Global credit rating agency Moody's has downgraded Reliance Industries Ltd (RIL) as credit negative following the downward revision in the company's assessment of natural gas reserve.

Last week, Reliance Industries (RIL, Baa2 positive) revised downward its assessment of its proved natural gas reserves by 6.7 per cent and its proved developed reserves by 36.2 per cent, Moody's said in its weekly credit outlook.

“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,” it said.

In addition, the declining gas production has prompted regulatory action against the company, it said.

On May 6, the government disallowed the recovery of $1.005 billion in joint venture spending for shortfalls in gas production through March 2012. RIL maintains that disallowance of recovery contravenes its production sharing contract (PSC) and has filed for arbitration, it said.

“We expect arbitration to be a long process but not to have any meaningful impact on company's cash flows for the next 12-18 months. However, the regulatory pressure on the company will continue to increase as long as the production levels continue to decline,” it said.

The rating agency noted that the 12.8 billion cubic metre reduction in proved reserves would reduce total cash flows from the project by about $1.7 billion, based on the existing gas price of $4.2 per million metric British thermal units.

The revision has not yet prompted a write-down of the value of the exploration assets, which stood at about $5.4 billion as of March 2012, because RIL records the assets at cost less accumulated depletion, and the estimated fair market value of remaining proved reserves exceeds the current book value, it said.