RIL and BP may have to give a $1.2 billion bank guarantee for high gas price

Mukesh Ambani’s Reliance Industries Limited(RIL) along with its partners, British Petroleum, the world’s fifth largest oil & gas company and Niko Resources of Canada may have to give a bank guarantee of $1.2 billion over three years to get approval from the government to double the rate of natural gas produced from the main fields at KG-D6.

On December 20th, it was announced that the Committee on Economic Affairs (CCEA) had in fact given the go-ahead to RIL to nearly double the pricing of natural gas from April 2014. The condition imposed at this point was that the company would have to give a bank guarantee to cover its liability if gas-hoarding charges are proved. This guarantee is the same as the incremental revenues that RIL stands to gain from the price increase. The reason for this guarantee is simple; if RIL is found to have hoarded gas or deliberately suppressed production at Dhirubhai-1 and 3 (D1 & D3) since 2011, the government will claim this guarantee. This bank guarantee, analysts claim will be around $4 billion. This amount will be the difference of the current and old price. This is because the price will rise from $4.2 per million British thermal unit to $8.2-8.4 million after the Rangarajan pricing formula comes into effect from next fiscal.

For the entire remaining gas reserves of about 0.75 Tcf (Trillion cubic feet) in D1 and D3, the bank guarantee comes to $3 billion. . At current rate of production of about 8 million standard cubic meters per day, D1&D3 will produce about 0.3 Tcf in the next three years – the time that may be needed to settle the issue of gas hoarding charges. Analysis estimate that the guarantee for 0.3 Tcf comes to $1.2 billion. RIL, which has a a 60% stake in KG-D6 will have to shell out $60million per quarter while BP and Niko who have a 30% and 10% stake respectively will also have to fork out some money.

Dhirubhai 1 and Dhirubhai 3, named after RIL’s Founder Chairman Dhirubhai Ambani were the first of 19 discoveries in the KG-D6 block in 2009. The offshore oil goldmine on India’s eastern coast was put into production in April 2009. The original estimation of the deposits in this basin was around 10.03 Tcf. However, this was drastically reduced to 2.9 Tcf following the production data at hand for the first three years. At this time, RIL faced nearly insurmountable hurdles with water and sand seepage rampant in these wells. As if that wasn’t enough, the wells faced a sharp drop in reservoir pressure. Industry veterans though, have universally praised RIL for the gas they’ve managed to extract in spite of these difficulties. Of the 2.9 Tcf, 2.2 Tcfhs been produced in just over four years.

Many people familiar with this particular case feel that the new rate will apply to all the other fields in the KG-D6 basin without any preconditions. Wells such as MA oil and gas as well as those fields like R-Series and satellite discoveries that come into production in 2016-17 will also get the new rates without any preconditions.



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