RIL plans to exit shale gas business in US

India's private sector firm invested $9 bn in US shale gas assets so far

With shale gas business becoming uneconomical due to low crude oil prices, India’s largest private sector firm, Reliance Industries (RIL) has said it would sell its remaining shale gas assets in the United States — if any company makes it an “attractive offer”. The Mukesh Ambani-led company has invested almost $9 billion in US since 2010. 

During interaction with analysts after its September quarter results on Friday, RIL’s Joint Chief Financial Officer Srikanth Venkatachari said the company was not a distress seller of its shale gas assets and at the same time is not looking to acquire any more assets. 

At present, RIL owns 45 per cent stake in Pioneer Natural Resources’ Eagle Ford shale block and 40 per cent stake in Chevron’s asset. On October 11, the company had announced that it sold its Marcellus shale assets for $126 million to BKV Chelsea, an affiliate of Kalnin Venture. RIL had bought stake in Marcellus shale-gas areas of Pennsylvania for $392 million In August 2010.

In its annual report of financial year 2017, RIL said the financial performance of the shale gas business was impacted by strong macro headwinds as WTI oil prices averaged 11 per cent lower at $43.3 a barrel in calendar year 2016, while gas prices averaged eight per cent lower. For the calender year 2016, the realised price was was 19 per cent lower than the average levels in 2015, thereby, impacting its revenues, earnings and cash flows. 

It said tight control over costs and improvement in efficiencies helped it achieve sequential improvement in lease operating costs and overheads. Absolute opex were lower over seven per cent across joint ventures, but could offset the impact of lower prices only to some extent. Consequently, Ebitda (earnings before interest, tax, depreciation and amortisation) of shale gas dropped by over 61 per cent year-on-year to $117 million in CY16, reflecting lower realisation and volumes. 

RIL was one of the early investors in the US shale gas assets, but was earning negative returns on its investments since fall in crude oil prices made shale gas production unviable. 
 

 

According to analysts, crude oil should trade at a minimum of $60 a barrel to turn economical. As on Monday, crude oil was trading at $57-58 a barrel, thus, hitting the shale gas operations hard. According to oil analysts, the West Asian countries want to keep the oil prices low so as to make competing shale gas business unviable.

In August 2010, RIL had bought stake in a joint venture with Carrizo Oil & Gas for $392 million. It was RIL’s third investment in the US shale gas sector that year, as in April same year, it had acquired 40 per cent stake in Atlas Energy’s Marcellus Shale acreage for $1.7 billion, and in June, it had purchased a 45 per cent stake in Pioneer Natural Resources’ Eagle Ford shale natural gas asset in Texas for $1.3 billion. It later made further investments to run the operations.

As oil prices crashed, RIL monetised its Eagle Ford midstream investment for $1.07 billion in June 2015. At the same time, RIL also reduced activity across all joint ventures and began targeted drilling on viable assets and also took write-downs on its investments.

Apart from falling crude oil prices, the industry was also accused of environmental damage by various state governments in the US. Many states like New York had even banned shale gas drilling saying it pollutes ground water and soil.

(With inputs from Bloomberg)