D6 output fine: Reliance's tough days are not over

The duel between the oil ministry and Reliance Industries Ltd (RIL) just got more intense.

On Thursday, the ministry slapped a fine of Rs 6,600 crore on India’s largest private-sector refiner for the sharp fall in gas output from its KG-D6 basin, according to The Economic Times. The report said the company would not be permitted to recover the cost of its investments -$457 million in 2010-11 and $778 million in 2011-12- from the sale of gas.

“This is to bring to your notice that you have failed to fulfil your obligations under the terms of the PSC and have deliberately and wilfully caused breaches, which have led to immense loss and prejudice to the government and the people of India. You have, over a period of time, failed to adhere to the terms of the PSC and have repeatedly failed to meet your targets under the PSC,” the oil ministry said in the sternly worded notice.

There are three implications of the government’s step:

One, the disallowed cost recovery means the government’s ‘profit petroleum’ for 2010-11 and 2011-12 would rise by an equivalent amount, according to Business Standard. Under the current policy, the government allows companies to recover their costs from revenues. The companies subsequently share a portion of the production with the government, termed as ‘profit petroleum’.

Two, further investments in the oil and gas sector could be affected since companies such as ONGC , which operate blocks adjoining RIL’s D6 block, may also have to account for such an eventuality when they develop their fields, the newspaper said.

[caption id=“attachment_298143” align=“alignleft” width=“380” caption=“Is it any wonder then that earlier this week, Tata Consultancy Services replaced RIL as the country’s most valued company in terms of market capitalisation. Reuters”] [/caption]

Three, Reliance won’t have to pay the fine to the government immediately because it is currently in the middle of a legal dispute with the government. Late last year, the company had served an arbitration notice on the government. While the ministry has, so far, refrained from participating in any arbitration, the new notice clearly shows there is a dispute over the extent of costs that can be recovered by Reliance because of a fall in gas output.

For Reliance shareholders, the latest twist in the battle between the company and the government represents one more thing to worry about.

It’s not just the gas portion of the business that is troubling Reliance, concerns over its gross refining margins in the refining business (which, admittedly, were better than expected in the fourth quarter), and its ineffective use of its mammoth cash hoard of more than Rs 70,000 crore have also left investors fretting.

Reliance’s fourth-quarter results also showed that the company is making money from money than from oil or refining. As a Firstpost story noted, the company was saved the blushes of a more serious drop in net profits by its huge cash hoard, which pushed up other income by 33 percent to Rs 2,295 crore from the preceding quarter, and by two-and-a-half times from other income in the corresponding quarter of 2010-11. As a percentage of profit before tax, other income stood at 42 percent, up from 29 percent in the previous quarter.

Is it any wonder then that earlier this week, Tata Consultancy Services replaced RIL as the country’s most valued company in terms of market capitalisation, as investors rallied behind shares of the IT giant. At the end of Wednesday’s trade, Tata Consultancy Services (TCS) commanded a market value of Rs 2,48,116 crore, higher than Reliance Industries’ Rs 2,43,413 crore.

No doubt about it, Reliance’s tough days are not over yet.