BOMBAY, 11 November 2002 — The biggest news of the Indian corporate world came from the biggest private sector company of India, Reliance Industries (RIL), giving probably the biggest gift, that of optimism to the Indian bourses.

Naturally, when RIL is involved, superlatives become almost mandatory. So the news is that, last week, the consortium of Reliance and Niko Resources of Canada discovered gas reserves totaling 7 trillion cubic feet (198 billion cubic meter) in the Krishna-Godavari basin off the east coast. And this discovery will not only mean a fatter bottomline for RIL but more importantly, is expected to change the international perception about hydrocarbon potential of India.

Recoverable reserves were 5 tcf, equivalent to 1.2 billion barrels of oil. Reliance owns 90 percent interest in this field, while 10 percent is owned by Niko Resources of Canada. According to industry experts this is the largest discovery in India in the last three decades, far larger than Bombay High. RIL management expects to produce 1.4 bcf per day of gas in three to four years and has estimated a capital expenditure of up to $1.5 billion to exploit this resource.

But after this discovery, the biggest buzz going round the market circles is that of valuation. Everyone wants to know how much this discovery translates into cash for RIL. And many analysts have tried to put a valuation.

According to Credit Lyonnais (CLSA), which expects the field to start generating revenues in 3-4 years time is estimated to produce nearly 40 million cubic meter of gas per day which translates to nearly $1.50 billion of revenues. CLSA has placed this discovery at nearly $1.7 billion, based on today’s values.

J. P. Morgan Stanley has also put out its estimates and it has placed the net present value of the discovery at $1.4 billions. This is based on assumptions of an average production of 40 mcmd, a price realization of about $3.25 per mmbtu, profit sharing in the ratio of 3.25 percent and an operating expense restricted to $5 per barrel.

There is no doubt that RIL has hit a pot of gold. The present demand-supply curve points out to precisely this fact. Demand for gas far outstrips supply in India. In 2002 while demand was estimated at 151 million standard cubic meters of gas per day (mcmpd), supply was only about 66 mcmpd and demand is likely to grow to 231 mcmpd by 2007.

Currently, the free market price of natural gas is around Rs.5.60 per standard cubic meter (scm), while for ONGC the price is capped at Rs.2.85 per scm under the regulated pricing environment. Analysts say that, assuming that gas prices remain stable at current levels, RIL will rake in revenues of Rs.81.50 billion in the fourth year, after the company has spent the earlier estimated capital expenditure of around Rs.70.00 billion in the first three years.

This gas find is also likely to have far reaching changes in the valuation dynamics for RIL shares. The day the news broke out, the RIL stock shot up 14 percent to Rs.265, with a record 54.4 million shares changing hands on the two top exchanges in the country.

Based on the gas discovery alone, there is a possibility that about Rs.80-Rs.100 will get added to each Reliance share based on cash flow projections for the next ten years. There are various other estimates that put the value of the find at Rs.50 to Rs.100 per share. Senior company officials, however, claim that the cash value of this discovery is much higher at more than Rs.200 per share.

And this is not all. The Reliance group is set to bag another four exploration blocks in the Krishna Godavari region under the bids called for new exploration licensing policy-III (NELP-III). The bids, which are to be announced shortly by the government, are expected to yield results, energy experts say. The discoveries by Cairn Energy and recently by ONGC in the KG basin indicate that this region is potentially rich, and exploration blocks could yield more results.

But the biggest impact of this gas discovery will be felt by liquefied natural gas (LNG) project developers in India as they all will have to put off their plans for the time being. The projects which were to come up were Petronet’s Kochi plant, Shell’s Hazira LNG plant, British Gas’s project and IOC’s LNG-cum-power plant at Kakinada. All these had a time frame of 5 years and now this is expected to get more delayed. There is also talk that pipeline projects with Bangladesh and Iran will also get affected.

Another major impact of this gas discovery by RIL will be felt by fertilizer and power plants. Natural gas will be used as a substitute for naphtha which is a feedstock for fertilizer plants and used as a fuel in power plants. And it is expected that such substitution of natural gas for naphtha will reduce costs and is also expected to lower petrochemical prices.

There is no doubt that RIL’s gas discovery will indeed change the entire dynamics of the Indian hydrocarbon industry. And a welcome change too!