Niko to sell stake in RIL block on lower gas price hike

Stung by lower-than-expected hike in natural gas prices, Canada's Niko Resources has put up for sale its stake in Reliance Industries' KG-D6 gas block saying there is uncertainty over long-term price outlook in India.

Niko holds 10 per cent stake in the KG-D6 block where a total of 20 oil and gas discoveries had been made and three out of them are in production.

The government had in October announced raising natural gas price to USD 5.61 per million British thermal unit from USD 4.2. The increase was lower than USD 8.4 that the industry was expecting and prevailing USD 5.71 rate applicable to gas from western offshore fields.

"The announced price for the period from November 2014 to March 2015 is a 33 per cent increase over the price received previously, but is lower than expected. In addition, there is uncertainty around the long-term natural gas price outlook in India," said Kevin J. Clarke, Chairman and interim Chief Executive Officer, Niko Resources Ltd.

Announcing financial results for quarter ended December 31, 2014, he said as a result the company has engaged Jefferies as its financial advisor to look for a buyer for KG-D6 stake.

"Marketing efforts are underway for the potential sale of the company's interest in the D6 Block in India along with other assets of the company and/or the entire company," he said.

RIL is the operator of the block with 60 per cent interest while the remaining 30 per cent is with BP plc of UK.

The partners have first right of refusal over the stake and it remains to be seen if RIL will exercise that right.

Niko also holds a 10 per cent interest in gas discovery block NEC-25, off the Odisha coast, with RIL and BP.

"Due primarily to the projected impact of the new domestic gas pricing policy for India on the company's future liquidity and significant uncertainty on the future long-term price outlook in India, the company engaged Jefferies LLC as its financial advisor to assist in pursuing strategic alternatives including the sale of assets of the company, a merger or other business combination, the outright sale of the company, a refinancing of its existing debt with replacement debt, or some combination thereof," Niko said.

While the higher gas price is applicable uniformly across fields, Dhirubhai-1 and 3 (D1&D3) gas fields in KG-D6 block will continue to get the old rate of USD 4.2 till it is settled through arbitration if the output falling by over 80 per cent to about 8 million standard cubic meters per day was due to natural reasons or was a deliberate ploy.

"...the difference between the revised price and the USD 4.2 per mmBtu will be credited to a gas pool account and whether the amount so collected is payable or not to the contractors of this block would be dependent on the outcome of the award of the pending arbitration and any attendant legal proceedings," Niko said.

As per the pricing guidelines announced in October last year, the gas price will be determined on a semi-annual basis. Notification of the gas price for the period of April 1, 2015 to September 30, 2015 is expected to occur in mid-March 2015.

Prices will be calculated based on a volume weighted average of prices in the US, Canada, Europe and Russia based on the twelve month trailing average price with a lag of three months.

Niko said the guidelines state that all discoveries after the announcement of the new price, in ultra deep water areas, deep water areas and High Pressure-High Temperature areas, would get a premium.

"The applicability of the premium to existing undeveloped discoveries in the D6 and NEC-25 blocks, such as the discoveries included in the approved plans of development for the R-Cluster and Satellite Areas, remains to be clarified.

"The development of these discoveries is dependent on the future long term price outlook for gas sales from these projects and the significant uncertainty in this outlook could mean that the development of these reserves could be deferred and/or material reductions in the company's reported reserves or future net revenues could result," it said.

Niko said a well drilled to appraise the giant MJ-1 gas field "confirmed hydrocarbons in a third fault block of the structure with the zone of interest thinner than expected."

The resource assessment for the significant MJ gas and condensate discovery is underway.