Mukesh Ambani owned Reliance Industries Limited (RIL) is standing firm behind the ambitious expansion of its telecom arm – Reliance Jio Infocomm and its petrochemicals business which includes the synthesis and production of chemicals, particularly ethylene.
This news comes on the back of RIL facing immense scrutiny about its Exploration and Production (E&P) business, particularly, the KG-D6 basin in Andhra Pradesh. RIL has invested about $14 billion in all aspects in this field but plunging output along with regulatory and pricing uncertainty has clouded the outlook. As a result, the RIL board has questioned further investment in this sector that once was RIL’s golden nest but is now irrelevant to the valuation of its shares.
A senior executive who did not wish to be named was quoted as saying, “Things are very difficult for us, our board has a lot of questions about the way things are going and it has not approved any further capital expenditure for the E&P business as it prefers to invest in the group’s petrochemicals business and telecom venture which it feels will yield greater returns in the future.”
The organisation maintains that it’s simply following market results. “Now even though we have approvals to start work in certain areas of KG-D6 and other hydrocarbon blocks, the board has not approved any further capex as it first wants complete clarity on the gas pricing issue and other related regulatory issues.” RIL’s performance in this line has taken a big blow over time. In April 2010, when gas output touched the peak of 60 mmscmd, the group’s oil and gas business posted a segment revenue ofRs 4,318 crore and a EBIT of Rs 1,702 crore. In October 2011, output fell 20% from a year ago and the segment’s revenue fell to Rs 3,563 crore and EBIT dropped to Rs 1,531 crore. In the following October, output plunged 35.1%, revenue dropped to Rs 2,254 crore and EBIT sank to Rs 866 crore. In October this year, segment revenue and EBIT dropped to Rs 1,464 croreandRs 356 crore, respectively.
The Board of Directors have voiced grave concerns regarding the same. “We have invested close to $14 billion in the overall E&P sector in India out of which $10 billion was spent in KG-D6 and even though we have recovered $9 billion from KG-D6 there is a huge capital cost involved here, as we started investing this amount from 2006, who will reimburse us for that? The PSC makes no provision for it so it has to come from RIL,” said the official.
As a result, with RIL’s E&P business going virtually unnoticed by the market, the company has taken the decisive decision to go ahead with the new cracker project that will greatly enhance RIL’s ethylene production and also reduce its use of expensive imported liquid gas by 50%.
This cracker will make RIL’s petrochemical division comparable or even better than refineries in the US and the Middle East and can give a ROI of 20%,” said JalIrani, oil and gas expert. The company’s petrochemicals business has done well, while the telecom venture has enormous potential. The retail business has also gathered momentum in recent quarters. These businesses, experts say are highly poised to give more returns as compared to the oil and gas business.