RIL’s peak output from KG basin seen at 50 mscmd

Mumbai: Peak production from Reliance Industries Ltd’s (RIL’s) gas reserves in the Krishna-Godavari (KG) basin may hit 45-50 million standard cubic metres per day (mscmd) in the next five years, said two executives of the company familiar with the estimates.

To be sure, this is far lower than the earlier estimated peak output of 80 mscmd, but is much above the 13 mscmd that RIL is currently producing from the block.

“While 80 mmscmd is not possible from the D6 block (in the KG basin), the company has the potential of reaching a peak of 45-50 mmscmd in a few years,” said an executive aware of the internal estimates of RIL. The executive did not want to be identified as the company has not released any official projections on the revised peak output from the KG basin.

A second executive, who is a part of the KG D6 consortium of RIL, BP and Niko, said the current block (KG D6) has the potential to produce about 45-50 mscmd, but added that the real output will eventually depend on the price of gas.

“The company has always maintained that it needs a market-linked price for its natural gas,” this person said.

An email sent to RIL remained unanswered.

RIL is in the midst of a dispute with the Union government over the pricing of gas. On 10 May, RIL and partners BP and Niko slapped an arbitration notice on the government, seeking a hike in natural gas prices, which had been notified by the government on 10 January. The previous United Progressive Alliance (UPA) government had notified a formula for gas pricing which would have doubled the price of gas from $4.2 per million British thermal units (mmBtu) to $8.4 per mmBtu.

However, the successor Bharatiya Janata Party-led National Democratic Alliance has deferred a decision on the pricing of gas until at least 1 October. In an interview to Mint on 3 July, oil minister Dharmendra Pradhan indicated that the pricing of gas should be determined while keeping the end-user in mind. “This is an energy security issue and the future of the country is linked to it,” Pradhan said.

According to Debasish Mishra, senior director at Deloitte Touche Tohmatsu India Pvt. Ltd, reserve estimates in the oil and gas industry always depend on pricing.

“Below a certain price point, production does not make sense. That’s the reason why clarity from the government on gas pricing is extremely important for investors to take decisions on future investment to enhance production from explored blocks,” he said.

Mishra declined to comment on RIL’s estimates.

Much of the increased production, if it materializes, will come from satellite fields known as the R series, which is a collection of small hydrocarbon bearing fields in the D6 block off India’s eastern coast, experts said.

A new field discovered last year, termed as the MJ1 Discovery—a part of the D6 block in the KG Basin and located 2km below the currently producing fields D1 and D3—is likely to add to output.

“At current estimates of MJ1, if we take a field life of 15 years, this discovery has a reserve base of 2.5 trillion cubic feet, which translates into almost 15-16 mmscmd of production,” said Gagan Dixit, senior analyst with brokerage firm Quant Capital Ltd, adding that the remaining output could be contributed from output from the R-series fields.

An analyst with an international brokerage firm, who did not want to be named due to compliance constraints, added that the R series fields have a potential to reach a peak output of 30 mscmd within five-seven years, while the new MJ1 field can replace falling output from the current D1 and D3 fields.

“This could translate to annual revenues of between $2.7 billion and $5.4 billion for a price range of $4.2 per mmBtu to $8.4 per mmBtu, respectively for RIL and its partners,” he said.

D1 and D3 fields are currently producing about 13 mscmd of gas.

These two fields started production in the first quarter of fiscal 2009-10. They were originally estimated to produce 80 mscmd by the first quarter of fiscal 2011-12. However, RIL has not been able to reach that output level and has cited technical complexities for the shortfall. So far, the company has only managed to hit a peak output of 59 mscmd, which it reached in the third quarter of fiscal 2010-11. Since then output has been on the decline.

On 30 May, Niko Resources Ltd, which holds 10% in KG D6 block, said in its annual statement that the partners might even defer further investment in developing the resources if the government does not increase the price of gas.

However, Niko, in its annual filing said the partners would still go ahead with the development of MJ1 discovery. “Niko and its partners are accelerating the commercial assessment of this significant discovery,” said the company in its filing.