In a significant development expected to transform India's energy landscape, Reliance Industries (RIL) has commenced production of natural gas from the Dhirubhai 1 and 3 discoveries of the KG-D6 block in the Krishna Godavari Basin, located off the East Coast of India, in the Bay of Bengal.

The gas from offshore is being received at its world class-onshore facility at Gadimoga, a small village in the East Godavari district of Andhra Pradesh and delivered to the East West Pipeline of Reliance Gas Transportation infrastructure, RIL said in a release to the stock exchanges.

At peak production of oil & gas, the KG-D6 facility is expected to produce over 550,000 barrels of oil equivalent per day. With an estimated gas reserves of 11.5 trillion cubic feet, the KG-D6 facility will add about Rs.4, 000 crore to the annual revenues of RIL.

India will save $9 billion in oil import bill with the beginning of production from Reliance Industries' eastern offshore KG D-6 fields, Petroleum Secretary R S Pandey told reporters on Thursday. The fertilizer units are expected to get the gas in 3-4 days time.

According to the Director-General of Directorate General of Hydrocarbons V K Sibal, it is a landmark in the history of oil and gas production and has set a new benchmark for deep-sea developers. As against the global benchmark of minimum nine years, Reliance' KG-D6 block took just seven years from the date of discovery to begin gas production.

The additional availability of gas from the KG-D6 facility would double the country's domestic gas production and may replace about seven per cent of India's oil consumption in 2009-10. According to a Goldman Sachs research report, the additional gas supply by the end of March would help in reducing India's current account and fiscal deficits and provide some downside protection to GDP growth. Besides, the gas would replace costly naphtha or imported LNG as fuel for power and fertilizer plants. Meanwhile, the government is expected to receive around $28 billion (Rs.140, 000 crore) by way of its share of profit and royalty over the field's life.

Reliance, which owns 90 percent of the gas-rich KG-D6 block, will start producing 10 million standard cubic metres per day (mscmd) initially, and this will be ramped up to a peak of 80 mscmd by the end of 2009. RIL already signed gas purchase and supply agreements with 12 fertilizer companies to sell about 15 mscmd of gas.

An empowered group of ministers (EgoM) has decided on a gas price of $4.2/mBtu (million British thermal unit) at landfall point for crude price greater or equal to $60 a barrel. The price is applicable to all consumers of D6 across all sectors. Besides the fertilizer sector, the other sectors prioritized by the EGoM were liquefied natural gas plants, petrochemical and power plants, and city cooking gas distribution projects and refineries.

Under the current gas utilization policy, RIL can't use its own gas. But, if reports are to be believed, the government is likely to alter the gas utilization policy to allow RIL to use the natural gas as fuel for its captive power projects, apart from other industrial uses such as heating.

RIL will transport gas from Kakinada in Andhra Pradesh to Baruch in Gujarat through a 1,386-km pipeline laid by Reliance. In Gujarat, Reliance will use the pipeline network of Gujarat State Petronet to take the gas to end-consumers as well as connect to HVJ pipeline.

On the Bombay Stock Exchange, RIL is trading at Rs.1642.70, up 4% over the previous close.

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