Reliance Said to Need Up to Four Years to Increase Output at Largest Field

By Rakteem Katakey - Sep 22, 2011

Billionaire Mukesh Ambani’s Reliance Industries Ltd. (RIL) and BP Plc (BP/) may need as long as four years to raise output from India’s biggest gas field because the reservoir is harder to tap than previously estimated, a person with direct knowledge of the matter said.

Reliance, which sold a 30 percent stake in the fields to BP, has sought permission from the Indian government to develop smaller areas to counter a drop from its main KG-D6 block off India’s east coast, the person said, asking not to be identified because the plan is private.

Profit at Reliance has missed analysts’ forecasts for six of the last seven quarters and its shares have slumped 26 percent this year as production of the clean-burning fuel falls. Tests showed increasing production may even be unviable at government controlled prices, the person said.

“The gas business is the most important for their growth and investors are hoping it’ll rise quickly,” said Walter Rossini, who overseas the equivalent of $269 million of Indian stocks, including Reliance, at Aletti Gestielle SGR SpA in Milan. “Without the growth in gas their shares will stagnate.”

Tushar Pania, a spokesman for Reliance, declined to comment on the gas production when reached on his mobile phone yesterday.

Shares of India’s biggest company by value fell 6.1 percent to 786.35 rupees yesterday, the biggest drop since July 6, 2009. BSE India Sensitive Index dropped 4 percent.

The cost of protecting Reliance’s debt using credit-default swaps has risen 126 basis points to 310 basis points, the most since since the quarter ended Dec. 31, 2008, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in privately negotiated markets.
‘Understand Options’

London-based BP, Europe’s second-biggest oil company, is studying data for the deepwater block in the Bay of Bengal after receiving the Indian government’s approval to buy the stake in 23 fields valued at $7.2 billion, according to an e-mail response from BP yesterday.

“We need to understand the options through joint evaluation of data before deciding the next course of action,” BP said in the e-mail. Reliance and BP are planning to develop discoveries known as the R-Series and other satellite fields in the KG-D6 block, according to BP.

Boosting output may take a couple of years, Sashi Mukundan, BP’s India chief said Sept. 6.

Gas output has dropped to 45 million cubic meters a day, a person with direct knowledge of the matter said Aug. 26. Production from the KG-D6 block averaged 48.6 million cubic meters a day in the three months ended June, R.P.N. Singh, junior oil minister, told parliament on Aug. 2.
Gas Price

Reliance sells gas to power plants and fertilizer units at $4.2 per million British thermal units, a price set by the government and scheduled for revision in April 2014.

The Indian government asked Reliance to drill 11 wells in the year ending March 31, S.K. Srivastava, director general at the country’s oil regulator, said May 2.

The decline in output may continue until work on the wells is completed and they are connected to the main pipeline system carrying the gas, according to a Aug. 25 statement from Calgary- based Niko Resources Ltd. (NKO), which has a 10 percent stake in the KG-D6 block.

The investment by BP will accelerate development and production from Reliance’s fields in India, Ambani said on Feb. 21 when the deal was announced. Reliance may get an additional $1.8 billion from London-based BP if the two companies discover more oil or gas in some of the blocks covered by the agreement.

To contact the reporter on this story: Rakteem Katakey in New Delhi at rkatakey@bloomberg.net

To contact the editor responsible for this story: Amit Prakash at aprakash1@bloomberg.net
®2011 BLOOMBERG L.P. ALL RIGHTS RESERVED.