Mumbai: Reliance Industries Ltd, India’s biggest private sector company by revenue, plans to invest $2 billion (around Rs.12,000 crore) in its three shale assets in the US, betting big on the potential of extracting natural gas and oil from the sedimentary rock formations.
Having already invested $7.3 billion since 2010 towards development of shale gas and oil in the booming US market, the company has now firmed up the new investments in the three joint ventures it has in the US, said two persons familiar with the plan.
The plan to step up RIL’s shale-gas investment comes at a time when the company is at loggerheads with the Indian government on the issue of increasing the price of natural gas produced from the company’s D6 block in the Krishna-Godavari (KG) basin.
The newly elected National Democratic Alliance (NDA) government has deferred until 30 September a decision on a proposed price hike pending modifications to a price formula suggested by the C. Rangarajan committee that would have nearly doubled the price of gas. Last month, it decided to join arbitration proceedings initiated by RIL and its partners seeking a price increase.
On 30 June, in its full-year earnings statement, Canadian company Niko Resources Ltd, which is a 10% partner in the D6 block, said the partners will defer their investment plans for the KG basin if the gas pricing issue is not resolved.
While these issues have deterred RIL’s domestic investment in exploration and production (E&P), the company has been steadily increasing its interests overseas with its bet on the shale oil and gas ventures, which have become a revenue generator for the company in a short span of three years.
According to the company’s June quarter results announcements, its shale gas operations posted a 26% increase in revenue to $270 million (Rs.1,620 crore) and 22% rise in operating profit to $201 million (Rs.1,206 crore) from the year-ago period.
Its share of production from the shale business too stood at 15 million metric standard cubic meters per day (mmscm) of gas, higher than its production of 8 mmsc of gas daily from the D1 and D3 fields of the D6 block in the KG basin.
“RIL’s share of US shale production increased to 15 mmscmd, 178% of its share of KG D6 production. Also, shale gas Ebitda (earnings before interest, tax, depreciation and amortization) of $201 million for RIL in 1Q was 126% of that from domestic E&P,” said a note by Deutsche Bank AG analysts Harshad Katkar and Amit Murarka on 20 July.
On 19 July, Alok Agarwal, chief financial officer of RIL, said after the announcement of its latest financial results that the company expects to post 20% growth in revenue, profit as well as production in this business.
One of the two persons cited above said the $2 billion of additional capex planned for the shale ventures will be largely directed towards the Marcellus region in the eastern part of the US where the company has agreements with Chevron, and Carrizo Oil and Gas Inc.
Most likely, the investment will flow into the Chevron shale acreage, the person said.
In 2010, RIL ventured into the fledgling shale gas business in the US through joint venture agreements with three companies—Atlas Energy Inc., (now owned by Chevron) and Carrizo Oil and Gas Inc., in the prolific Marcellus region in south-western Pennsylvania and with Pioneer Natural Resources Co. (PNRC) in the Eagle Ford shale acreage, in the Texas region of the US.
It had invested a total of $2.046 billion in acquiring the stakes, giving it access to 12 trillion cubic feet of reserves.
“In the JVs with Pioneer and Carrizo, the business has already turned profitable and cash flows from the business are enough to fund the incremental capex there. Therefore, the new capex is meant for the stake with Chevron,” the second person said.
The ramp-up of production in the Chevron JV is still very slow while the prospects are high. It is the Marcellus reserves the company is banking on, he added.
A mail sent to Chevron and RIL on 7 August remained unanswered till press time.
Ashish Jagnani, an analyst with UBS, said in a 21 July note that in the future the Chevron JV will account for a large part of the capital expenditure for RIL. Jagnani said RIL’s shale JV production was expected to rise at a compounded annual growth rate of 21% between fiscal 2014 and fiscal 2018.
Dhaval Joshi, analyst with brokerage Emkay Global Financial Services Ltd, said that a substantial part of the investment also depends on the Henry Hub prices, the benchmark natural gas price for the US market.
“Since the life span of a shale well is for a period of two to three years, companies always take a call on investment based on the estimated trend of Henry Hub. Anything above $4 per mmBtu makes good sense to invest heavily,” he said.
According to Bloomberg, the current Henry Hub prices are at $3.9 per million metric British thermal units (mmBtu) and analysts say the outlook for the price is tepid for the next one year.