"The planned investment will increase RIL's exposure to Indian gas business, which is extremely challenging given the delays in regulatory approvals, retrospective changes in regulations and slow resolution of disputes. RIL is already in arbitration with the regulator for costs previously incurred in the KG-D6 block," Moody's said in its Issuer Comment.
It said given the regulatory environment, the timing of both the investments and cash flows from the project remains uncertain.
"Two fields in the KG-D6 block that are already producing gas have seen a sharp decline in production of 60 mmscmd in 2010 to 7.8 mmscmd in 2017. The company has attributed the decline to more-than-expected complexity of the reservoirs. If the new fields also exhibit the same kind of complexity, the cash flows from the project could be much lower," it said.
Reliance Industries and BP estimate that the fields have 3 trillion cubic feet of discovered gas resources, which could be monetised with these investments.
The investment is subject to approval by the government of the development plans which RIL and BP plan to submit before end of 2017.
The companies will only move forward when the development plans are approved by the government and their respective board of directors.
"We expect the development plans will be approved in stages and the investments will be mostly back ended," it said.
RIL owns a 60 per cent interest in the block and its share of investment will be Rs 24,000 crore. "We expect minimal investments in fiscal ending March 2018 and the annual investments will be about Rs 6,000 crore after that, which will increase borrowings and leverage," Moody's said.
While relative to RIL's total EBITDA of Rs 56,800 crore in fiscal year 2017, the amount will have little impact on its credit metrics, the annual investment amount is disproportionately higher than the cash flows being generated by its upstream segment.
RIL's upstream segment reported a pre-tax loss of Rs 1,600 crore in fiscal year 2017.
"This implies that the upstream business will drain cash from the rest of the business from fiscal 2018 until production begins from these blocks. This adds further drag on RIL's refining and petrochemical businesses which are already supporting the company's Rs 3 lakh crore ($47 billion) capex program over last four years in its energy and telecom businesses," Moody's said.
Currently, RIL is only getting $2.5 per million British thermal unit for its current gas production from the KG-D6 block. But the new fields are entitled to a higher rate, which is capped at $5.56.
RIL-BP plan to award soon the contracts for development of the first field - R-Series, deep water gas fields located in water-depths of more than 2,000 meters, approximately 70 km offshore.
The companies expect to produce up to 12 mmscmd, with first production in 2020.
"At current gas price ceiling of $5.5 per million Btu, this level of production can generate $860 million (Rs 5,500 crore) of annual revenues for the block.
"If the three new fields together manage to achieve production volumes of 30-35 mmscmd of natural gas, they could generate annual revenues of $2.2-2.5 billion, of which RIL's share will be $1.3-1.5 billion," it said.