<p>The friction between Reliance Industries (RIL) and the government seems to be easing. The government-led management committee (MC) approved field development investments for RIL’s Krishna Godavari (KG) D6 block for three years, but with riders. The MC approved the pending budget for the past two financial years and gave consent to $1.06-billion expenditure for 2012-13. “Whatever the contractor needs technically and administratively to raise production, we will do. Approvals will be given subject to conditions,” petroleum minister S. Jaipal Reddy said.<br /><br />The grave power situation in the country and the recent collapse of the transmission grids may have prompted the government to soften its stand on KG-D6. The government needs fossil fuel from all sources to tackle the shortages. But allowing the RIL investment with riders indicates the government’s eagerness to avoid flak from watchdogs such as the CAG.<br /><br />But will RIL be able to ramp up its production to the expected levels? The company’s current gas production is 29 million standard cubic metres a day (mscmd) from its KG-D6 block. This is much lower than the target of 80 mscmd. Output from the fields is expected to fall drastically.<br /><br />On 6 May, Reddy informed Parliament that the gas output from KG-D6 is projected to decline to 20 mscmd by March 2015. RIL had estimated 10.3 trillion cubic feet (tcf) of recoverable reserves in the Dhirubhai-1 and 3 (D1 & D3) gas fields in KG-D6. But the revised estimate of recoverable reserves is 3.10 tcf.<br /><br />“At least for the next two years, the output will remain low. New investment is needed to sort out the geological issues for increasing production,” says an RIL executive. The company has spent about $10.5 billion in developing the fields. At present, RIL and BP are working on an integrated and capital-efficient plan for D6 block development, involving production from all the 18 gas discoveries in KG-D6. The R- Series and satellite fields are also covered. Officials estimate that the company could save up to $1 billion through the integrated block development plan. <br /><br />According to sources, the MC headed by director-general of hydrocarbons Rajiv Nayan Choubey allowed RIL and BP to develop three other gas fields in the same block, but said that the operator would be able to recover costs only after extensive appraisal of these discoveries to establish commercial viability. <br /><br />The MC has not yet approved the Declaration of Commerciality of the R-Series cluster comprising of D-29, D-30 and D-31 gas discoveries due to technical reasons, but it has expressed its willingness to give time to the company to solve the issues. <br /><br />Obviously, the MC doesn’t want to delay production from these discoveries. But RIL still needs approval from the ministry and the Cabinet Committee on Economic Affairs. <br /><br />The government’s move is need-based. But is Reliance, which is struggling to increase production, confident of overcoming the geological hurdles? If it fails to reach the targeted 80 mscmd, how will it recover its cost by selling the fuel? Multiple issues are staring the company in the face.<br /><br />(This story was published in Businessworld Issue Dated 20-08-2012)</p>
