Two years after it bought three shale gas assets in the US, the business, Reliance Industries says, is set to become a material contributor to the company's earnings in the next three years. The company made this claim in its analysts’ presentation.
By 2015, RIL expects shale gas volumes to grow at a compounded annual average of 50 per cent, with the business to contribute eight to 10 per cent of earnings before interest, tax, depreciation and amortisation (Ebitda. In 2010, it had entered into three joint ventures (JVs) in US shale gas assets.
Last quarter, it had said shale gas was profitable, despite low gas prices. This quarter, the share of gross production was up 18 per cent sequentially.
Reliance’s shale gas business in America comprises three upstream joint ventures with Chevron, Pioneer Natural Resource and Carrizo Oil & Gas, and a midstream joint venture with Pioneer. Aggregate investments since the inception of these JVs stood at Rs 22,000 crore ($4 billion) as at the end of the first quarter of this financial year.
RIL reported revenue of Rs 737 crore ($134 million) and Ebitda of Rs 528 crore ($96 mn) from its shale gas assets during the quarter. The company on its website said drilling efficiency improved in all JV’s and trials are on to lower development costs.
During the last quarter, shale gas revenue for RIL was Rs 1,300 crore ($250 million, dollar at 52/Re), while profit after tax stood at Rs 156 crore ($30 million) and Ebitda at Rs 1,040 crore ($200 million).
“RIL claims a fairly ambitious target of having 10 per cent of their overall Ebitda from shale. I think that is a bit aggressive, given where gas prices are at the moment. But even if 10 per cent becomes five or seven per cent, it does mean that at least one non-core domestic business becomes material and that is a positive for the company,” said the assistant vice president, research, at a Mumbai-based securities firm.
RIL’s Pioneer JV has 12 rigs operational. During the quarter, the company accelerated the pace of construction and connectivity by putting 37 wells on production versus 26 wells in the last quarter.
There has been a significant ramp-up in production, with an average gross production rate at 381 million standard cubic metres per day (mscmd) against 358 mscmd during the last quarter. The company has incurred capital expenditure of $2.23 bn to-date on the asset.
RIL's Chevron JV, despite regulatory and other delays, reporterd an average gross JV production rate of 87 mscmd against 73 mscmd in the March quarter of 2011-12. In its annual report this May, it had said these regulatory delays should ease by mid-2012. Capex spend on the Pioneer JV has been Rs 6,600 crore ($1.2 bn) to date.
The company's Carrizo JV reported an average gross JV production at 61 mscmd against 26 mscmd in the last quarter, up 135 per cent. "Strong growth was supported by higher wells online and lesser downtimes," the company said.
RIL, last week, exceeding analysts' expectation, posted a net profit of Rs 4,473 crore for the quarter ended June, the third quarter when it posted a lower net profit. It was down 21 per cent due to falling gas output from its Krishna-Godavari basin and a worse than expected performance of its petrochemical business. It had posted a net profit of Rs 5,661 crore for the corresponding previous quarter.
RIL told analysts that along with BP, its 30 per cent partner in the KG-D6 basin, it had plans to revamp gas production to 60 mscmd in the next three-four years, subject to necessary government approvals. "They have also reworked on geological models and have identified prospects which are expected to provide exploration upside. RIL plans to start exploratory drilling in FY13," said Dikshit Mittal and Gunjan Poddar in their research report after the analyst presentation.
It has planned to file a Revised Field Development Plan (RFDP) for the D1-D3, aimed at maximising gas recovery from the existing fields. And, to further pursue approval of RFDP of D-26 (MA), filed in the earlier quarter. To expedite the development projects of other discoveries, it is preparing plans, to be filed in the third quarter.
Gas output at the D6 block fell to 33.1 mscmd against 36.5 mscmd in the last quarter. Production from the block is projected to decline to 20 mscmd in 2014-15 from 28 mscmd in the current year. That's less than half the 60 mscmd it was producing in 2010 and well below planned peak capacity of 80 mscmd.