The curious case of Reliance's KG-D6

Dhirubhai Ambani once famously said, "Stay away from three C’s—chelas, chamchas and cronies." All such have been working tirelessly to fulfill all their tasks, staying away from yet another C-CCTVs. The tasks include laying hands on official documents, which subsequently change hands. Some of these documents have even landed in the hands of journalists, who also belong to the three C’s category.

Hence, it comes as no surprise that secret documents from ministries are shared on 'friendly' terms, handed over under the table. What is surprising is that the media has been associating Reliance Industries with this controversy from the oil ministry. The company vehemently denies it and the company must be right. Many of us assumed that RIL too, like British Petroleum (BP), wrote-off its oil and gas business. RIL's partner BP recently wrote-off its $830 million off its $8 billion investment in the former’s upstream business in India.

Here is how the company transformed from an oil-to-others company. Since 2004, RIL has been a company which discovered India's biggest gas reserves at Krishna Godavari basin, and its prize block--KG D6. After the group split, Anil Ambani and Mukesh Ambani fought over these gargantuan gas reserves for five years. In 2009, RIL started production and beat all the world’s oil majors to become the fastest company to extract gas from a block.

RIL won the race but could not walk up to the stage to collect its prize. Everything was fine with the gas block for a year. After that, its production started falling. The block was supposed to peak its production to 80 mmscmd by 2012. It has been gradually falling and is now at around 11 mmscmd. RIL's share of shale gas blocks that it bought into in the US, is higher at around 16 mmscmd. While the shale gas revolution toppled the world’s petroleum prices, India's gas story became a storm in a tea cup.

Indian shareholders and those power companies which built their gas-based plants are not the only ones who stand to lose. One of the world’s largest companies BP bought 30% of RIL's 23 blocks in India. The technical partner, BP had experience in running gas blocks in the famed Gulf of Mexico to repair the KGD6.  Water seepage, it is known, had affected the 'flaring up' of the natural gas from the blocks. Experts however say that BP’s confidence about fixing the block might be a blunder. It is well-known that once water seeps into a deepwater gas blocks which fathoms below the stream, it almost impossible to repair. Add to that the fact that RIL had surrendered all its gas blocks except four, back to the government. So, was BP betting only on KGD6?

BP said in its statement that a part of the write-off is due to lesser-than-expected increase in gas prices by the government. If that was true, the government would have to increase gas price by around eight times, to make up for its decrease in production. After all, its gas production fell to one-eighth of its original estimates.

Quoting the same 'gas pricing' as the reason, RIL's partner Niko Resources too wants to exit the block. The Canadian company had been a partner in the block since inception. As per the original agreement, RIL has the first right of refusal to the sale. RIL is still a giant and is cash rich but is stuck at crossroads in this offer. If it does not buy into the block, it proves that they too see no potential. If it does, which it will have to do at the right price of its current performance, it will be a public admission of what value it assigns itself. But few are waiting to see how this story will end, as many have already ignored the company’s gas business and its value.

It is now time to refresh our memories that RIL has a huge refinery business as well. While the refineries at Jamnagar have no complaints on the performance side, this business is facing its cyclical difficulties. The crude prices have been falling and are hovering at $50 per barrel. It means the refining margins of the company will be under pressure. This time around, experts also say that this price might remain under pressure for a long time. There is competition from shale gas whose production was begun because of the apathy of OPEC, to cut oil production. This is the short-term risk. The long-term risk to this high-end refinery which can process crude of low quality and export it later, is the Saudi government's huge investment in similar refining capacity.

Reliance has other businesses too.  Its retail business has been growing in revenues steadily as it is adding stores. It currently has 2,285 stores across 150 cities. The margin in this business with heavy competition, is at around 4%. The business is also facing threat from e-commerce businesses.

Reliance also own pan-India spectrum for the next-generation high speed data providing 4G spectrum. And it is the only company to do so. Though it has been delayed, the environment is conducive as the market for high-speed data in the form of 3G is growing rapidly. Everyone is waiting with bated breath for a big bang market-disrupting launch from RIL. Maybe, it is time to crank up CCTVs in the telecom ministry, and ensure they function well.

Katya B Naidu has been working as a business journalist for the last nine years, and has covered beats across banking, pharma, healthcare, telecom, technology, power, infrastructure, shipping and commodities.