Pricing oil for the market

It appears to have been a planned manoeuvre. Not having got adequate traction from the Rangarajan Committee report on the pricing and taxation of petroleum products and not wanting to lose the opportunity of pushing ahead with petroleum price decontrol under a government not dependent on Left support, UPA II set up an Expert Group chaired by former Planning Commission member Kirit Parikh.

The committee's clear mandate was to examine the pricing policy for four sensitive petroleum products (petrol, diesel, PDS kerosene and domestic LPG) and recommend a viable and sustainable pricing strategy for these products.

The composition of the committee suggested that it was expected to recommend wholesale liberalisation of the pricing of petroleum products.

The Expert Group did not disappoint, and delivered its recommendations in five months.

What is surprising is that the Government has decided to accept most of the committee's recommendations and hike the prices of petrol, diesel, kerosene and LPG, opt for price decontrol for petrol immediately and announce that a similar transition would follow for diesel in the not too distant future.

Surprising move

The move is especially surprising because persisting inflation is already a major cause for concern. The Wholesale Price Index (WPI) figures for May pointed to three worrying trends. First, for the fifth month running, the aggregate annual rate of inflation as reflected in the month-on-month increase in the WPI was near or well above double-digit levels.

The figures for May put inflation at 10.2 per cent over the year. Second, the current inflation is particularly sharp in the case of some essential commodities, as a result of which the prices of food articles as a group have risen by 16.5 per cent and of foodgrains by close to 10 per cent. Finally, there are clear signs that what was largely an inflation in food prices is now more generalised with fuel prices rising by 13 per cent and manufactured goods prices by 6-7 per cent.

The immediate and near-term impact of the oil price decisions would be an aggravation of these inflationary trends focused on essential commodities that currently burden the common man. Petroleum products are consumed in some measure by all. Given the fact that these products are universal intermediates, entering into the costs of production of a number of goods and services, the cascading effects of the price hike on the costs and prices of a range of commodities is likely to be significant.

With prices of essentials already on the rise, the move threatens a return to the days when inflation was a major economic problem faced by the country. It follows, therefore, that this is the worst time for hikes in and the decontrol of the prices of petroleum products.

Under-recoveries

The Government claims that this was unavoidable because of the “losses” being suffered by the oil marketing companies (OMCs). When the domestic prices of oil products are controlled but the price of imported oil is rising, oil marketing companies receive from the consumer less than what it costs them to acquire the products they distribute.

This leads to what are termed “under-recoveries”, which would affect the accounts of the OMCs (Indian Oil Corporation, Bharat Petroleum Corporation, Hindustan Petroleum Corporation and IBP) that obtain their supplies of petrol and diesel from the refineries at prices that equal their import price inclusive of customs duty.

According to estimates, if retail prices had not been raised under-recoveries by the oil marketing companies would have exceeded Rs 70,000 crore in the current fiscal year. Since this is unsustainable, it is argued, the hike in prices and a shift out of a controlled pricing regime is unavoidable.

The Government's argument is by no means watertight. While under-recoveries are a reality, they do not turn oil refining and marketing firms into loss-making enterprises, because those firms deliver a range of products and services, the prices of all of which are not controlled.

If, for example, even if we consider the profit after taxes of the most important oil companies over the last ten years, they have remained positive in all years and quite substantially so in some (Chart 1).

Under-recoveries are notional losses that only lower book profits relative to some benchmark. Thus, there is little danger that the industry would be bankrupted even if prices were kept at their earlier levels.

There is, of course, the question of fairness. Since there are many players involved in the industry there is no reason why under-recoveries should affect only the books of the oil marketing companies.

Sharing the burden

As Charts 2 and 3 show, the returns on net worth earned by the oil marketing companies are far more volatile and vulnerable than that garnered by the upstream oil companies (ONGC, OIL and GAIL). The burden should be shared by the latter, which receive prices that more than compensate for costs; by the Central Government which garners revenues in the form of customs duties and excise duties (besides dividends from the oil majors); and by the State governments which benefit from sales taxes.


This requires, for example, the oil refineries to offer discounts when selling products to the OMCs and for the Government to reduce the taxes it levies on oil products in order to absorb part of the under-recovery.

The controversial question as to how the burden should be shared was analysed by a committee headed by C. Rangarajan. The committee spent much of its energies on the different stages through which imported and domestic crude is converted into petroleum products supplied to the consumer, and the cost escalation that arises as the raw material passes through these stages.


Through that analysis, it found that the upstream oil companies (or oil companies other than the oil marketing companies, such as ONGC, OIL and GAIL) had recorded profits to the tune of Rs 15,600 core in 2004-05 and Rs 14,600 crore in the first nine months of 2005-06. That the oil industry's contribution to the central exchequer in terms of duties, taxes, royalty, dividends, etc., rose from Rs 64,595 crore in 2002-03 to Rs 77,692 crore in 2004-05. That the petroleum sector alone contributed around two-fifths of the total net excise revenues of the Centre. That taking Delhi as an example, Central and State taxes amounted to 38 and 17 per cent respectively of the retail price of petrol and 23 and 11 per cent respectively of diesel. And that the incidence of taxes as a proportion of the retail price in India was higher than in the US, Canada, Pakistan, Nepal, Bangladesh and Sri Lanka, though they were lower than in many countries in Europe known for their higher average level of prices.


In sum, the numbers suggested that there was an adequate buffer to shield domestic consumers from the effects of increases in international prices, so long as segments that can afford to take a cut in petroleum-related revenues because they have alternative sources of resource mobilisation are willing to accept such a reduction.


Difficult to justify

Thus, if at all there is an argument for price deregulation it can only be that it is for some reason wrong to expect the oil companies and the Government to bear the burden of the irrational fluctuations in the global prices of oil. That argument too is difficult to justify.

When the industry was wholly in the public sector, the prices of oil products were treated as one set of instruments in the tax-cum-subsidy regime of the Government. Any losses suffered by the industry or any shortfall in funds required for investment as a result of price regulation were to be met from resources mobilised through progressive taxes rather than from regressive price increases. The Government should have adopted a similar approach in the current situation and focused on rules that can and have been devised.


It needs to be noted here that oil prices have not been held constant in recent history. Rather, as Chart 4 shows, alternative measures of the average annual increase in prices over the last two decades indicate that the increase has been much higher in the case of retail prices of petrol, for example, than in the wholesale price index for all commodities.
The common person has indeed borne some of the burden of volatile oil prices. What the Government is arguing now is that the burden of irrational shifts in the international prices of oil should largely be borne by the consumer, even if the burden sharing involved is extremely regressive.

In what seems an afterthought, the Government has declared in its recent pricing policy announcement that it reserves the right to intervene in the market to protect consumers if prices rise to levels too high or price movements are excessively volatile. Nobody can or has taken that right from the Government. It is the Government that is giving it up, and exposing the common person to the volatility in international prices that has no rational basis.


The question remains as to why the Government is choosing this policy direction. Ideological commitment may be playing a role. But, more importantly, the Government's move seems intended to favour the private companies that have been allowed to enter and expand in this sector.

Private companies will treat any shortfall in profits as a “loss” and demand price adjustments. The Government seems inclined to oblige.
 
Source: Hindu Business Line
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RIL makes 7th oil discovery in Cambay Basin

Reliance Industries Limited (RIL) has made its seventh oil discovery in exploration block CB-ONN-2003/1 (CB 10 A&B) in Cambay Basin, Ahmedabad, Gujarat.

The block was awarded to RIL under the NELP-V. RIL had earlier this month, made the sixth oil discovery in the basin.

The discovery is significant, as it is expected to open more oil pool areas leading to better hydrocarbon potential within the block. RIL, as operator, holds 100 per cent participating interest in the block and is continuing further exploratory drilling efforts," RIL said in a press statement.  

The block covers an area of 635-sq km in two parts, Part A and Part B. Of the 17 exploratory wells drilled in the block by RIL so far, 13 are located in Part A and the remaining 4 in Part B of the block. 

"This discovery, named Dhirubhai–50, the seventh oil discovery in the block so far, has been notified to the Government of India and to the Director General, Directorate General of Hydrocarbons. The potential commercial interest of the discovery is being ascertained through more data gathering and analysis," RIL added in the statement.

Source: Business Standard

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RIL to pay Rs 6,200 cr for US shale field

In a bid to build its presence in the US shale gas industry, Reliance Industries (RIL) will pay $1.35 billion (around Rs 6,200 crore) for a stake in a field controlled by Pioneer Natural Resources, reports said on Tuesday. Reliance, India’s largest listed company, will acquire 45% stake in the Eagle Ford shale gas field in south Texas. The deal would be the second of its kind in recent months for Reliance, controlled by Mukesh Ambani, the world’s fourth-richest man.

The acquisition is part of RIL’s bid to tap the growing market for non-conventional energy. In April, RIL had bought 40% stake in Atlas Energy, under which the Indian company will invest $1.7 billion (around Rs 7,500 crore) in Atlas’s core Marcellus Shale acreage position.

Shale gas—produced from shale, a fine-grained sedimentary rock—is becoming an increasingly important source of natural gas across the globe. Over the next decade, shale gas is expected to contribute to over 20% of the overall gas production in the US.

RIL shares fell 0.15% on the BSE on Tuesday to close at Rs 1,063.65, while the 30-share benchmark Sensex fell 0.71%. RIL, which has huge cash resources, does not have any problem funding large acquisitions.

RIL had cash and cash equivalents of Rs 15,960 crore as of December 31, 2009, and raised about Rs 9,240 crore by selling treasury stocks in three tranches since September last year.

Mukesh Ambani told shareholders last week at the Reliance AGM that the company was looking to build up its presence in the US shale gas business.

RIL has also been eyeing some distressed assets in the developed world. It made a $14.5-billion bid for Dutch petrochemicals company LyondellBasell Industries, but the bid was rejected this March.

The International Energy Agency (IEA) in its World Energy Outlook 2009 estimates that by 2030, global energy demand will rise 49% from its current level. Oil and natural gas are expected to remain primary energy sources, meeting 51% of global demand.

In the Pioneer deal, Reliance was represented by Barclays and UBS, while Pioneer was advised by Bank of America-Merrill Lynch, reports said.

During its Atlas acquisition, in addition to funding its own 40% of drilling obligations, RIL had agreed to fund 75% of Atlas’ respective portion of drilling and completion costs until the $1.36 billion drilling carry is fully utilised. Atlas and Reliance also agreed upon a five-year development plan that calls for the drilling of 45 horizontal Marcellus Shale wells for the joint venture during the remainder of 2010, increasing to 108 wells in 2011, 178 wells in 2012, and 300 wells in 2013 and 2014.

Atlas had been looking for a partner for its operations in the booming Marcellus Shale in the eastern US. Barclays Capital had advised Reliance on the Atlas deal. Shale gas is natural gas stored in organic-rich sedimentary rocks. It may be attached to or “adsorbed” onto organic matter. The gas is contained in difficult-to-produce reservoirs that require special completion, stimulation and/or production techniques to achieve economic production. RIL is planning to invest more than $3 billion over the next four to five years to build capacity for its entry into the fertiliser sector. The move is related to the announcement on Friday on setting up a giant coke gasification project at Jamnagar....

Source: Financial Express

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RIL may partner Mexico’s Pemex to set up refinery

State-owned Mexican oil company Pemex and India’s Reliance Industries may soon forge a partnership to develop a large-capacity greenfield refinery in Mexico. The 300,000-barrels-a-day refinery will largely meet the domestic energy requirements of Mexico. 

“We are impressed with the refinery operations of Reliance. A team of senior government officials will visit RIL’s site at Jamnagar to explore the possibility of partnerships,” Mexican energy secretary Georgina Kessel told reporters while talking about country’s potential in the energy sector. 

It is expected that Reliance will be roped in as a service provider in the new refinery project to be developed by Pemex. “There would be no joint venture with RIL, as the law does not permit that,” the minister said. 

Without specifying the date, Ms Kessel said, she would be visiting India and meet with energy ministers besides visiting the facilities of RIL. She also did not give details of the scale of investment needed in the refinery, but said that it would be used to meet needs of products for domestic market. She said Indian companies could also forge alliances for setting up refinery operations for exports of products from Mexico. On the possibility of Indian companies exploring oil and gas reserves in Mexico, she said, it is not possible. However, the possibility of exploring oil and gas in third countries can be explored by Pemex and ONGC Videsh and other companies. 

While Reliance is operating one of the largest refineries in the world, ONGC’s foreign arm, ONGC Videsh, explores oil and gas in foreign countries. Mexico has huge reserves of oil and gas and Indian companies are looking for partnerships that can allow them to bring some products back to the country. 

Besides reliance, Tata Motors is also exploring partnership with a local auto company to meet the domestic needs of Mexico.

Source: Economic Times

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Pioneer deal adds twice the punch to RIL's shale gas plans

After picking up 40 per cent interest in the Marcellus shale gas acreage of Atlas Energy in April, Reliance Industries Ltd (RIL) on Thursday announced a $1.3-billion (Rs 6,000 crore) acquisition of 45 per cent interest in the Eagle Ford shale acreage of Pioneer Natural Resources. This is its second acquisition in two months in US shale gas assets, the former nearer the east coast and the latter in Texas.

Though RIL was already present in the unconventional gas business in India through its interest in coal bed methane, it is quickly building a portfolio of new age and unconventional hydrocarbon resources abroad with the two acquisitions.

Pioneer has about 310,000 acres of shale gas plays in the Eagle Ford region. Being the operator, it had the controlling 84 per cent interest; its partner, Newpek LLC, has 16 per cent. Both companies will now offload 45 per cent of their respective working interests in the acreage to RIL.

The deal has been done through a RIL subsidiary, Reliance Eagle Upstream. Under the new arrangement, Reliance will have 45 per cent share in the acreage, Pioneer 46 per cent, with Newpek holding the remaining 9 per cent. Reliance has agreed to upfront pay $266 million in cash to Pioneer and to also pay an additional $879 million to carry Pioneer's share of future drilling costs over the next four to six years.

As part of the deal, Reliance will also be paying Newpek approximately $210 million for buying its stake. It will also share Newpek’s future drilling costs, by paying it $173 million over the same four to six-year timeframe.

The shale gas business in the US was primarily dominated by small companies. However, over the past year, it has seen a spate of acquisitions by big companies. Royal Dutch Shell acquired East Resources’ shale gas interest in the US for $4.7 billion this May, while Exxon Mobil bought XTO for $30 billion last year. Similar acquisitions were made by Statoil and BG.

Manisha Girotra, managing director and chairman of UBS, one of RIL’s financial advisors in the deal, said: “In the shale gas space, the way to go forward is through a string-of-pearls acquisitions — a multiple of small to relatively midsize buys, as that’s what is available. This (Eagle Ford) is one of the biggest assets in the US... And, a JV (joint venture) route is a clever way to keep the management team intact and imbibe their existing expertise.”

RIL executives said all the discovered oil and gas assets in conventional sand formations were already taken up by global players. So, while RIL will focus on new discoveries, like the one it did in the Krishna-Godavari (KG) Basin in 2001, the focus will increase towards shale and other unconventional energy sources. Power, with fixed annuity return, will also play a significant role in RIL’s energy portfolio.

“RIL is clearly building its economies of scale in shale gas,” said Vandana Hari, Asia news director at Platts, the energy watch agency. “Its part of a bigger strategy. They have heft in India but now want to grow overseas… And, shale is the hydrocarbon story of the decade. If you move in early in the most developed market and build scale, then you have tremendous early mover advantage.”

Shale gas is natural gas stored in organic-rich sedimentary rocks. It is considered an unconventional source, as the gas may be attached to organic matter. The gas is contained in difficult-to produce reservoirs that require special completion, stimulation or production techniques to achieve economic production. It accounts for between 15 per cent and 20 per cent of US gas production but is expected to quadruple in coming years, triggering a scramble among producers, large and small, for access to resources.

“For a late starter of gas exploration like RIL, the opportunities are limited. The prolific gas fields are already taken. Shale is a new opportunity that RIL will not like to miss out on,” said Anish De, CEO Asia of Mercados Energy Markets International, an oil and gas consulting company.

There are other reasons, too, for this subtle but significant review in strategy. RIL insiders said after the big-bang discovery of KG-D6, success has been moderate. The risk perception towards traditional exploration and production activities has gone up. “There have been cases of dry wells across the east coast. Its part of the risk that every player faces. That also means there is no guarantee of 100 per cent strike rate for anybody, including RIL,” said a company official, on condition of anonymity.

“Adding to that, the BP incident has reminded the whole world of the perils of offshore oil and gas drilling,” added Hari.

In comparison, shale is safer, has better longevity but traditionally has low productivity, as most reservoirs have low permeability. However, with horizontal drilling tactics and by creating artificial fractures by the “hydrofracing” technique, the surface area can be increased and by applying low to medium pressure, gas can be “oozed” out. “Traditionally, recovery from one area is low, depending on the tightness of shale and its porosity,” said an RIL executive. “But new techniques are coming into force every day. This is the future.”

“Low operating costs, significant liquid content (70 per cent of the acreage lies within the condensate window) and excellent access to services in the region combine to make the Eagle Ford one of the most economically attractive unconventional resource plays in North America,” RIL said in a statement.

The deal is also a shift in RIL’s acquisition strategy. Instead of outright buyouts, it is going in for partnerships with existing players like Atlas and Pioneer for joint acreage development. Many analysts feel this is the best way to pick up expertise and get training. “RIL has money, but it needs to learn the dynamics of the shale business. In a developed market like the US, a local player brings a lot to the table. But who is stopping them from hiking their business interests in the same acreage in future? There can be buyouts from RIL, once they master the shale exploration business,” said a Hong Kong-based energy analyst with a foreign brokerage firm.

RIL executives said a new core team to proceed with its shale business is already taking shape, with Walter van de Vijver, a former Shell executive, leading the charge in both the US and the Netherlands. Some of the executives from the Indian operations will also get trained in this new skill set.

Shale gas can be used the same way as natural gas. Which is why RIL will also participate with Pioneer in the development of midstream assets in the Eagle Ford Shale, as a 49.9 per cent partner and will be paying $46 million. The midstream business will initially consist of central gathering facilities to separate condensate production from produced gas and to treat the produced gas. Developing this midstream business, as against contracting with a third party, will provide enhanced control and efficiencies for the marketing of the joint venture’s upstream production and the potential to attract third party business.

Source: Business Standard

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Gas as transportation fuel

Should the prices of petrol and diesel be freed? This is a tough call for decision makers, though expert panels, including the Kirit Parekh committee, have voted for price decontrol. But not freeing the prices would mean losses to the three oil marketing companies, thereby weakening the pillars of energy security in India. The burden of under recovery on four administered products, petrol, diesel, LPG and kerosene oil is estimated at Rs 80,000 crore in 2010-11. 

This can be partly bridged, at the expense of their own requirements of investment and growth, from the upstream PSU oil companies as has been the practice over the last few years. But, the government will have to issue either bonds or cash to protect the bottom-lines of OMCs. This will, however, lead to macroeconomic distortions at present or in future. 

If prices are freed and aligned with the international prices, petrol and diesel would cost more by over Rs 3.50 per litre each immediately. This would further fuel inflationary pressures. So far, the government has been managing the situation, trying to balance the interest of consumers, the OMCs and the exchequer. Product prices are adjusted to some extent, the upstream PSUs and OMCs are asked to chip in and balance of the underrecovery is met by government subsidies through bonds and cash. This arrangement, though ad hoc, has worked for the past few years and may work this year too. 

The government should re-structure the taxation of petro products. Replacing ad valorem by specific rate of duties will bring in relief to the customer, while reasonably protecting government revenues. The future is scary. A spurt in crude prices to $100 per barrel is imminent. It will be no surprise if the prices touch $120-150 in the next five years or so. If we find it difficult to free the prices at the current level of around $75 per barrel of crude oil, how are we going to manage in the years to come? 

Based on current policies and projections, the International Energy Agency (IEA) in its report of 2009, has estimated India's crude oil requirements to grow at the highest rate, by 3.9% per annum. By 2030, India's import will go up to 92% of the country's consumption requirement, excluding the requirement of processing for exports. 

India's import bill is bound to rise substantially and the balance of trade will become more adverse. The burden on consumers or the OMCs or both will be a matter of serious concern. Such a scenario has grave implications for energy security and calls for a strategic shift in our approach. We have to reduce our dependence on crude oil to the extent possible. This can be done through many ways, by involving measures to promote efficiency and conservation of fuel use and using substitutes. An important way is to use gas as transportation fuel instead of petrol or diesel. 

This is feasible and happening in Delhi and Mumbai. Gas users pay less. In Delhi, the per km cost of running a car with gas is Rs 1.31 at present as against Rs 2.54 with diesel and Rs 3.20 with petrol. If all the three fuels are sold at market prices, the running cost with diesel and petrol will be even higher. This is because gas is cheaper than Oil. One barrel of crude produces the same energy as 6 mmbtu of gas. Therefore, at crude price of $ 80 per barrel, gas should be priced at approximately $13 per mmbtu. Happily, most of the gas in India is sold at $ 4.2 per mmbtu, and the imported gas is available at about $5 per mmbtu. So, there is a clear disconnect between the price of crude oil and gas. 

Unfortunately, less than 6% of the vehicles in Delhi are on CNG. Imagine the savings to the economy and the consumers and the political dividend it will generate if all vehicles in Delhi and Mumbai, where gas supply infrastructure exists and also throughout India, run on gas at half the cost of diesel and further less of petrol. 

The 21st century is said to be the century of gas as the 20th century was that of oil. Availability of gas within the country as well as globally is more than oil. As per IEA 2009 estimates, while domestic oil production will decline to less than half of its present level by 2030, gas production will double. If oil reserves globally are to last for 30 years, gas reserves are estimated to last for 60 years.

Moreover, newer sources of gas, such as shale gas and coal bed methane gas will increasingly be available. Gas is also cleaner than oil. Tax rates on gas are lower than on petrol or diesel and as a tool to disincentivise pollution, are expected to remain lower even in future. 

So, it makes sense to substitute oil by gas to the extent possible. Since about 40% of petroleum products are used for transportation and since much of the expected increase in petro consumption is for transportation, it is necessary to switch over to gas as transportation fuel as speedily as possible. 

The present market mechanism will not be able to bring about this change fast. Besides a policy thrust, work needs to be done on promotional activities such as creating a road map for covering the country with a network of pipelines, devising fresh funding strategies, firming up availability and infrastructure for import of gas, coordinating with state governments, municipal authorities and the automotive industry, dealing with bottlenecks in replacing existing retail outlets with CNG stations and so on. 

The regulatory regime also has to adopt imaginative approaches with a suitable organisational arrangement to bring this about. Energy security imperative would call for a time bound target to substitute petrol and diesel by gas as transportation fuel. This has to be implemented in a mission mode. It should be possible to substitute about half of transportation fuel by gas in the next ten years. And if this happens, it will also have a salutary effect on international prices of crude even in anticipation of its happening since India is amongst the largest consumers and importers of crude oil. Connectivity of habitations with gas will also connect kitchens with PNG instead of LPG thereby reducing imports and under recoveries of LPG. 

India aspires to be in the top league along with China and the US in the next two to three decades, but India's vulnerability in matters of oil for energy is much more than that of China and the US. Energy security is as critical as national security. 

Source: Economic Times

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Gas price: CEA, NTPC differ

The Central Electricity Authority and NTPC appear to be taking different stands on having a common price for gas from different sources, called pool pricing. 

CEA is open to considering separate price pools for power and fertilizer sectors with certain conditions, NTPC has outrightly rejected the idea. 

Commenting on a report by Spain’s Mercados Energy prepared for gas utility GAIL, CEA said the pooling option excluding spot LNG (gas imported in ships) suits the power sector. Supporting separate pools for power plants, it said ‘‘ electricity generated by burning gas is distributed in a competitive environment and tariff is decided by regulators ... The nodal agency and the pool can be achieved with a few necessary operational regulations... and may be considered.’’ 

But NTPC has told the power ministry it is opposed to any kind of pooling as the resultant price will be higher than the present average cost of fuel sourced variously by power producers. With a common price, both power producers and gas importers will lose incentive to source LNG at competitive rates. 

NTPC said the pool term of 4-5 years will create uncertainty as power plants are planned on long term of 25 years or more and fuel supplies are also tied up as such on term contracts. Price pooling will put old plants at a disadvantage because of their lower efficiency. Power producers will also have no incentive to schedule their production plan efficiently and higher pool price could also affect viability of many projects that were financially planned with lower fuel costs.

Source: Economic Times

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RIL-Pioneer deal as value accretive from onset: Macquarie

Reliance Industries has signed a USD 1.15 billion joint venture with Pioneer Natural Resources, reports CNBC-TV18. The latter will sell 45% interest in Eagle Ford Shale acreage in south Texas. RIL is looking to build its presence in the US shale gas sector.

In an interview with CNBC-TV18, Jal Irani of Macquarie spoke about his reading of the RIL- Pioneer deal and road ahead for RIL.

Q: What do you make of this move on Eagle Ford, for yet another shale gas unit from RIL?

A: Based on our analysis, at even the worst case scenario of USD 10,000 an acre, the IRR would work out to 17%. Now it seems that RIL has acquired even cheaper, so it seems like a fairly good deal. The Pioneer’s acreage in Eagle Ford itself is second largest in that shale gas region. It also seems to have acquired one of the larger acreages there.

The cost per acre works out to USD 8200 per acre this compares with USD 14,000 per acre for RIL’s Marcellus acquisition just a couple of month’s back, so it’s significantly cheaper than its early acquisition 40% cheaper.

Q: So will it be value accretive for them from the word go? Any sense of what kind of realizations they may have over here?

A: We will have to calculate that but given that on a worst case basis with actually USD 10,000 per acre the IRR was working out at 17%, so it's value accretive at that point. At USD 8200 per acre, it would seem that it would be even more value accretive. I am just commenting from headlines. We need to see there are any final details to this. But on the face of it the answer is yes.

Q: What do you make of RIL’s strategy in Shale Gas because this is not the first one there have been a string of deals which RIL is putting together on Shale gas assets, what do you make of it directionally?

A: There is couple of things here. RIL management group philosophy has improvised into getting into newer fast growing technologies with arguably potentially higher returns and high risk. Now shale gas is one such sort of technological of innovation and an extremely large one. In the US itself out of the one trillion dollars which are expected to be spent on upstream exploration and development, 80% of it is meant to be in shale gas and shale gas itself from an economic perspective the cost are falling and in fact shall potentially become even cheaper than your conventional gas.

As a result, RIL is really going for something which is potentially extremely large and it is actually at a cutting edge of technology and gives it a huge competitive advantage in an extremely large market. This can progressively be utilized in India also, it is too premature for India but India also seems to have some decent size hydro-carbon reserves and shale is nothing but source rock. So, it could potentially be extended to India also.

Source: Money Control

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Reliance to spend over $3 billion in fertiliser push

 Reliance Industries plans to invest more than $3 billion over the next four to five years to build capacity for its entry into the fertiliser sector, a source with direct knowledge of the plan said. 

The move is related to Chairman Mukesh Ambani's announcement on Friday to set up a giant coke gasification project at Jamnagar on west coast, where Reliance's two refineries are located. Reliance's refining complex, the largest in the world, can process 1.24 million barrels of crude a day. 

"The entire project right from coke gasification to urea production will need an investment of over $3 billion," the source, who declined to be named, said, adding: "Reliance can also gasify coal in the same plant, in case there is a shortage of petcoke". 

Urea is used as a fertiliser. The source said Reliance was evaluating proposals from global firms that have the technology to set up the plants. 

"Reliance is in the process of evaluating proposals from global licensors to set up coke gasification and giant urea plants in India ... It is in advanced stages of financial closure," the source said. 

Reliance is on an expansion spree. Last week, Ambani unveiled plans for Reliance to enter the power sector and expand its retail operations. It also recently returned to telecoms by agreeing to buy control of Infotel Broadband. 

Mukesh Ambani, the world's fourth-richest man, and his long-estranged younger brother Anil last month agreed to scrap a pact that prevented them from competing on the other's turf, opening up key sectors for the elder brother's firm, including power and telecoms. 

Reliance, largest listed company, is also close to investing $1.35 billion in a shale gas field in Texas, according to a newspaper, which would be its second such investment in the United States this year. 

The source said Jamnagar's refineries can together produce 180,000 tonnes of petcoke annually, which when gasified can be utilised as fuel for power generation for the two plants and as feed for producing ammonia and, in turn, urea. 

Reliance plans to set up a plant that can process 7,000 tonnes of ammonia a day to produce 10,000 tonnes of urea, the source said. 

FERTILISER INVESTMENT SOUGHT 

India plans to further ease controls on urea pricing to strengthen private participation in the sector, which has not seen a new urea plant built in the past 12 years. Earlier this year, India eased controls over pricing of crop nutrients and raised prices of urea in a move aimed at capping subsidy spending. 

The source said Reliance's entry into urea production depends on government policy, and the firm also plans eventually to produce nitrogen, phosphate and potash (NPK) fertilisers. 

"We have to protect farmers' interest. Food security is a big issue. Reliance eventually wants to come into NPK fertilisers -- that is because crop productivity is dropping due to use of nitrogen fertiliser," the source said. 

Fertiliser use in India is heavily skewed towards urea. Nitrogen-based urea accounts for more than half of India's fertiliser consumption because of heavy government subsidies on the nutrient. Phosphate fertilisers account for a fifth of Indian demand, while potash accounts for 8 percent. 

A government official said, "Even in the current scenario Reliance can make good profit. If you have the raw material, production of urea costs much less than the government subsidy you get. Fertiliser subsidy is linked to import cost." 

Satish Chander, director general of the Fertiliser Association of India, said Reliance's entry into urea production will help reduce fertiliser imports. India imports 6-7 million tonnes of nutrients annually, he said. 

"Any investment which produces 2-5 million tonne is always welcome ... Our average consumption of nutrients is much lower than neighbouring countries. Per hectare use of nutrient in India is almost one-third of China."

Source: Economic Times

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RIL to pick up 45% in Texas shale gas field for Rs 6,500 crore

Reliance Industries (RIL) will make its second investment in two months in a large shale gas field in the US, as it tries to cash in on a boom in a vast new energy resource that is threatening to change the global energy balance. 

The company is close to buying a sizeable minority stake in a shale gas field in Texas from US-based Pioneer Natural Resources, people close to the development said. 

India’s largest company will buy 45% in the Eagle Ford shale gas field for about Rs 6,500 crore. It will make an up-front payment of nearly Rs 1,400 crore and the balance in the next four years, said a person close to the matter. 

In April, RIL had acquired a 40% stake in Atlas Energy’s Marcellus share acreage in the US, gaining access to approximately 343,000 acres of undeveloped land with estimated gross resources of over 13 trillion cubic feet of gas. 

“We will continue to pursue such joint development opportunities with the best operators as well as on our own to build a substantial upstream business in North America,” RIL chairman and India’s richest man, Mukesh Ambani, had told shareholders at the company’s annual general meeting on Friday. 

Shale gas is extracted from a common rock formation found in most parts of the world by pumping water and sand. Till recently, it was not considered economically viable to extra gas from shale formations but the emergence of new drilling technologies has changed the game. 

The sudden increase in the production of shale gas in the US has changed the dynamics of the US gas industry. Gas prices have dropped with companies such as ExxonMobil and Royal/Dutch Shell joining in the rush. 

According to the website of Pioneer, the Eagle Ford gas field has around 310,000 gross acres of prospective gas. 

Pioneer has another shale gas field in Barnett, near Fort Worth in Texas. 

“RIL wants to consolidate its position in gas as it will be tomorrow’s fuel,” said Deven Choksey, managing director of KR Choksey Securities.” RIL will create such assets in the US, the best destination for alternate energy, by utilising part of its cash flow so that its balance sheet remains unstretched.” 

RIL, which owns the world’s biggest refinery complex and India’s largest gas field in the KG basin, has cash and cash equivalent of more than $6 billion, and a projected annual cash flow of $7-8 billion. 

The expansion of RIL’s footprint in shale gas is in line with the investors’ expectations, said Ambarish Baliga vice-president of Karvy Stock Broking. “The acquisition cost of such assets is cheap, making more sense for the company.” 

UBS is learnt to be RIL’s advisor for the deal. The RIL spokesman declined to comment while the Pioneer spokeswoman could not be reached. 

Led by ExxonMobil, which bought shale gas specialist XTO for $41 billion in December last year, any big energy company worth its salt is getting into the unconventional energy space in the US. The list includes BP, Statoil and Total. 

“Shale Gas is the most promising development in the energy area in North America,” Mr Ambani had said in its AGM speech. “It is likely to overtake both conventional gas as well as liquid fuels as a source of energy within the next decade. Shale gas development represents a low level of geological risk as the gas is trapped in rock across a wide geographical region in excess of tens of millions of acres.” 

Reliance aspires to build a significant position in the shale gas business, Mr Ambani had said at the AGM. “ We will enhance efficiencies across the chain by drawing on our experience in drilling and project management. We will commit capital alongside proven low-cost operators to accelerate the development of this resource.” RIL has been looking for assets in a range of areas. It made an abortive attempt to buy bankrupt petrochemical company LyondellBasell early this year. 

Earlier this month, RIL acquired a 95% stake in Infotel for Rs 4,800 crore after the HFCL Group firm bagged the national licence for broadband wireless access (BWA) radio waves. International rating agency Moody’s Investor Service on Monday said the risk profile of RIL has increased following its entry into telecom with the acquisition of Infotel Broadband Services, but has retained the stable outlook of the company.

Source: Economic Times

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Oil gets extension for most exploration licences

State-run Oil India (OIL) has secured an extension for petroleum exploration licences (PELs) for 10 of its 16 independently held blocks in Assam and Arunachal Pradesh.

The company has, however, been asked to surrender five blocks, according to a company official. OIL had in 2009 written to the Ministry of Petroleum and Natural Gas, seeking extension of PELs for 15 of its 16 nomination blocks. "The ministry granted us PELs for 10 blocks after they saw our work programme. It, however, asked us to surrender the other blocks, which do not hold much potential," an OIL official told Business Standard. Through these blocks, OIL held a total area of approximately 5,367 sq km. Having posted a six-fold jump in its net profit at Rs 431 crore for the quarter ended March 31, it plans to spend around Rs 2,300 crore as on exploration and production this financial year "This extension will allow us to carry on with our exploration activities in these blocks. Had these not been granted, our business could have been adversely affected," the official added. OIL produced 3.6 million tonnes of crude in the year, a 3.3 per cent increase over 2008-09. It also produced 2.4 billion cubic metres of gas during the period, 6.4 per cent more than last year. The company added around 9.7 million tonnes of new hydrocarbon reserves in 2009. All of its current reserves, estimated at around 42 mt, are in Northeast India.

With the recent revision in administered price of natural gas from $1.79 to $4.2 per unit, OIL is expecting an upward revision in the company's top line by Rs 500 crore a year and net profit by Rs 315-340 crore. The company produces two billion cubic metres of natural gas a year, of which around 85 per cent is sold at administered prices. Gas sold to power and fertiliser customers in the northeast is given a 40 per cent 

Source: Business Standard

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Natural gas players: Attractive for a long term

Although natural gas players have weathered the storm much better in the past couple of months and are apparently fairly priced, retail investors can still find the sector attractive for long-term investments. 

The industry has showed a robust performance in the last quarter for FY10, which is likely to continue in future as the availability of gas increases and the necessary infrastructure is put in place. 

The total natural gas supply in the country has risen to 175 mmscmd from 114 mmscmd last year, thanks to RIL’s KG basin fields. While the domestic demand for gas remains robust, the companies transporting gas continue to earn higher revenues from increasing volumes. The four listed companies in the industry — Gail, Gujarat State Petronet (GSPL), Gujarat Gas Company (GGCL) and Indraprastha Gas (IGL) — posted a healthy growth in net profit for the Mar ‘10 quarter. 

The industry leader Gail posted a 17% rise in profits of its natural gas transmission business to Rs 506 crore in the quarter, as gas volumes jumped 39% to 114 mmscmd. Similarly, GSPL nearly doubled its bottom line to Rs 108 crore as its volumes nearly tripled to 36.2 mmscmd. 

The two listed city gas distribution (CGD) entities — Indraprastha Gas and Gujarat Gas — reported profit growth of 28% at Rs 51 crore and 73% at Rs 62 crore, respectively in the March 2010 quarter. The volume growth for them was around 22%. 

As the availability of the natural gas is growing and demand remains strong, the transporting infrastructure is the only bottleneck in the future growth of the industry. All the companies have lined up heavy capex plans to extend their pipeline networks and increase their gas carrying capacity. 

Gail alone is investing nearly Rs 35,000 crore between FY10 and FY14 to double its pipeline network. GSPL, which has already incurred a capex of Rs 2,800 crore in the past 4-5 years to set up a pipeline network spanning most of Gujarat, is further planning a capex of Rs 1,500 crore to augment its existing pipelines and set up CGDs. 

IGL is also investing nearly Rs 3500 crore in next 5 years to expand its CGD business within the NCR region as well as Noida, Greater Noida and Ghaziabad. In view of the pending regulatory approvals, Gujarat Gas has not drawn any major capex plans except Rs 300 crore of annual capex. 

With this the gross block of the gas industry is expected to double within the next 3-4 years, which will necessitate the players that were debt-free so far to borrow. 

The players have started gradually cutting down on their dividend payouts to preserve cash. Although all the companies increased their dividends for FY10, the growth was lower than that in the profits marking lower payouts. Only in case of Gujarat Gas the payout increased as it gave a special one-time dividend of Rs 5 per share. 

The recent dismantling of administered pricing mechanism for natural gas will have a great impact on this industry, although it is not the ultimate consumer. Gail stands to benefit due to the$0.11/mmBtu marketing margin it will now be able to charge , while passing on the increased cost to its customers. Gail is expected to earn additional net profit of around Rs 200 crore from this. 

Contrary to the belief that the CGD businesses would find it difficult to pass on the price hike to the final consumers, Indraprastha Gas last week raised the CNG prices by around 25% across all its geographies. This won’t affect IGL’s volume growth, as gas still remains a cheaper option to liquid fuels and IGL holds a monopoly in its region. 

The impact on Gujarat Gas is insignificant as less than 5% of its gas came from APM sources. Gujarat State Petronet being a pure transporter of gas won’t have any impact from the development. 

The industry’s improving prospects have hardly remained a secret among investors. The industry has consistently outperformed the market over the past one year. With huge capex plans coming on stream, the industry is expected to continue with the growth momentum in the coming years. 

All the companies are currently trading in a price-to-earnings multiple (P/E) range of 13 and 18.5 as against the Sensex P/E of 20.3. These valuations appear attractive for long-term investment, considering the expected profit growth in the coming years.

Source: Economic Times

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India's public finance, oil price are big issues'

Indian and global equity markets saw substantial outflows in the month of May due to concerns ranging from Europe to China. In an interview with Jitendra Kumar Gupta, Cameron Brandt, senior global markets analyst at EPFR Global, which provides fund flow and asset allocation data (for over $13 trillion) to financial institutions across the world, shares his views on the issues. Edited excerpts:

In last couple of weeks, we have seen FIIs (foreign institutional investors) pulling out from Indian markets. What is the trigger and how much more outflow is India likely to witness?

There are two main and well-chronicled reasons for the shift in sentiment. The first is the fear that China’s efforts to rebalance its economy and head off asset bubbles fall short of what is really needed, and is setting up a situation where more harsher measures would be needed. China is now a key trading partner for most of the region’s larger economies and an abrupt deceleration of its economic growth would have a ripple effect.

The second is the Greek debt crisis and its impact on that region spells trouble for Asian exporters, almost any way you cut it. While China-US trade tends to get headlines, a slightly bigger share of China’s total exports goes to the EU-27 — which also happens to be India’s largest trading partner — and weaker demand from this region will have a real impact.

How are foreign investors pursuing Indian markets vis-a-vis emerging markets, particularly China?

Overall, India is viewed as a defensive play, albeit one with an IT (information technology) angle. So, the likely response to the country’s strong GDP growth by foreign investors will be a reassessment of plays geared to the domestic demand.

According to you, where is the global investors’ money flowing now in terms of assets classes and markets?

Since mid-2009, the bulk of the fresh money coming into the major fund groups has flowed into the four major bond fund groups: US, global, high yield and emerging markets bond funds. Flows into high yield bond funds have, however, turned sharply negative in recent weeks. Year-to-date winners among the equity fund groups — albeit at modest levels — are Pacific, global, global emerging markets and EMEA equity funds.

Flows into emerging markets bond funds have picked up markedly since the beginning of December 2009 quarter, with funds investing in local currency debt faring particularly well.

How is the currency risk perceived now? 

The strong flows into local currency emerging markets bond funds, allied to a longer-term pattern whereby fund managers are rotating out of dollar-denominated assets, suggest the whole issue of currency risk is being re-evaluated and currencies of emerging markets with solid fundamentals are being viewed as less and less risky.

What are the key concerns that foreign investors have in their minds regarding the Indian market?

India’s public finances and the price of oil are probably the two biggest macroeconomic issues. The uncertainty created by the Greek crisis has reinforced a long-standing coolness among FIIs to markets with big current account deficits. India’s, if you add in the states, could well be running around 10 per cent of the GDP at the moment. Given that India imports some 80 per cent of the oil it uses, spikes in prices translate — via the trade balance and fuel subsidy system — into bigger deficits and producer-driven inflationary pressures.

Are global investors waiting for a bigger correction in the emerging markets, especially Indian equity?

We don’t think so. There is still a lot of liquidity out there chasing a finite number of good quality assets. As for India, again, no. Investors are very anxious to put the money they preserved from the 2008-09 recession by moving it into ultra low-yielding money market funds.

Despite good earnings and economic growth, countries like India are suffering due to the ills of the European economies and the US market...

While it is not entirely fair, India’s fiscal issues and the extremely slow unfolding of the anticipated reform story give those external issues a resonance. India is also linked by trade and remittance flows to those economies.

Source: Business Standard

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