It is the first announcement of a discovery by Reliance Industries Ltd (RIL) after BP came on board in February 2011, and it has promptly triggered a
rally in the company's stock price. In the two trading days following the announcement - made last Friday, May 24 - the
company's stock gained nearly seven per cent, rising to Rs 843.15 at the Bombay Stock Exchange (BSE). And since it has the second highest weight (8.62 per cent) among the 30 stocks that make up the BSE Sensex, the rally also brought a cheer to the equity markets.
RIL, in a statement on Friday, notified the
discovery of gas and condensate in the KG-D6 block off the Eastern Coast in Andhra Pradesh. "Formation evaluation indicates a gross gas and condensate column in the well of about 155 metres in the mesozoic reservoirs. In the drill stem test, the well flowed 30.6 million standard cubic feet per day (mmscf/d) and liquid rate of 2,121 barrels a day," the statement said. The development of this discovery and production thereafter may take another 18 months. A detailed appraisal followed by reservoir modeling will establish the rate at which production can happen. However, this is said to be a sizeable discovery that will add significantly to RIL's existing reserves. RIL is operator of the D6 block with 60 per cent stake. BP and Niko are partners with a stake of 30 and 10 per cent, respectively. The discovery was made two km below the gas producing D1/D3 fields of the block. Operators are looking to drill appraisal wells in the area over the next few months.
Still, the petroleum ministry advised caution in estimating the commercial aspects of the discovery. Not surprising considering RIL's D6 block has so far fallen way short of expectations - it was projected to produce 80 million standard cubic metres of gas per day (mscmd) by 2012, but is producing only 15 mscmd. The company attributes the decline to reservoir complexities. "The commercial potential of the said discovery is yet to be established," the ministry in a statement said.
In a note, Nomura agreed this could be a
big discovery (D-55) of gas & condensates and would add significantly to resources. "This is RIL's first discovery in India in two years and in KG-D6 in nearly five years. RIL/BP have been optimistic on deeper prospects in KG-D6 and were willing to drill MJ-1wells at their own risk. We ascribe a value of $4 billion (Rs 75 per share) to the exploration upsides," it said. Nomura has a Buy rating on RIL with a target price of Rs1, 000 a share.
According to Nomura, the discovery should pressure the Indian government to expedite the gas price approval process and work programme approvals. The current price of $4.20 per million British thermal unit (mBtu) was fixed by an Empowered Group of Ministers in 2007, to be applicable for a five-year period from the date of commencement of gas supply. Supply began in April 2009. This was through a formula where the crude oil price was capped at $60 a barrel. This price is applicable till March 31, 2014. RIL has for long been seeking a three-fold increase in the price for KG D6 gas to be on a par with the global gas price.
Goldman Sachs sees this discovery as a development that will turn around RIL's exploration and production business. "The announced discovery looks significant given that the largest D6 discovery had a gross hydrocarbon column of 194 mts (the MA-2 well). Moreover, if this discovery leads to a new commercial reservoir, it could meaningfully add to D6 reserves, in our view. Overall, we believe, this discovery further strengthens our view that RIL's E&P business is turning around," it said. It added that a policy move towards market driven gas pricing in the next 2-3 years could mean that the base case gas price of $8 per mBtu from FY15 could well be the medium term floor with potential for earnings upside.
Niraj Mansingka of Edelweiss said the production of MJ-1 discovery should not take as much time as a normal discovery since it is located below existing producing D1/D3 fields. We estimate value of the discovery at Rs 29 per share and henceforth, increase our target to Rs 1,036 per share, he added.
The government has constituted a Committee under the Chairmanship of
C Rangarajan, Chairman of the Economic Advisory Council to the Prime Minister in May, 2012, to suggest structure and elements of the guidelines for determining the basis or formula for the price of domestically produced gas in India. The Committee submitted its Report in December 2012 and the petroleum ministry is in the process of finalizing a Cabinet Note to be placed before the Cabinet Committee of Economic Affairs (CCEA) for a decision. The proposed guidelines will be effective from April, 2014 for pricing of domestic natural gas based on the methodology suggested by Rangarajan Committee, consequent to the approval by the CCEA.
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