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No Real Upside For Reliance Industries And Partners From KG-D6 Block: HSBC

Reliance’s investment in KG-D6 block unlikely to yield windfall gains for the company says HSBC.

 Flames burn from gas venting pipes on the oil platform (Photographer: Angel Navarrete/Bloomberg) <br>
Flames burn from gas venting pipes on the oil platform (Photographer: Angel Navarrete/Bloomberg)

Sixteen years and $12.1 billion later, Reliance Industries Ltd. (RIL) and its two partners, BP Plc and Niko Resources Ltd. stand to make no windfall gains from the D6 block in the Krishna-Godavari basin, says brokerage house HSBC.

Reliance has 60 percent stake in the gas block, while BP holds 30 percent and Niko Resources the remaining 10 percent.

The brokerage house says the RIL-led consortium managed to recover its entire investment only in the last financial year, realising just $12.7 billion over the last seven years, ever since the block started generating revenue.

Taking the time value of money into account, the present value of all expenditure exceeds the present value of all revenue from the block. Therefore, no case of a windfall gain can be made out, in our view. In fact, there is no profit from the block in present value terms, either.
HSBC Report

The recent penalty of $1.55 billion on RIL and its consortium partners – BP and Niko Resources – imposed by the government only raises questions about the commercial viability of block. The report suggests that any further investment by the three partners will not yield enough gas to make up for this fine.

Production has been declining too. We believe the consortium would require another $5-7 billion in capex to fully produce the KG-D6 block. Therefore, a penalty of $1.55 billion for a 15 percent fraction of total production indicates that the associated costs have not been factored in appropriately.
HSBC Report

The Gas Migration Case

In May this year Oil and Natural Gas Company Ltd. (ONGC) filed a suit against RIL alleging that that private refiner illegally drew gas from its Godavari and KGDWN-98/2 blocks. These blocks are adjacent to RIL’s KG-D6 block. The government then appointed a technical consultant, who concluded that there was migration of gas from ONGC's blocks into KG-D6’s wells. Thereafter, the government appointed a one-man committee, headed by Justice AP Shah, who concluded that migration between ONGC and RIL gas blocks gives the government the right to seek restitution of loss.

The government, based on the recommendation of Directorate General Hydrocarbons, has imposed a penalty of $1.55 billion on the Reliance-led consortium. RIL has said in a media statement that it will invoke the dispute resolution mechanism and issue a notice of arbitration to the government.