Reliance of India Buys into US Shale Gas Assets

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Commodities, M&A Activity

On the face of it, Reliance Industries of India’s purchase of a stake in Pioneer Natural Resources for US$1.35 bn looks like a simple diversification by India’s largest listed company into a solid long term investment. The report in FinancierWorldWide.com states that Reliance will take a 45% stake in the Eagle Ford shale gas field in southern Texas. This comes on top of Reliance’ joint venture with Atlas Energy in April and resulting 40% stake in its Marcellus Shale operations in the eastern US.

That all makes good sense, although the price of natural gas has plummeted in North America (and indeed worldwide). This, driven by a surge in supply from new shale gas deposits and the low cost of shale bed drilling makes these deposits still attractive. A Times of India blog article explains why Anadarko Petroleum is ramping up drilling in the relatively low yielding Marcellus Shale (stretching hundreds of miles from West Virginia to New York), even though natural gas prices are low. The firm is aiming to achieve a 10% rate of return at a gas price of $2.50/mm British Thermal Unit. This is well below the current US price of $3.70, and a fraction of the $13 last seen in June 2008.

But maybe the Reliance investment in the US shale gas market should be seen in the wider trend by foreign oil companies to buy into US gas explorers to secure access to the technology for exploration at home. Much as BP, Statoil and Total have each struck deals with Chesapeake Energy partly to buy into solid investments but also to position themselves for the flurry of exploration opportunities in Europe, Reliance could have an eye on the potential for shale gas back in India. India has huge shale deposits across the Gangetic plain, Assam, Gujarat, Rajasthan, and many coastal areas. Natural gas from shale could be accessed at a fraction of the cost of the offshore fields Reliance is developing in the Krishna-Godavari Basin in Andhra Pradesh basin.

You may ask why shale gas is not already a hot topic in India and you will not be surprised to hear the reason is government bureaucracy. India’s exploration policy allows companies to produce only conventional oil and gas from their exploration blocks. If they find non-conventional energy ” such as coal-bed methane or shale gas ” they are forbidden to produce it! Why? Because, the petroleum ministry regards any non-conventional deposit as an unwarranted windfall for the exploring company, and wants separate bidding for non-conventional energy. Clearly this has to change and you can be sure Reliance is playing its part lobbying the shadowy halls of power in Delhi (they may even have advance warning that the rules are going to be changed). Regardless, Reliance investments are a hopeful indication that shale gas could begin to be a significant power supply source in India where dispersed electricity generation facilities are desperately needed across the whole country. In the case of shale gas this could be done with much lower levels of environmental pollution than would be the case with the current coal fired power program underway in the country.

–Stuart Burns

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