Face-off with CAG: Reliance must step on the gas instead

Reliance Industries’ (RIL) response to the Comptroller & Auditor General’s (CAG) findings is similar to that of an angry cricketer complaining about an umpiring decision.

The 250-page long response, according to news reports, questions the ability of the CAG to conduct such an audit in the first place. “The CAG neither had any expertise in hydrocarbon exploration nor knowledge of Good International Petroleum Industry Practices, Reliance said. It added that the auditor has confused the authenticity of expenses with desirability of expenses,” said a report in The Hindu on Thursday.

The company’s observations are in response to a draft report prepared by the CAG that alleged that the company had inflated production costs to $ 8.8 billion for Krishna Godavari-D-6 development. This is against the $2.47 billion estimated in 2004.

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[caption id=“attachment_42064” align=“alignleft” width=“380” caption=“The stock market may not be pleased with a confronting stand the company has taken.Mario Tama/Getty Images”]  [/caption]

RIL claims to have lost billions of dollars from the D-6 block by selling gas at $4.2 per million metric British thermal unit (mmBtu), according to a report in The Times of India. “RIL has already produced 1.5 trillion cubic feet (tcf) of gas, equivalent to 250 million barrels of oil imports which would have cost the nation at least $25 billion,” the company is reported to have said. “Equivalent LNG imports during the period would have cost more than $12 billion and increased subsidy burden on the government by a minimum of $6 billion,” the company had told CAG, according to The Times of India report.

While we do not know whether these arguments are fair, the stock market may not be pleased with a confronting stand the company has taken. A sector analyst pointed out that the company needs to move on and focus on enhancing the production of the gas using all possible means. To that effect, the company needs to work towards getting the deal with BP cleared. Any delay in boosting output would mean a further change in the company’s rating by the stock market.

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Analysts have already cut estimates. “We have cut FY2012E, FY2013E, FY2014E gas production to 50 mcm/day, 55 mcm/d and 70 mcm/d against 52 mcm/d, 65 mcm/d and 80 mcm/d previously,” said Kotak Securities in June after the annual general meeting of the company.

Reliance Industries shares continue to underperform the market. A confrontation with Indian regulators may not go down well with the stock market. Over the past one month, Reliance shares shed 5% in value while the BSE Sensex rose 1.7% during the same period.