Gas pricing: Get govt out of the way

The contentious issue of gas pricing has evoked strong reactions from all quarters. Not wanting to be left out, everybody is jumping into the fray with his gyan on gas prices, either by dishing out their pricing formula or leveling allegations of scam, favoritism and so on.

Sample this: the Petroleum Ministry, Finance Ministry, Power and Fertilizer Ministries, political parties like Communist Party of India, BJP, Left, explorers like RIL, ONGC, GAIL, Cairn India, Oil India and experts like the Rangarajan Committee, the Vijay Kelkar committee, etc, have all been making statements in recent months about gas prices.

 

GAS PRICES AND COMPANY

 

 

The Rangarajan Committee on production sharing contract has arrived at a price of $8.80/mmBtu for gas from the current $4.2/mmbtu. The panel recommended the 12-month average of US’s Henry Hub, UK’s National Balancing Point and Japan’s liquefied natural gas price along with the average of the price of India’s LNG imports for arriving at the domestic price.

In line with Rangarajan Committee’s recommendations, Mukesh Ambani-led RIL and his partner UK’s BP Plc have also favored linking of domestic gas prices with international prices, seeking prices of around $12.5/mmbtu.

But the Power ministry has opposed the near doubling of gas prices saying it will raise the costs for power plants by over Rs 46,000 crore per annum.

 

GAS AVAILABILITY

 

 

The Finance Ministry has also rejected the formula and, instead, wants the panel to taken into account wellhead prices prevalent in Qatar, Oman, Abu Dhabi and Malaysia.

Sensing the backlash that was brewing over Rangarajan panel’s report, the oil ministry, recently, moved a cabinet note recommending a price of $6.8/mmBtu.

Amidst all this hoopla surrounding the pricing of gas, a key factor to consider is: why should the government be involved in fixing gas prices or for that matter any fuel?

Prices of fuels like gas and coal should be determined by the market based on demand-supply, taxes prevalent in states and levies on imports and exports, rate of inflation, availability of alternate fuels, etc.

 

RLNG INDIA

 

On pricing rationale, linking domestically produced gas with international prices makes little sense. While offering adequate incentives for producers in developing gas fields is a priority for recovering investment and a reasonable rate of return, using global prices as a benchmark for arriving at a cost for producing gas in India would be tantamount to exploiting consumers to benefit explorers.

From an economic standpoint, why should lawmakers be fixing prices? Let the explorer and industrial consumers negotiate the prices themselves, sign up long-term agreements for gas supplies? Let the buyers decide for themselves whether the price suits them or not.

As long as the gas pricing mechanism is controlled by the government, explorers like RIL and Cairn India will have no desire to produce more, forcing the economy to rely on coal and oil, both of which are neither eco-friendly nor available cheaply.

 

GAS DEMAND

 

Market-linked price also results in increased government share apart from eliminating unwanted consumption. Some analysts have also called for price discovery through a competitive, transparent bidding process by the contractors wherein all spectrum of buyers of natural gas participate in the process.

Taking about alternatives, the emergence of shale gas has been billed as a game changer. In the US, gas prices are at record lows as a surge in shale gas production coupled with lower demand has led to oversupply and record high gas inventories. The average price of gas at the Henry Hub has reduced from US$8.8 per mmbtu in 2008 to around US$2.9 per mmbtu in July 2012.

 

shale gas reserves

 

In India, shale gas formations are spread over several sedimentary basins such as Cambay, Gondwana, Krishna-Godawari on-land and the Cauvery. By initiating steps to identify prospective areas for exploration, shale gas can emerge as an important new source of energy and also pave the way for lower gas prices.

The country’s dream of energy security may turn into a reality only if its policies are aligned to meet the challenges facing all its stakeholders including the end consumer. But as it stands, everybody is allowed to have an opinion except the market.

 
CAIRN 270.55 -3.70 (-1.35%) GAIL 478.50 3.20 (0.67%) OIL 600.00 3.35 (0.56%) ONGC 386.15 5.25 (1.38%) RELIANCE 994.50 9.15 (0.93%)

Analysis: RELIANCE

Reliance Industries RELIANCE 994.50 9.15 (0.93%) has been a permanent disappointment since 2005 and this year has been no different. The stock is down 7.46% compared to the Nifty’s 5.35%. The stock just doesn’t seem to have the zing in spite of the bonus in 2009, the more than Rs. 8/share in dividends and stock buy-backs.

Reliance chart

After breaking its up-trend line, the chart shows that Reliance is headed towards its most recent support area at Rs. 770 levels. RSI at mid-20′s is basically plumbing the depths at this point – the stock has bounced whenever it has seen such dire readings. However, just about every other technical indicator is bearish. Its 18-day SMA cut the 9-day SMA; Aroon is bearish; MACD histograms are not helping either.

The company remains a cash machine. So much so that Mukesh Ambani is using to enter pretty much all sectors of the Indian economy. It looks like by the end of this decade, Reliance will be dabbling in everything from telecommunications to power to banking. So even though Reliance is classified as a petrochemical major, its undergoing a transformation into a wide winged conglomerate.

The stock, however, is not cheap. With a PE of 12.84, it is trading above other oil multinationals like Exxon (9.30) and Total (7.83). It has a sub-market beta of 0.86 which could have been good news except that its Bull & Bear betas are skewed towards the downside.

RELIANCE - Reliance Industries Limited - Quarterly Results

To conclude, we are a short-term BUY on RELIANCE. We expect a bounce off these over-sold conditions and a support at Rs. 770 levels. The long-term is a bit hazy. The company is at risk of losing focus by spreading itself too thin on vanity projects and blowing away its cash-hoard on capital intensive projects with low returns and intense competition.

Analysis: RELIANCE

Today’s pick is RELIANCE RELIANCE 994.50 9.15 (0.93%). The stock started the year with a fall to Rs. 650 levels by the end of middle of May. After finding support, the stock has been on an uptrend ever since. It saw its 52 weeks high of Rs. 955 in January and has since been on a fall to find support along the trend-line. In the last three months, the stock moved -2% Vs. -4% of the Nifty’s.

RELIANCE Technical Analysis Chart

Oscillator RSI and CMO are drifting towards over-sold bounds. The stock is trading close to the lower edge of Bollinger bands giving out a slight bullish signal. Short-term technical saw a 9×4 bearish signal a couple of days ago.

The MACD line and signal line are moving parallel to each other without giving any directional bias. Also, Long-term and short-term GMMA lines are currently contracting but are unable to give any direction for the stock.

RELIANCE correlation chart

RELIANCE’s average correlation with the Nifty is 0.72 which is positive and strong. The scrip will be replicating movement of Nifty quite closely. NIFTYBEES 855.10 -2.67 (-0.31%)

RELIANCE volatiliy chart

RELIANCE has a historical volatility in the range of 0.3 to 0.7. The scrip’s volatility is currently in the higher end of the range.

Given these technicals, we suggest a short-term hold with a keen eye on the behavior of stock near the trend-line. A long-term call could be taken depending on the directional movement of the stock about the trend-line. It would be nice to have tight trailing stop-losses to book profits in case of a sudden trend-reversal.

Analysis: RELIANCE

This week’s pick is RELIANCE 994.50 9.15 (0.93%). Trading at around the same price as an year ago, the stock has made a meager return of 3% over the last 12 month period. The stock is in constant uptrend since May, with a few small corrections in between after it found the support at 670 levels.

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Oscillators like RSI and CMO are at currently at 47 and -23. At this level of RSI, the uptrend has no potential stops in the very near future. And looking at the previous highs of RSI, the stock can see an up-move till RSI reaches close to 75. The CMO as well is in the middle, and moving close to the -50 levels. If it gets too close to -50, it will signal a buy.

MACD line and signal line are drifting apart from each other and histogram levels are stagnant, but a higher high in the prices with lower highs in the MACD line is a divergence. This behavior can be suggesting the imminent change in the direction of the prices.

Looking at GMMA for a medium to long term outlook is not giving a lot of indication. The long term lines are moving close to each other (signaling a probable change of previous trend). The decreasing separation in the short term lines also suggests a lookout period for the near term.

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Reliance’s average correlation of 0.73 with the Niftybees suggests that the correlation is quite strong and positive, and the movements will be of the similar magnitude as Niftybees. NIFTYBEES 855.10 -2.67 (-0.31%)

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Reliance has volatility in the range of 0.2 to 0.6 for the most part, which is not a very big range. The volatility is currently at sky high levels of beyond 0.7, higher compared to the recent past. A constant eye is required on the scrip in case it makes a sudden move.

The up-trend is quite prominent. Looking at these technical, a short term buy is good but for the long term you might want to be cautious as the stock can check for the resistance levels at Rs. 900.

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KG D6: Time to end the off-field drama

From being a prized asset to a pain in the neck for Reliance Industries (RIL) RELIANCE 994.50 9.15 (0.93%), the government, investors and other stakeholders, KG-D6, the country’s biggest gas discovery, has been mired in several off-field controversies than on-field exploits. Production was expected to touch 80 mmscmd by April this year as per the original development plan after all the 31 wells are drilled and brought to production. However, in the last few months, output has dipped to below 30 mmscmd, sparking a ugly row between the government and operator of the eastern offshore block, Mukesh Ambani-owned RIL. This will be the lowest level since RIL began production from KG-D6 block in April 2009.

imageWhile a drop in pressure in the wells and increased water and sand ingress pulled down per-well gas output, the flagging Krishna-Godavari (KG)-D6 fields has been subjected to several other distractions like sharp downward revision in provable reserves by partner Niko Resources, tussle between RIL and the government after the centre refused to clear the operator’s investment proposals of over $1.5 billion and delays in regulatory approvals forcing the company to defer investments.

Under the production sharing contract, the government allows companies to recover their cost from revenues and then share profits with the government.

Last November, RIL sent an arbitration notice to the government over recovering its investments in the KG basin after the oil ministry disallowed the cost recovery saying RIL failed to meet drilling commitments, accusing it of violating the production sharing contract.

Some voices in the street also believe that RIL is deliberately allowing production to drift downwards as it is unhappy with the gas price of $4.2/ mmbtu that stays till 2014.

The ugly battle has created a climate of uncertainty and loss of confidence among global oil & gas majors, forcing them to stay away from India’s hydrocarbon sector.

imageInstead of adopting a confrontationist stance, the oil ministry and the company need to bridge the gap and work in tandem for the sake of the country’s energy security. Sagging output from KG-D6 has forced companies to import gas at almost double or triple rates. While KG-D6 gas is available at $4.2/mmbtu plus taxes and marketing margin, imported gas varies anywhere from $8.5/ mmbtu to $14/mmbtu.

While the government must get rid of its bureaucratic hurdles and cut down on red tape, RIL must ensure greater transparency in terms of the problems facing the basin, the costs undertaken, etc. Both the sides have taken steps in this direction. While the oil ministry has conditionally approved RIL’s KG budget for the last three years, the Mukesh Ambani-controlled company has agreed to provide the Comptroller and Auditor General of India (CAG) access to records of the KG D6 block. This paves the way for the company to obtain green signal for its integrated field development plan (IFDP), which is crucial to revive the declining KG-D6 production.

technical analysis chartThe conditional approval will not only facilitate investments but also lead to an amicable resolution of the pending arbitration between RIL and Oil Ministry over reduction in KG – D6 cost-recovery.

For RIL, its fortunes and growth outlook are linked to quick recovery in gas production from KG-D6 basin. Last fiscal (FY12) saw the company’s share price slump by 28.6% against a 10.5% fall in the Sensex during the same period, reflecting investors’ unease over the standoff. If RIL is to regain its aura as the darling of D-Street, it needs to step up the gas and ramp up declining production.