The Bombay High Court's ruling on the sale price of the K-G basin gas may have come as a big setback for Reliance Industries, but all is not lost for India's largest private sector company.
The reason: Sale of natural gas from the Krishna-Godavari basin reserves at $2.34 per million British thermal unit (mBtu) would still allow RIL to make a profit margin of over 60 per cent. While RIL has pegged the cost of production of gas at $0.8945 (Rs 42) per mBtu, the company would be selling the gas to Reliance Natural Resources Ltd at a profit of $1.44 (Rs 68).
In a letter to the Directorate General of Hydrocarbons last month, RIL had said that the post-wellhead cost (the cost of natural gas itself or commodity cost) per unit of natural gas works out to $0.8945 per mBtu and, accordingly, the wellhead value for the purpose of payment of royalty works out to $3.3105 (around Rs 155) per mBtu.
RIL's profit from the sale would, however, decline by 44 per cent. That's because, at Rs 47 a dollar, the annual fuel revenues for 28 million metric standard cubic metres per day at the price of $4.2 per mBtu comes to Rs 5,527 crore (Rs 55.27 billion), while at $2.34 it is Rs 3,079 crore (Rs 30.79 billion). Thus, the difference between the two is around Rs 2,450 crore (Rs 24.5 billion) annually -- a 44 per cent fall in profit.
"RIL would make profits even if it sells gas to RNRL at $2.34 per mBtu. The company's earnings per share, however, will decrease by Rs 135 per share," Mumbai-based Asian Market Securities' head Kamlesh Kotak said.
The Bombay High Court had on Monday directed RIL to supply 28 mmscmd of gas from the K-G basin for 17 years at $2.34 per mBtu by entering into a fresh agreement within 30 days with RNRL.
The court dispute between RNRL and RIL on K-G gas pricing, tenure and quantity has been going on since 2006.
On the pricing issue, Senior Advocate Harish Salve, appearing for RIL, had earlier told the court that even if RIL sold the gas at $2.34 an mBtu, it would still make a profit. RIL has invested $5.2 billion in the K-G D6 basin against an estimated total of $8.8 billion.
However, the court has yet to pass its order on the allocation of 12 mmscmd of the 40 mmscmd of gas at $2.34 per mBtu to NTPC. Hence, the impact on RIL and NTPC is yet to be assessed, say analysts. If the court issues such a directive, NTPC will stand to gain.
Macquarie Research, in its latest analysis, termed the judgement as a big positive for RNRL and modestly negative for RIL.
'Early resolution is unlikely. In the present situation, the government's future stand will be the key. The government has maintained that gas is a national resource and hence has set clear guidelines for allocation for the usage of natural gas produced from RIL's K-G D6 block,' it said.
Moreover, the government's share of the profit petroleum (up to 85 per cent) from the gas sold from K-G D6 will depend on the price at which the gas is sold.
Profit petroleum is the non-tax revenue which is receivable by the Central government out of the profit generated.
