Weekly Market Commentary - Dec 2 - Dec 6, 2013

Indian investors are a happy lot this week. Though tapering sword is still hanging over bullish investor sentiments, it seems investors have lot to rejoice over the coming days. Not just exit polls have sounded a victory for their favorite PM candidate, but it has also forced the govt. to increase the pace of their reforms as a last ditch effort to thwart the current anti-incumbency wave in the country. Govt. is back to its disinvestment ways to fill the deficit gap and is likely to make some reform announcements benefitting power and sugar industries.

Sensex gained 1.0%; Nifty gained 1.4% while CNX Midcap was up by 1.1% this week.

Monday – Sensex up by 0.5%, Nifty up by 0.7%, Midcap up by 0.7%
Markets cheered the 2QFY14 GDP growth of 4.8% vs. 4.4% in previous quarter, according to data released by govt. The growth numbers were in-line with street estimates. Also, HSBC PMI index recorded improvement in manufacturing activity for the first time since July. The Index for the manufacturing industry climbed to 51.3 in November from 49.6 in previous month.

Tuesday - Sensex down by 0.2%, Nifty down by 0.3%, Midcap flat
Markets ended up lower as investors resorted to profit booking and cautiousness ahead of Fed’s job report expected at the end of the week. Any improvement in the job recovery may lead to decision in favour of tapering of QE by Federal Reserve. Investors also stayed cautious as India’s capital, New Delhi prepares for polls next day. Even a good announcement from RBI was unable to lift the mood of the market. RBI announced that India’s current account deficit (CAD) narrowed sharply to $5.2bn or 1.2% of GDP in 2Q, from $21bn or 5% last year.

Wednesday – Sensex down by 0.7%, Nifty down by 0.7%, Midcap down by 1.0%
Market sentiments were weak as rise in crude prices added to inflationary concerns. Investors raised concerns that this may lead RBI to raise rates again raising the cost of doing business in the country.

Thursday – Sensex up by 1.2%, Nifty up by 1.3%, Midcap up by 0.8%
Markets went up and regained 21,000 levels as exit polls showed BJP coming to power in at least 4 out of 5 states that had elections recently. BJP is widely viewed as business friendly party among the host of other parties contesting the elections. Any success in state elections will be a testimony of BJP Prime Ministerial candidate Narendra Modi’s popularity and acceptance.

Friday – Sensex up by 0.2%, Nifty up by 0.3%, Midcap up by 0.5%
Exit polls results kept markets up and gave boost to the idea that congress might try to get more reform measures passed in the run up to the main elections in May 2014.

Notes on Indian Gas Policy framework and KG-D6

I have been trying to keep up with developments happening on oil and gas industry front in India for quite some time now. Here, for the benefit of my readers, I am posting copy of my notes on the Indian gas policy and KG-D6 controversy. Although these notes are not comprehensive (I have to work harder), but may give a beginner some headway in the Indian oil and gas industry policy and development space.

 

Brief summary of evolution of Gas Policy in India 

Gas received policymakers’ attention after the discovery of the offshore Bombay High fields by ONGC, from which production began in 1974. 

• By 1984, the government realized the need for a gas distribution network, and set up a separate state-owned company, the Gas Authority of India Limited (GAIL), to develop one.
• In the 1990s, as public sector exploration companies failed to make further gas discoveries, the government auctioned off fields that had been ‘discovered’ but not fully developed by NOCs, to joint ventures between private companies and NOCs under production sharing agreements.
• An upstream regulator, the Directorate General of Hydrocarbons (DGH), was set up in 1993.
• In 1998, the government launched a new regime, the New Exploration Licensing Policy or NELP which was based on PSAs, pitched at greater private and international participation.
• Under the first eight rounds, 234 contracts were signed.
• The ninth round was launched in October 2010. However, bidders have predominantly been domestic private sector companies, and not international companies.
• India also began importing LNG in 2004; it should be noted that, particularly in fertilizers, there was a demand for LNG despite high prices, as prices of the competing input, naphtha were very high.
• In May 2010, the price of ‘administered’ gas was more than doubled from its previously subsidized level; from US$ 1.8 per mmbtu to US$ 4.2 per mmbtu.
• Between 2005 and 2010, APM gas prices remained frozen, with state-owned companies and the Federal government taking on the burden of subsidies. 

 

Gas Pricing Framework

There are three kinds of gas pricing regimes existing in India:

1. Gas prices based on Administered Pricing Mechanism (APM) for those gas reserves before NELP. This was around $2.50/mmbtu and was raised later to $4.2/mmbtu.
2. Import prices paid to LNG imports which depend on international prices which were as high as $16/mmbtu and 
3. Arm’s length price based on market for those gas reserves discovered after NELP. For Krishna Godavari basin the government has fixed gas price at a level of $4.20/mmbtu.

 

KG-D6 Controversy

• The $4.2 price was fixed by Empowered Group of Ministers (EGoM) led by then finance minister Pranab Mukherjee (now President of India) in 2007 and was fixed for 5 years (till Mar 31, 2014).
• RIL’s position is that gas produced from KG-D6 was priced competitively in 2007 but does not reflect the market conditions in 2012. So, RIL is seeking a revision to this price
• Govt invoked the PSC to deny the RIL- BP approvals for 2012-13 budget and recovery of around $1 billion from sale of gas from KG-D6
• PSC Allows govt to conduct audit either through its own representatives or through chartered accountants.
• Petroleum Ministry says approval for budget and work programmes will come after CAG is given the access to records
• RIL maintains that nothing in the PSC permits an audit of operational, commercial and technical decisions of the operator
• The company also maintains that PSC contains no provision that restricts cost recovery through reference to factors like the production level or the extent to which field facilities are utilised.
• RIL attributed the fall in production to the unexpected geology of the area, adding data had established drilling more wells would not have helped.
• RIL says the next stage of its exploration plan for enhancing production is dependent on government approvals. And, it would take four to five years after the approvals for production to rise.
• R S Sharma, former chairman and MD of ONGC (state owned E&P), said it is unfair to withhold approvals, adding RIL does not fall under the purview of CAG. “Decisions in E&P are taken in stages. Characteristics of each block are different, and decisions have to be taken on a case-to-case basis. It is a complex business. It is not like processing, or even the mining industry”.
• Gas output from KG-D6, which peaked to 61.5 mscmd in March 2010 and was set to rise to 80 mscmd by April 2012, has been declining.
• Many believe production is being allowed to fall, as RIL is stuck with a gas price of $4.2 a million British thermal unit till 2014.
• Govt constitutes Rangarajan Committee to resolve gas pricing, profit sharing issues. .
• Rangarajan committee recommends average global prices for domestic gas
• Expected gas price revision is unlikely to benefit Reliance Industries. The clauses in the Cabinet note will not make RIL eligible for any price hike before April 2014.

You can find a compehensive list of all news items that appeared in several newspapers on KG-D6 controversy here.

KG-D6 dispute timeline

In case, a link went dead, you can easily search using the news headline text. 

• April 12, 2000 – RIL signs the PSC with government to develop the KG-D6 basin. (Link)
• Nov 1, 2006 – RIL files amended development plan for KG-D6 with DGH. Production rate to be enhanced to 80 mmcmd from 40 mmcmd. (Link)
• Sept 21, 2008 – RIL has commenced production of hydrocarbons in its KG D6 block of KG basin with crude oil production on Sept 17, 2008. (Link)
• April 1, 2009 – RIL starts natural gas production from KG-D6 fields. (Link)
• Oct 29, 2009 – Production ramped up to about 40 mmscmd. (Link)
• Jan 22, 2010 – Production ramped up to about 60 mmscmd. (Link)
• Feb 21, 2011 – RIL-BP deal announced. (Link)
• June 2011 – CAG report leaked in the media. (Link)
• October 2011 – RIL asks for explanation from ministry preventing cost recovery. (Link)
• November 2011 – RIL seeks arbitration on the matter. (Link)
• April 17, 2012 – RIL and Niko petitioned the Supreme Court asking that the Govt. should nominate an arbitrator. (Link)
• May 3, 2012 – Govt. asked RIL to refund $1.25 bn in production costs. (Link)
• May 30, 2012 – Govt constitutes Rangarajan Committee to resolve gas pricing, profit sharing issues. Committee to submit report by Aug 30, 2012. (Link)
• June 21, 2012 – Niko announced Indian govt. is considering increase in KG-D6 gas prices. (Link)
• Jan 2, 2013 – Rangarajan committee recommends average global prices for domestic gas. (Link)
• Jan 7, 2013 – CAG to begin its audit on Jan 9. (Link)
• Jan 14, 2013 - Gas output from RIL's KG-D6 fields drops to 22 mmscmd. (Link)
• Jan 21, 2013 - Government wants to resolve RIL row over KG-D6 block via talks: Veerappa Moily (Link)
• Jan 22, 2013 - Gas output from RIL's KG-D6 fields drops to all time low of 20 mmscmd. (Link)
• Jan 23, 2013 - Expected gas price revision is unlikely to benefit Reliance Industries. The clauses in the Cabinet note will not make RIL eligible for any price hike before April 2014. (Link)
• Feb 4, 2013 - DGH refused to issue approval letters for the block's work plans and budget since 2010-11. (Link)
• Mar 5, 2013 - Natural gas supplies to power plants has completely stopped after output from the eastern offshore fields dropped to an all-time low of 17.3 mmscmd. (Link)
• Apr 11, 2013 - RIL has shut its ninth well at the main gas fields in the KG-D6 block, leading to output plummeting to an all-time low of 15.5 mmscmd. (Link)
• May 11, 2013 - RIL announced a major gas find more than 4 kms below the sea bed and 2 kms directly underneath the currently producing D1&D3 field in the KG-D6 block off the east coast. (Link)
• June 16, 2013 - In a relief to RIL, Oil Minister has indicated that he may not fully accept DGH's recommendation for taking away 86% of the company's KG-D6 gas block area. (Link)
• July 19, 2013 - The government has given the go-ahead for RIL’s $1.5 billion field development programme for the KG-D6 block. (Link)
• July 22, 2013 - RIL plans to invest $6.5 billion in its KG-D6 gas fields to re-attain natural gas production of up to 60 mmscmd by 2019-20 and regain the lost glory of the prolific block. (Link)
• Aug 7, 2013 - DGH has recommended additional penalty of $781 million (taking the total to $1.786 bn) on RIL for producing less than projected natural gas. (Link)
• Aug 15, 2013 - RIL plans to invest $3.18 billion in R-Series gas field to produce 13-15 mmscmd of gas for 13 years from the D-34 (Dhirubhai-34) discovery in the KG-DWN-98/3 or KG-D6 block. (Link)
• Aug 22, 2013 - 12 power plants solely dependent on KG-D6 gas lying idle. (Link)
• Aug 22, 2013 - ONGC may share KG-D6 infrastructure. (Link)
• Sept 03, 2013 - Government not honouring contracts on KG-D6 gas block, says Reliance. (Link)
• Sept 15, 2013 - Reliance Industries slams oil regulator's move to snatch KG-D6 area.(Link)
• Sept 25, 2013 - If you find more gas in KG-D6, keep it: Angry RIL to govt.(Link)
• Sept 25, 2013 - Govt may hire consultant to end KG-D6 gas row with RIL.(Link)
• Oct 13, 2013 - RIL trashes expert report on KG-D6 output fall.(Link)
• Oct 18, 2013 - RIL, BP to invest up to $10 bn in KG-D6 block: Moily.(Link)
• Oct 22, 2013 - Govt says no to fresh evaluation of whether RIL hoarded KG-D6 gas.(Link)
• Oct 29, 2013 - Oil ministry to ask RIL to surrender 5 KG-D6 gas finds.(Link)
• Nov 12, 2013 - Reliance Industries to furnish bank guarantee (Link)
• Nov 17, 2013 - Non-adherance to KG-D6 plan be taken as default: Panel (Link)
• Nov 18, 2013 - RIL plans to increase KG-D6 gas output (Link)
• Nov 21, 2013 - Govt disallows another $792 mn RIL investment in KG-D6 block (Link)
• Nov 26, 2013 - Reliance Industries' new gas discovery likely biggest ever (Link)
• Nov 26, 2013 - No going back on gas price hikes; notification soon: Moily (Link)
• Nov 27, 2013 - KG output drops to record low (Link)
• Dec 5, 2013 - Reliance Industries's KG-D6 output slips to 10 mmscmd (Link)

Weekly Market Commentary - Nov 25 - Nov 29, 2013

All eyes on Delhi election results on December 8th. These results may act as a precursor to what is in store for Indian investors. As DII turned buyers during the end of November, it seems that street is expecting a rally in December, which may only happen if BJP wins.

Sensex gained 2.8%; Nifty gained 3.0% while CNX Midcap was up by 3.1% this week.

Monday – Sensex up by 1.9%, Nifty up by 2.0%, Midcap up by 1.5%
Indian markets went up in tandem with global markets as Iran nuclear deal led to easing of crude prices. The deal is good for India in more than one way. It helps in removing the hindrances from importing crude from Iran, and lower prices benefits in reduced inflation expectations and deficits.

Tuesday - Sensex down by 0.9%, Nifty down by 0.9%, Midcap down by 0.5%
Markets gave back some of gains it made yesterday as crude prices rebounded and investors booked profits ahead of GDP data release.

Wednesday – Sensex, Nifty and Midcap flat
Markets ended flat as November derivative expiry arrives and investors stay cautious ahead of GDP and fiscal data release expected on Friday.

Thursday – Sensex up by 0.6%, Nifty up by 0.6%, Midcap up by 0.9%
Markets went up on the day of derivative expiry as traders cover their shorts and domestic institutional investors (DIIs) turned net buyers for first time in November, in addition to FIIs who continued stake building in Indian markets.

Friday – Sensex up by 1.3%, Nifty up by 1.4%, Midcap up by 1.1%
Markets showed optimism ahead of 2Q GDP data release expected during after-market hours. Consensus on the street is 4.6% of GDP growth. Anything below that will be indicator of adverse impact of recent repo rate hikes initiated by Governor Raghuram Rajan.