The company will now have to invest $6-7 bn, double the original amount
KG gas project delay proves costly for RIL
Mumbai, May 23 The delay in production at Reliance Industries� KG-DWN-98/3 (D6) gas field has had a direct impact on the company's financials of extracting gas from the mega project. While the petroleum ministry had approved an investment of $2.5 billion for the gas fields in October, 2004, Reliance now estimates it will need to put in more than double that amount -- between $6-7 billion.
On May 11, Reliance�s president of gas business RP Sharma announced in Hyderabad that Reliance would be investing about $ 6-7 billion (about Rs 27,000 crore to Rs 32,500 crore) to tap the huge natural gas potential in the Krishna-Godavari (KG) basin. While a part of the increase is because Reliance will be drilling more exploratory wells in the area, a major reason for the rise is that equipment costs have shot up considerably during this period.
The other major implication is on the two buyers for phase I of gas production - state-owned NTPC and Anil Ambani-controlled Reliance Natural Resources Ltd (RNRL). Of the 40 mmscmd of gas to be produced in phase I starting 2008, 12 mmscmd has been committed to NTPC and 28 mmscmd to RNRL.
NTPC has planned expansion of 2,650 mw at Kawas and Gandhar project sites situated in Gujarat. This will be in addition to existing generation capacity of 650 mw each. RIL�s tie-up with RNRL is for supply of gas which is to be used for Reliance Energy�s 3,750-mw power plant at Dadri, Uttar Pradesh.
Meanwhile, the pricing of gas is already in dispute. NTPC has taken Reliance to court for not signing the final sale purchase agreement for gas. The petroleum ministry is yet to approve the gas sale purchase agreement (GSPA), according to which, gas has been contracted at $2.34 per mmbtu. The prevailing market price is $10 mmbtu.
Neither of these projects has yet achieved financial closure. Unless the pricing issue is sorted and they achieve financial closure, the projects will be unable to take-off since engineering and procurement contracts will be awarded only after the financial closure.
The third major implication is on Reliance�s own plan to enter the city gas distribution business. RIL, which has already committed its entire KG basin gas in phase I (40 mmscmd) to NTPC and RNRL, is also planning to enter into city gas distribution projects on its own. Sources believe that US oil major Chevron Corp will partner RIL in this project with investments of over $1 billion and in domestic gas distribution in eight cities across India at an investment of Rs 5,000 crore. This project can take-off only in phase II. Delay in gas production in phase I has already pushed back the work on phase II.