Rising prices a boon for RIL-BP gas business

After a decade of struggle in reviving its natural gas business, Reliance Industries (RIL) and its partner BP Plc look up as fuel prices continue to be strong, tracking the global cues post Russia-Ukraine conflict. Analysts expect that the price ceiling of natural gas from RIL-BP's KG Basin would increase to $10 per million British Thermal Unit (mmBtu) from $6.13 per mmBtu. The price rise is expected to help the operators in making further investments in exploration and production assets, say company sources.

Under the government administered pricing regime, RIL-BP was allowed to sell natural gas produced from KG-D6 -- which is enlisted under the Deepwater, Ultra Deepwater, and High Pressure-High Temperature area (collectively called difficult discoveries) category -- sell gas at $3.62 per mmBtu during the first half of 2021-22 and $6.13 per mmBtu in the second half. The consecutive price rise helped drive up the segment revenue of RIL's oil and gas exploration and production (E&P) business by 324% to ₹5,484 crore in the first nine months (April-December 2021) from ₹1,292 crore in the same period of the previous year. The company posted segment earnings before interest, tax, depreciation and amortisation (EBITDA) of ₹3,901 crore in this period, compared to an EBITDA loss of ₹222 crore in the previous year. The EBITDA margin stood at 71.1%, versus a negative margin of 17.2%.

In parallel, RIL's gas production has also increased in this period and it helped to bulk up top line as well as bottom line. The gas production increased to 147.7 Billion cubic feet (Bcf) in the nine months period from 86.2 Bcf. RIL-BP had commenced gas production from R-Cluster in December 2020 and the Satellite Cluster came onstream in April 2021. R-Cluster is expected is reaching plateau gas production of about 12.9 million Standard Cubic Meters of Gas per day (mmscmd), Satellite Cluster will have a peak output of 6 mmscmd. The partners are now on a mission to start production from MJ field in KG D6 by December this year and it will have a peak output of 12 mmscmd.

In the third quarter ending December, when gas price almost doubled, the E&P segment revenues of RIL increased by 55.7% sequentially to ₹2,559 crore as against ₹1,644 crore in the second quarter. The EBITDA shot up 90% to ₹2,033 crore. The third quarter EBITDA margin stood at a huge 79.4%.

The earnings are expected to multiply when the year closes with high gas prices and increasing output. RIL also produces gas from coal bed methane (CBM) blocks. It recently sold natural gas produced from CBM field in Madhya Pradesh for over $23 per mmBtu to firms, including GAIL, GSPC and Shell. Market price discovery is allowed in the gas produced from CBM blocks.

"Reliance Industries Ltd's gas production from KG basin will benefit from the higher price ceiling, but the impact on RIL's financial profile is minimal as gas makes a limited contribution to its revenue," rating agency Fitch said in a report last year. RIL has business in three huge cash-generating verticals -- refining and petrochemicals, telecom and retail. Size of E&P business is less compared to the rest of the businesses.

BP Plc had bought 30% stake in most of RIL's oil and gas blocks, including the gigantic eastern offshore KG-D6 fields, in 2011. BP Plc was roped in when the assets were facing huge decline in production quantity. The assets failed to meet its production targets set by the government even after BP Plc's entry. BP wrote off a part of its investments after the delayed production revival. The partners began their new round of investments of ₹40,000 crore from 2018 to enhance production.