, following national elections in May.
“We hadn’t expected we’d be held up from producing,” Prasad said. Reliance is also buying liquefied natural gas for its own needs because the company hasn’t been allotted any gas from the field, he said.
Reliance is producing just 37 million cubic meters from the gas field, Prasad said yesterday.
Price Accord
Anil is trying to enforce a 2005 agreement requiring Reliance to sell natural gas from the field off the country’s east coast to his Reliance Natural Resources Ltd. at 44 percent less than the price set by the Indian government.
The accord also distributes all future gas from the KG-D6 basin between the brothers, with Reliance Industries getting 60 percent of the fuel, according to Oil Secretary R.S. Pandey. The agreement between the brothers requires Reliance Industries to sell 28 million cubic meters of gas per day at $2.34 per million British thermal units for 17 years to Reliance Natural.
Reliance Industries has said gas from the field in the Krishna Godavari basin can’t be sold at less than the $4.20 per million Btu set in 2007 by the government, which controls prices of the fuel.
Pipeline Constraints
Efforts to reach peak production of 80 million cubic meters may also be deferred to April next year because of pipeline constraints, Prasad said yesterday. The company aims to drill wells in six months in locations such as Oman, Kurdistan and East Timor, he said, adding it may take five years for Reliance to recover its expenditure on the KG-D6 field.
Production at the KG-D6 field, which started in April, may increase India’s oil and gas output by 44 percent and help save 10 percent of the country’s oil import bill. The development of areas in the Bay of Bengal will offset shrinking supplies from ageing domestic fields that force fertilizer-makers and power producers to use more expensive naphtha and imported gas.
Reliance currently produces 12,000 barrels of crude daily from the field and plans to raise output to as much as 30,000 barrels a day by December, Prasad said. It also plans to produce as much as 9 million cubic meters a day of gas from the area.
India is betting that gas output from the KG-D6 field will help attract investors for its biggest auction of 70 exploration blocks, for which bids close Oct. 20.
Source:http://www.bloomberg.com/
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