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India Orders Reliance to Ship Gas to 'Core Sector' Only

The oil minister has ordered Reliance Industries to stop gas supplies from India's biggest gas field, the Krishna Godavari (KG) D6 block, to non-core users. The reason being a sharp decline in the production from the block.

Reliance Industries chairman Mukesh Ambani holds a glass container filled with crude oil extracted from the D6 block of Krishna Godavari (KG) basin in September 2008. Ambani is India's richest man.
Str | AFP | Getty Images
Reliance Industries chairman Mukesh Ambani holds a glass container filled with crude oil extracted from the D6 block of Krishna Godavari (KG) basin in September 2008. Ambani is India's richest man.

The ministry has asked the company to first meet full demand of fertilizer and power plants. This means the company needs to cover only the core sector at the moment. The news has hit the stock, but fertilizer and power stocks have reacted postively.

The RIL management did indicate in its analysts meet that they will drill more wells. The RIL numbers were sub-par and the oil ministry has apparently reiterated that it can supply oil only to core sectors of the economy. CNBC-TV18’s research analyst Gautam Broker reports that more than anything else it is looking like an increased souring of relations between government heads and Reliance.

This is a bit of a fight on who owns the gas. The government owns the gas but Reliance wants to use it the way it wants too. The government is trying to impose what it thinks is the right policy on Reliance and Reliance has to adhere to that. After the fall in D6 production from about 60 million standard cubic metres (mscmd) to 50 mscmd, Reliance made a proportionate cut across the board to all the sectors that have been supplied gas.

The government has been telling Reliance to supply gas only to core sectors, and not to non-core sectors. This means they are asking RIL to supply gas to fertilizers, power plants and city gas distribution networks while leaving out the steel industry and refineries. Now Reliance itself is a refinery that has been allocated gas but Reliance made a proportionate cut and made a cut across the board.

The oil ministry has asked Reliance to stop doing that. At present, sentiment is negative for Reliance, IOC, HPCL and BPCL as well as for steel companies like Ispat in particular, which is listed. Essar Steel as well but it is not listed. On the positive side, the power plants that benefit from this are GVK, GMR, Lanco and NTPC which have gas allocated from D6.

Also on the positive side there is city gas distribution, so IGL benefits, fertilizers like RCF, Nagarjuna Fertilizers and Chambal Fertilizers stand to benefit. But across the board sentiment is positive. This is because it was known in the market that since production has fallen, much of the non-core sectors anyway wouldn’t get much of the gas. The stocks haven’t reacted much but there is a positive-negative sentiment for the users.

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