Reliance shale gas returns sink with oil prices

The great American shale gas hunt in the US six years ago attracted investors from all over the world. Crude oil touched a record high of $146 a barrel in July 2008 and shale gas, extracted from rocks by using streams of water and chemicals, was touted as the game changer for the oil industry.

Along with big boys Shell and BG, shale gas attracted the attention of Reliance Industries Chairman Mukesh Ambani, who was looking for new investments for the cash generated by the oil refining business.

Reliance Industries identified shale gas for record investments in any overseas venture. Backed by rising crude oil prices, the company expected shale gas to be the next cash cow. But as oil prices crashed last year the $8 billion shale gas bet turned sour.

According to Reliance Industries’ latest annual report, the returns from equity investments in shale gas have turned negative.

“The business suffered negative net earnings and hence negative return on equity during 2015-16, compared to 18 per cent in the previous year,” a company spokesperson said.

Alarmed by the sharp fall in oil prices that made shale gas production uneconomical, Reliance Industries cut its capital expenditure by 25 per cent and lowered production. Many states in the US have also banned shale gas production for polluting groundwater, but this has not affected Reliance Industries investments.

Analysts said for shale gas to be economical, oil prices should reach $60 a barrel, up from $43 now. Till then the forecast for Reliance Industries’ shale gas output will remain grim. “Production will drop by 11-12 per cent in 2016-17 and might drop even more if US gas and oil prices do not recover,” said an analyst with Motilal Oswal Financial Services.

Reliance Industries had in April 2010 acquired a 40 per cent stake in Atlas Energy's Marcellus shale acreage for $1.7 billion. Two months later it bought a 45 per cent stake in Pioneer Natural Resources' Eagle Ford shale gas asset in Texas for $1.3 billion. Then in August of that year, Reliance Industries bought a 60 per cent stake in a joint venture with Carrizo Oil & Gas for $392 million.

Reliance Industries monetised its Eagle Ford investment for $1.07 billion last June. It has also reduced activity in all joint ventures and narrowed drilling to sweet spots. Reliance Holding USA Inc, which mainly comprises the shale gas business, posted earnings before interest and tax of Rs 316 crore in 2015, down from Rs 1,949 crore in 2014.