Mukesh Ambani unplugged

Last month, 50 years after independent India’s first petroleum discovery at Lunej in Gujarat on September 5, 1958, oil started flowing out of the installation at the Krishna-Godavari basin’s block D6. The differences between the two discoveries are many. While Jawaharlal Nehru preserved his crude-stained sherwani as a souvenir of the Lunej find (he visited the site in 1960) made by the then Oil & Natural Gas Commission, Reliance Industries (RIL) Chairman Mukesh Ambani, flanked by wife Nita, posed with crude in a conical flask at a media conference and distributed drops of D6 crude smartly packed in glass capsules to journalists. While Lunej is now a national monument, Mukesh is locked in a battle with brother Anil over the gas flow from the same D6 wells.

However, India’s first deepwater crude flow can be as much of a game changer for the country as was the flow at Lunej 50 years back, perhaps more. In his first press conference in five years, Ambani pointed out that, come February 2009, the oil and gas flowing out of the field will equal 40 per cent of India’s current production. The Rajasthan field, (operated by Cairn India) which has the potential to provide India with a fifth of its oil production, is thought to contain at least a billion barrels and capable of producing 175,000 barrels a day at its peak. The production is likely to start in 2009.

Crude is flowing out at 5,000 barrels a day and is expected to rise to its peak of 550,000 barrels of oil or oil equivalent in another 18 months. Ambani said he wanted the benefits of the hydrocarbon reserves to reach millions of Indians. “Five hundred and fifty thousand barrels per day of hydrocarbons can feed cooking gas to 100 to 120 million households. For this, we need to pipe gas to towns, cities and rural areas on a war footing,” he said. Even as Ambani was speaking about D6, farmers at Raigad voted in a referendum against a proposed Special Economic Zone planned by Mukesh in the area.

Ambani said: “Now is the time to provide natural gas to 50 million two-wheelers, five million cars and 10 million trucks.” Ambani also spoke about distributed power where households will have their own fuel-cell generators that will use natural gas to produce electricity. His target for lighting 80 million households is just “a few months” away.

Ajay Parmar, Head of Research at Emkay Global Financial Services, points out that the Ambanis have grown by integrating their businesses. “Naturally, Ambani is thinking of forward integration by taking the gas to the consumers,” Parmar said.

But why is Ambani thinking of this when a host of fertiliser and power companies are eager to be the first-users of D6 gas? The companies that can switch to gas will benefit hugely, Parmar said. “Deepak Fertiliser, in fact, said that they may double their net profit if they can use the gas from D6,” he said.

While the gas and crude from D6 can do wonders for the economy and the country, it can also move the company’s stocks to great heights.

Parmar points out that if this crude had started flowing one year back— when the markets were in a bullish phase—the RIL scrip would have touched unimaginable highs. Predictions are that RIL will be able to double its turnover in two years. Parmar says: “That would be an unheard of 40 per cent compounded annual rate of growth with RIL accounting for six per cent of the GDP.” It would also make RIL one of the top 20 global energy players. Surely, a court stay on the sale of gas from D6 can feel like an iron ball and chain around the ankles for Mukesh.

The public sector NTPC and brother Anil’s Reliance Natural Resources (RNRL) have taken him to court demanding that he honour the pact to sell gas to them at $2.34 per million British thermal units (MBTU). This is way lower than the government approved rate of $4.20 per mbtu. If allowed a market price, RIL can price the gas even higher. Retail sales to consumers can allow RIL that leeway. Parmar of Emkay thinks the government may allow Ambani an even higher rate. In fact, soon after the press conference, the Union Ministry for Petroleum and Natural Gas announced that it will request the court to remove the stay on sale of gas from the D6 block of KG basin.

Another reason for Mukesh to push for clearing the ground is that his new refinery at Jamnagar is coming on stream later this year. And the success of the new refinery depends a lot on unfettered supply of gas from the KG basin. With a lot of refining capacity coming on stream globally, refining margins will be under pressure. According to Ballabh Modani of Enam Securities, over the long term “pressure on RIL’s margins will be largely offset by incremental gross refining margins attributed to cheaper captive gas as fuel.”

So, naturally, Mukesh took a potshot at brother Anil at the September 21 press conference by saying how he has tried to stay away from creating paper wealth and financial gamesmanship. Junior brother Anil is better known for his abilities to raise capital.

Anil responded at RNRL’S annual general meeting that followed by stating that the shareholders of RNRL feel shortchanged by RIL as it did not give it a proper agreement for supplying gas—for their power plants. He also filed a case of defamation against Mukesh.

Mukesh maintained at the press conference that NTPC and RNRL could have all the gas agreed upon as long as they built their power plants—which are at least three to four years away.