Moody's downgrades RIL to credit negative

Global credit rating agency Moody's has downgraded Reliance Industries Ltd (RIL) as credit negative based on RIL's downward revision of its assessed natural gas reserves at its largest gas field, KG-D6 at the Krishna-Godavari (KG) basin on the east coast of India, by 6.7 per cent and its proven developed reserves by 36.2 per cent.

The revisions are credit negative for the company as it confirms the technical difficulties that it faces in its exploration and production (E&P) business from declining production and consequently lower cash flows,'' Moody's said in its weekly credit outlook released today.

The agency said the 12.8 billion cubic meter reduction in proven reserves will reduce total cash flows of the company from the project by approximately $1.7 billion, based on an existing gas price of $4.2 per million British thermal units (BTU).

The revisions follow nearly two years of declining production at KG-D6. Since reaching its peak of just over 60 million standard cubic meters per day (mmscmd) in March 2010, the production rate has declined to 35.7 mmscmd for the quarter ended March 2012, versus a target production level of 80 mmscmd, owing to greater than expected reservoir complexities and water ingress into the wells.

''The revision of reserves has resulted in the company's reserve life declining significantly, especially for proven developed reserves, based on last year's rate of production. However, we expect the rate of production to decline further, which would help lengthen reserve life. We also expect RIL to get technical support from BP Plc, which in February 2011 acquired a 30 per cent stake in the block and RIL's other upstream assets in India for $7.2 billion. However, given the extent of the decline, we do not expect the company to reach the target level of production in the next 12-18 months,'' the agency added.

The rating major also noted that the regulatory pressure on the company would continue to increase as long as the production levels continue to decline, hinting at the regulatory action against the company.

On 6 May, the government of India disallowed the recovery of $1.24 billion in joint venture spending for shortfalls in gas production through March 2012.