|Flashpoint||Last Update On Wednesday, December 11, 2002|
All fired up
Gas strike by Reliance Industries
What it means for the company's bottom line
The financial market was given a pleasant surprise on 31 October 2002 when Reliance Industries (RIL), along with its second quarter ended 30 September 2002 results, confirmed that it had struck natural gas reserves of seven trillion cubic feet off India's eastern coast.
The company's chairman Mukesh Ambani told shareholders at its annual general meeting in Mumbai that the in-place volume of natural gas at the newly discovered reserves is in excess of seven trillion cubic feet or 1.2 billion barrels of oil equivalent.
The news acted as a major trigger for the stock market and the RIL scrip, itself, was boosted by 13.9% to settle at Rs 266.70 on Thursday. RIL was largely responsible for lifting the BSE 30-share Sensex by 60.73 points or 2.10% to 2,949.32, at close.
RIL accounts for 15% weightage in the BSE Sensex.
RIL has struck gas at all five exploration wells at depths of more than 2,100 feet in its deepwater D-6 exploration block in the Krishna-Godavari basin off India's eastern coast. The company's announcement comes after widespread media reports about the discovery.
The new find is India's biggest gas discovery in nearly three decades and one of the largest gas discoveries in the world this year, Reliance Industries' chairman Mukesh Ambani informed shareholders at the company's annual general meeting. The reserves of the find are estimated at around 40 times larger than that of the Bombay High field, and double the total gas production of Oil and Natural Gas Corporation (ONGC).
In the current fiscal (between April to September 2002) the total gas production of India has been 15,340 million cubic metres (mcm) as against 14,725 mcm in the same period of the previous year. The total production includes gas drilled by ONGC and private players like British Gas, etc. For the period April-September 2002, the total production of ONGC was at 11,942 mcm.
Natural gas mainly consists of methane and ethane, that accounts for 75-90% of the total reserves, with carbon dioxide, hydrogen sulphide and other inflammable gases in mere quantity. Composition of natural gases differs from region to region- the composition of natural gas in India would be different from the composition of gas in Iran.
Sanjeev Zarbade, research analyst, Fortis Securities, said the news is not only of great importance to the company but to the fuel-starved economy as well. At the moment, the country's domestic oil and gas production meets just 60% of its needs.
With the striking of gas Reliance Industries has established itself as one of the pioneers in oil exploration as it drilled directly into deep water, becoming the first company in the world to do that.
RIL currently has interests in 23 exploration blocks in consortium with other exploration and production companies. These blocks cover a wide range of geological settings, spanning onland, shallow and deep waters on the country's east and west coasts. RIL is the operator in 14 of these blocks. The company's total oil and gas exploration acreage exceeds 1,30,000 sq kms.
Gas produced from the blocks will be targeted towards industries like power, steel and fertilisers, which have high consumption levels and are facing shortages. Gas also enjoys the advantage of being environmentally clean and is easy to transport
Meanwhile, for the nation, the find can partly meet the shortage in gas requirements and also give it bargaining power in the world gas arena.
The estimates given by RIL indicate gas find in the region of 7 trillion cubic feet (tcf) or 45 million standard cubic metres per day (mmscmpd). The current supply by ONGC is at 55 mmscmpd, clearly indicating that the find by Reliance will play a significant role in the nation's gas industry in future. This will also bring down imports as well as prices of gas. Countries like Russia and Iran were eyeing India as a major market for exporting their gas, but the newly found gas by RIL will restrain them from charging exorbitant prices for their gas.
However there are latest indications that the gas reserves may be much more than the original estimates given by RIL. As per reports RIL's D-6 deepwater block in Krishna Godavari basin may contain up to 15 tcf of natural gas reserves. If this holds true, then it will drastically change the gas scenario in India.
Meanwhile the gas, spewing from the floor of the Bay of Bengal, will be brought ashore by a sub-sea pipeline to Kakinada where the company will put up a terminal to purify the gas before transporting it. RIL has already approached the government for trans-India pipeline between Goa on the west coast and Kakinada on the east coast. This is expected to pass through Andhra Pradesh, Karnataka, Maharashtra and Goa. To furnish the subsidiary pipelines to connect customers will also be built.
There is talk, that key fertiliser and power companies are lining up for long- term tie-ups with Reliance.
Earlier, doubts were raised over whether the location of the gas find may prove disadvantageous as demand for gas comes more from the north and west rather than the south and east, which it is closer to. But RIL already found customers for its gas that has been quite a sentiment booster for the RIL stock at the bourses.
On 15 November 2002 (Friday), RIL signed a memorandum of understanding (MoU) with Lanco Kondapalli Power for the supply of 3.5 million cubic metres a day (mcmd) of gas from the location (the Krishna-Godavari basin in Andhra Pradesh) for expansion of Lanco's existing power plant. This is the first tie-up between a power company in the state with RIL, since the latter announced the discovery of seven trillion cubic feet of gas off the Rajahmundry coast in the Krishna-Godavari (KG) basin. The MoU provides for assured supply of gas by RIL for 15 years.
Lanco Kondapalli Power currently operates a 368-MW power plant at Kondapalli near Vijayawada in Krishna district, with 1.75 million mcmd gas being supplied by Gas Authority of India (Gail) from Oil & Natural Gas Corporation's (ONGC) fields in the KG basin.
Following RIL's gas discovery, Lanco Kondapalli Power submitted a proposal to the state government seeking its clearance for undertaking a 740-MW expansion of the power project, taking the total capacity to 1,108 MW. RIL has promised to supply the gas from June 2004.
Sunil Shah, assistant vice president-research, Indsec Securities & Finance said, as against key fertiliser and power companies for long-term tie-ups with RIL, foreign players are also in the fray to be a part of the scheme for funding RIL's gas project.
RIL can now expect improved margins and, thereby, good financials. The earliest production shall start from mid-2005. To determine what the exact quantity of gas is, will take some more months.
Amit Mahajan, senior analyst, Khandwala Securities said, it will impact RIL's balance sheet earliest from the third quarter of 2005. Revenues from the current gas discovery are expected to be Rs 3,500 crore in 2005, which would rise to Rs 6,300 crore from 2007 onwards.
On 31 October 2002, RIL also announced its results for Q2 ended 30 September 2002. For the quarter, the company posted a net profit of Rs 1,002 crore (Rs 801 crore) on total sales of Rs 16,206 crore (Rs 14,712 crore). The results reflect the performance of the merged entity (Reliance Industries and Reliance Petroleum).
The petrochemicals business contributed 44.5% of the merged entity's Q2 sales and 55% of operating profit. The refining business contributed 54% in sales and 37% in operating profit
Shah said gas as a percentage of sales of ONGC accounts for 24% of its turnover. With market cap of ONGC at approximately Rs 520 billion, gas market cap should be at Rs 130 billion. If a corresponding increase in market cap of RIL can be assumed the share price of Reliance should have a scope for increase by Rs 100. Thus conservatively Reliance should trade at Rs 340 to Rs 350. The only caveat being selling pressure from UTI.
As on 30 September 2002, the promoters' holding in RIL was 43.7%, while the public, domestic and foreign institutions held 15.3%, 13% and 26.4%, respectively.