optimistic about RIL’s E&P segment :: Kotak Sec

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Reliance Industries (RIL)
Energy
We may be optimistic about RIL’s E&P segment. An RIL presentation to the Ministry
of Petroleum and Natural Gas (MOPNG) puts peak gas production from KG D-6, NEC-
25 and CY D-5 blocks at 120 mcm/d for a couple of years and projects sharp decline in
production in the D-6 block to 50 mcm/d by FY2020E. D-6 reserves are in line with our
assumptions but may disappoint the Street with its more aggressive assumptions. We
retain SELL rating with downside risks to our `1,015 target price.


Gas reserves in line with our assumptions for D-6 block, production lower
We model gas production from the D-6 block at 17.7 tcf. The MOPNG presentation puts RIL’s 2P
reserves for 13 satellite fields at 4.3 tcf. This would put RIL’s 2P reserves in the block at around 18
tcf including 13 tcf of D1 and D3 fields (see Exhibit 1 for a breakdown of reserves). Peak
production from the satellite fields is around 26-28 mcm/d. More important, the presentation
shows a sharp decline in production from D-6 block to 50 mcm/d by FY2020E against our
estimated 72 mcm/d.
Data on NEC-25 block is disappointing
The MOPNG presentation puts gas reserves at 1.5 tcf significantly below the 4.7 tcf of recoverable
reserves assumed by us. We assume production will start by mid-FY2015 against the company’s
target of mid-FY2016. Exhibit 2 shows our production estimates for NEC-25 and other blocks for
FY2010-22E. We may be aggressive in light of lower reserves estimates for NEC-25 block and
continued delay in exploration and development at other blocks (see Exhibit 3).
Gas price may need to be higher for development of discovered fields
In our view, gas price would need to be higher for RIL to start development work of D6 satellite
fields, NEC-25 and CY D-5 blocks given the ‘small’ size of the reserves. RIL has been pressing for a
higher gas price for its new blocks. We model gas price at US$5.25/mn BTU for RIL’s KG D-6 block
beyond FY2014E and for its other blocks.
Delays in other projects may not auger well for the country
We believe the lower-than-expected production from reserves of RIL’s blocks may constrain the
development of the Indian gas sector. It is unfortunate that India has let go of several
opportunities to procure overseas gas at low prices due to a misplaced optimism about domestic
supply—(1) Petronas’ bid of US$3.53/mn BTU for LNG for NTPC’s 12 mcm/d tender in 2003; RIL
had bid US$2.34/mn BTU but the contract is yet to be signed, (2) Iran’s offer to supply gas
through Iran-Pakistan-India pipeline and (3) Myanmar gas from A-1 and A-3 blocks, which has
gone to China, despite Indian companies owning stakes in those blocks.